Record of resolutions of the Life Insurance Actuarial Standards Board: actuarial standards - incorporating actuarial standards 1.04, 2.04, 3.04, 6.03 and 7.02 (05/12/2005)
8New Business - Calculation of Profit Margins and Acquisition Expense Recovery Components
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SECTION 8 New Business - Calculation of Profit Margins and Acquisition Expense Recovery Components
8.1 Profit Margins
8.1.1 Where explicit Profit Margins are required, they are determined by dividing:
- the value at Commencement of the expected future profits from the benefit; by
- the value at that date of the appropriate Profit Carrier(s).
8.1.2 The value at Commencement of expected future profits must be determined on the basis of Best Estimate Assumptions.
8.1.3 The Best Estimate Assumptions, with the exception of the Acquisition Expense assumption, must be determined as at a single date, but that date may be:
- the beginning of the reporting period; or
- the date of commencement of the business; or
- the end of the reporting period.
8.1.4 The Acquisition Expense assumption will be determined at the end of the reporting period.
8.2 Treatment of Losses
8.2.1 If the projection reveals a value of expected future profit at Commencement for new business in a Related Product Group that is below the Adequacy Threshold, then that loss must either be recognised, or dealt with in accordance with the provisions of paragraph 8.2.2. Any losses at Commencement so recognised must be accumulated. If the Related Product Group subsequently generates profits above the Adequacy Threshold, the cumulative losses must be offset (see section 11).
8.2.2 Alternatively, new business may be grouped with existing in force business for the same Related Product Group for the purpose of calculating Profit Margins. Where new business is so grouped, any losses at Commencement for that new business cannot be accumulated or subsequently offset.
8.2.3 The approach used by the Actuary for treatment of losses on new business must be applied consistently over time.
8.3 Acquisition Expense Recovery Components
8.3.1 Where explicit Acquisition Expense Recovery Components are required, they are determined at Commencement by dividing:
- the Best Estimate Assumption for Acquisition Expenses at Commencement (to the extent not recovered by Establishment Fees); by
- the present value at that date of the appropriate Acquisition Expense Recovery Carrier(s).
8.3.2 The Acquisition Expense Recovery Carrier(s) must reflect the element of the premium or other income item, including surrender penalties, designed or intended to recover Acquisition Expenses.
8.3.3 Appropriate adjustment to Acquisition Expenses and Acquisition Expense Recovery Components will be needed where Acquisition Expenses are expected to be incurred in a year other than the year of issue. Any adjustment by the Actuary must have regard to Acquisition Expenses accrued or deferred in the accounts.