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)
Investment Experience of Assets Backing Investment Experience of Assets Backing them.
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Investment Experience of Assets Backing them.
Overview
A change in the discount rate (and other related economic assumptions) at the reporting date may occur because of:
changes in the market conditions; and/or
other changes (such as a change in the mix of assets backing the benefits that are dependent on investment performance).
The recalculation process described in this section results in the Policy Liability reflecting the effect of changes in discount rates (and other related economic assumptions) due to market conditions only . The effect of other changes in discount rates or other assumptions is spread over the future benefit term, through the recalculation process.
Where the only change in the Best Estimate Assumptions is a change in the discount rates (and other related economic assumptions) due to a change in market conditions, the recalculation process will result in the Profit Margins and Acquisition Expense Recovery Components being unchanged.
9.1 Recalculation of Profit Margins
9.1.1 Where Profit Margins are determined at Commencement, the principles of section 3 require a recalculation of those Profit Margins at each subsequent reporting date to ensure that future expected profits are neither released prematurely nor deferred inappropriately.
9.1.2 The methodology detailed below produces results in accordance with the principles of section 3. Other methods may be appropriate where the Actuary can demonstrate that the principles have been met.
9.1.3 A recalculation of Profit Margins at the reporting date may be carried out as follows:
- derive the value of expected future profits at the reporting date as:
Best Estimate Liability (on Basis 1)
plus Value of expected future profits (on Basis 1)
less Best Estimate Liability (on Basis 2);
and
- recalculate the Profit Margins as:
Value of expected future profits (from (a) )
divided by
Value of the Profit Carrier(s) (on Basis 2).
Where
Basis 1 uses the Best Estimate Assumptions and Profit Margins at the previous reporting date, except for the discount rate and related economic assumptions - see paragraph 9.2; and
Basis 2 uses the Best Estimate Assumptions at the current reporting date.
9.2 Discount Rate
9.2.1 The discount rate (and related economic assumptions) used for calculations on Basis 1 is determined as that used at the previous reporting date adjusted only to the extent that there have been changes in market conditions.