PART C – METHODOLOGIES FOR DETERMINING POLICY LIABILITIES IN RESPECT OF LIFE INSURANCE CONTRACTS

Overview

If the Best Estimate Assumptions made at Commencement remain valid through the policy term, and if experience under the benefit exactly reflects those expectations, the methodologies should ensure that profit emerges at each reporting date as:

 investment earnings (net of tax) on any retained profits and shareholder capital; plus

 release of the expected profits (net of tax) in respect of the valuation period.

In reality, actual experience in the valuation period will likely differ from that expected, and to this extent there will emerge an experience profit (or loss).

Further, as experience changes, the Best Estimate Assumptions as to the future may change.

The principles of this standard require that the present value of profit resulting from a change in non-economic Best Estimate Assumptions of the Actuary, must not be released immediately at the reporting date, but rather must be released appropriately over the future life of the benefit.

Appropriate profit emergence is achieved through a methodology which involves recalculation at each reporting date of the expected future profit. Profit Margins and Acquisition Expense Recovery Components are determined as required to ensure the appropriate release of those future profits.

In the case of benefits with an entitlement to share in the investment experience of the assets backing them, the methodology must deal specifically with investment experience profits to allow its release over the future life of the benefit as:

 in the case of Participating Benefits (including friendly society benefits under benefit funds where there is a provision for distribution of unallocated surpluses to policy owners), future Bonuses and Shareholder Profits; or

 in the case of Non-Participating Benefits, future Discretionary Additions.

Note that in this Part, discussions of the detail of the methodologies for calculating policy liabilities will typically be in terms of a benefit. A policy may incorporate multiple benefits. Further, certain processes described in this Part may be performed at a Related Product Group level, which incorporates multiple (like) policies.

While recalculation processes described in this Part will normally be considered for a Related Product Group, the Actuary may group benefits at a lower level where this is supported by company practice or stated philosophy and is done consistently over time.