8.1.1. Value of Insurer’s assets to match its Insurance Liabilities

(1) An Insurer must hold supporting assets of a value at least equal to the amount of its Insurance Liabilities.

(2) Such asset must be of a sufficient amount, and of an appropriate currency and term, to ensure that the cash inflows from the assets meet the expected cash outflows from the Insurer’s Insurance Liabilities as they fall due.

8.1.2. Projecting cash flows - treatment of options

In determining the expected cash outflows from its Insurance Liabilities for the purposes of PINS 8.1.1, an Insurer must take into account any options that exist in the Insurer’s Contracts of Insurance including:

• (a) any unilateral option available to the policyholder to extend a Contract of Insurance; and
• (b) any unilateral right available to the Insurer to either cancel or renew a Contract of Insurance.

8.1.3. Projecting cash flows - Long-Term Insurance Business

In projecting cash flows in relation to Long-Term Insurance Business for the purposes of PINS 8.1.1, an Insurer carrying on Long-Term Insurance Business must take into account the nature of the projections and the factors relevant to its Long-Term Insurance Business, including:

• (a) expected investment earnings;
• (b) expected reinsurance recoveries;
• (c) mortality and morbidity;
• (d) expenses;
• (e) options and guarantees; and
• (f) persistency.

8.2.1. General provisions

(1) An Insurer may:

• (a) measure the value of an asset at less than the value determined in accordance with this Chapter; and
• (b) measure the value of a liability at more than the value determined in accordance with this Chapter.

(2) However, if the AFSA directs an Insurer to measure an asset or a liability in accordance with principles that differ from those specified in this Chapter, the Insurer must measure such assets or liability in accordance with those principles as directed.

8.2.2. Basis of accounting

Save where directed otherwise by the AFSA or where inconsistent with the rules in this Chapter, an Insurer must recognise its assets and liabilities and measure their value in accordance with the IFRS basis of accounting.

8.2.3. Methods and assumptions that may be used

In measuring assets and liabilities, an Insurer must use methods and prudent assumptions that:

• (a) are appropriate to the nature, scale and complexity of the Insurer’s business;
• (b) are made using professional judgement, training and experience;
• (c) are made having regard to reasonably available statistics and other information;
• (d) are consistent from year to year and without arbitrary changes;
• (e) include appropriate margins for adverse deviation of relevant factors;
• (f) recognise the distribution of profits or emerging surplus in an appropriate way over the duration of each Contract of Insurance;
• (g) are in accordance with generally accepted actuarial practice; and
• (h) do not reflect the Insurer’s own credit rating.

8.2.4. Changes in methods and assumptions on which valuations depend

(1) Where the valuation of an asset or liability is dependent upon the adoption of assumptions or the adoption of a calculation method, an Insurer must ensure that any change in the assumptions or methods adopted is reflected immediately in the value attributed to the asset or liability concerned.

(2) The recognition of the effects of changes in assumptions or methods may not be deferred to future reporting periods.

8.2.5. Actuarial principles

The AFSA may specify actuarial principles to be used by an Insurer in measuring assets and liabilities.

8.2.6. Derecognising liabilities

(1) An Insurer must not derecognise an Insurance Liability (or a part of an Insurance Liability) until the obligation giving rise to the liability expires or is discharged or cancelled.

(2) To avoid doubt, if reinsurance covering the liability (or part of the liability) is purchased, the liability must not be derecognised unless the purchase results in the discharge or cancellation of the obligation giving rise to the liability.

8.2.7. Discount rate

In calculating the present value of an Insurance Liability, the discount rate must be a prudent estimate of the yield expected to be earned by assets of the Insurer that are sufficient in value and appropriate in nature to cover the provisions for the liability being discounted.

8.2.8. Valuation of expected future payments

Where this Chapter requires an Insurer to recognise as a liability the value of expected future payments, that liability must be measured as the net present value of those expected future payments.

8.2.9. Valuation of expected future receipts

Where this Chapter requires an Insurer carrying on General Insurance Business to recognise as an asset the value of expected future receipts, that asset must be measured as the net present value of those expected future receipts.

8.3.1. Treatment of premium liability

An Insurer carrying on General Insurance Business must recognise as a liability the value of future claims payments and associated direct and indirect settlement costs, arising from future events insured under policies that are in force as at the Solvency Reference (premium liability).

8.3.2. Treatment of value of future claims payments

An Insurer carrying on General Insurance Business must recognise as a liability the value of future claims payments and associated direct and indirect settlement costs, arising from insured events that have occurred as at the Solvency Reference Date.

8.3.3. Treatment of expected recoveries

An Insurer carrying on General Insurance Business must recognise as an asset the value of reinsurance and other recoveries expected to be received in respect of claims referred to in PINS 8.3.1 (Treatment of premium liability) and PINS 8.3.2 (Treatment of value of future claims payments).

8.4.1. Treatment of policy benefits due before Solvency Reference Date

An Insurer carrying on Long-Term Insurance Business must recognise as a liability the amount of policy benefits that are due for payment on or before the Solvency Reference Date.

8.4.2. Treatment of net value of future policy benefits

An Insurer carrying on Long-Term Insurance Business must recognise as a liability the net valueof future policy benefits under policies that are in force as at the Solvency Reference Date, taking into account all prospective liabilities as determined by the policy conditions for each existing contract, and taking credit for premiums payable after the Solvency Reference Date.

8.4.3. Measuring net value of policy benefits as liability

In measuring the liability associated with future policy benefits, an Insurer carrying on LongTerm Insurance Business must:

• (a) use actuarial principles;
• (b) provide for all liabilities based on assumptions that meet the general requirements for prudent assumptions in PINS 8.2.3 (Methods and assumptions that may be used) including appropriate margins for adverse deviation of relevant factors that are sufficient to ensure that there is no significant foreseeable risk that liabilities to policyholders for long-term insurance contracts will not be met as they fall due; and
• (c) take into account:
• (i) all guaranteed policy benefits, including guaranteed surrender values;
• (ii) vested, declared or allotted bonuses to which policyholders are already either collectively or individually contractually entitled;
• (iii) all options available to the policyholder under the terms of the contract;
• (iv) discretionary charges and deductions from policy benefits, in so far as they do not exceed the reasonable expectations of policyholders;
• (v) expenses, including commissions; and
• (vi) any rights under contracts of reinsurance in respect of Long-Term Insurance Business.

8.4.4. Negative values for reserves—Long-Term Insurance

An Insurer carrying on Long-Term Insurance Business must not value its mathematical reserves for a Long-Term Insurance Contract at less than zero unless:

• (a) the calculation is based on assumptions that meet the general requirements for prudent assumptions in PINS 8.2.3 (Methods and assumptions that may be used);
• (b) the contract does not have a guaranteed surrender value at the actuarial valuation date; and
• (c) the total mathematical reserves established by the Insurer have a value of at least:
• (i) if the Insurer’s Long-Term Insurance Contracts include linked long-term contracts—the sum of the surrender values of all its linked long-term contracts at the actuarial valuation date; and
• (ii) in any other case—zero.