Document ID: chunk:federal_register_of_legislation:F2023L00694:body:0:p15
Version: federal_register_of_legislation:F2023L00694
Segment Type: other
Provision Reference: 
Character Range: 38433–41425

options must be determined (via a suitable option pricing method) and added to the best estimate liability, or the best estimate assumptions adjusted so as to appropriately capture the value of the options as part of the best estimate liability.
84.         The requirements throughout this Prudential Standard in respect of best estimate assumptions and best estimate liabilities are to be interpreted in this context.

Investment earnings
85.         For participating business, when determining the best estimate liability the best estimate assumption for investment earnings must reflect the expected investment earnings applicable to the actual assets on which the cash flows depend. For all types of life insurance business, when determining the risk-free best estimate liability the best estimate assumption for investment earnings is specified in LPS 112.

The discount rate
86.         For participating business and other types of business where benefits under the policy are contractually linked to the performance of the assets held, when determining the best estimate liability the gross rate used to discount expected future cash flows must reflect the expected investment earnings applicable to the assets backing the benefit being valued. For other types of business, when determining the best estimate liability, the gross rate used to discount expected future cash flows must reflect a rate that the life company considers to be risk-free based on the current observable, objective rates that relate to the nature, structure and term of the future liability cash flows. For all types of life insurance business, when determining the risk-free best estimate liability the discount rate is specified in LPS 112.
87.         For both best estimate liability and risk-free best estimate liability the discount rates may make allowance for assumptions that are expressed as a percentage of the value of assets, rather than allowing for those assumptions explicitly in the projection. This practice may apply in respect of certain expenses or taxes.

Taxation
88.         For business where tax is based only on profits, the best estimate liability must exclude the value of future tax payments. Otherwise, appropriate allowance must be made for the effect of taxation.
89.         Where allowance for tax on investment earnings is required, it must be made in accordance with best estimate assumptions, but based on an asset profile which would be expected to yield a return equal to the discount rate assumption.

Servicing expenses
90.         The best estimate assumption for maintenance expenses must be sufficient to cover the expected maintenance cost of servicing each policy, in respect of in force business, in the year following the reporting date. The expected maintenance cost of servicing each policy is the expected maintenance expenses appropriately adjusted for one-off expenses.
91.         The best estimate assumption for investment management expenses must be