Document ID: chunk:federal_register_of_legislation:F2023L00694:body:0:p12
Version: federal_register_of_legislation:F2023L00694
Segment Type: other
Provision Reference: 
Character Range: 30281–33165

bonus.
63.         Terminal bonus is included in the calculation of cost of bonus to the extent it is immediately vested in the policy owner and is guaranteed.

Loss recognition
64.         Where at a reporting date the value of future profits for a subcategory falls below the adequacy threshold for that subcategory, the resulting shortfall is not spread over the benefit term (as are expected future profits above the adequacy threshold) but is recognised as an immediate loss at that date. This is achieved by setting the relevant future profits to an amount such that the value of future profits is equal to the adequacy threshold at the reporting date.
65.         A record of cumulative losses is kept for each subcategory. Before a subcategory can have a value of future profits in excess of the adequacy threshold, cumulative losses must have been offset. Once cumulative losses have been eliminated for the subcategory it will return to a position of adequate future profits.
66.         Cumulative losses may be run-off in accordance with the run-off of the business of the relevant subcategory.
67.         If at a reporting date it is established, in respect of a subcategory which has cumulative losses recorded, that future profits are now expected the present value of that profit must be utilised:
(a)          firstly, in offsetting the cumulative losses; and
(b)          then to the extent available, in producing future profits in excess of the adequacy threshold.
68.         There must be no release of profit as a consequence of the combining of subcategories. Where there is grouping of previously separate subcategories, the policy liability of the combined subcategory must equal the sum of the policy liability of the separate subcategories immediately prior to the grouping. Cumulative losses that previously existed in respect of the separate subcategories must be extinguished, except in the case where cumulative losses existed for all separate subcategories.
69.         The adequacy threshold for the value of future best estimate bonuses and shareholder profits participating benefits is equal to the difference between:
       (a)          the best estimate liability, calculated using the discount rate (or rates) 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 is to be used. The discount rate does not need to satisfy the definition of risk-free discount rate given in LPS 001 as described in paragraph 86; and
(a)          the best estimate liability.

Reinsurance
70.         Outwards reinsurance that meets the definition of a life insurance contract is to be measured as if it were a negative liability, even though the measurement result may be recognised as an asset in the company's financial statements. For