Document ID: chunk:federal_register_of_legislation:F2023L00694:body:0:p14
Version: federal_register_of_legislation:F2023L00694
Segment Type: other
Provision Reference: 
Character Range: 35578–38678

estimate liability is also used in determining the risk-free best estimate liability for all types of life insurance business as defined in LPS 112.
76.         The best estimate liability is determined as the value of the expected future payments and receipts under the policy based on obligations at the reporting date. This best estimate liability is equal to:
(a)          the value of expected future benefit payments; plus
(b)          the value of expected future expenses; less
(c)          the value of expected future receipts.
77.         Insurance policy payables net of insurance policy receivables are not included in the best estimate liability.
78.         Note that the benefit obligations projected include all contractual benefits. In the case of participating benefits, the best estimate liability includes bonuses declared prior to (but not on, or after) the date of valuation.  In the case of non-participating benefits which include an entitlement, at the discretion of the company, to share in the investment experience of the assets backing the benefits, the best estimate liability includes current year and expected future discretionary additions. Friendly Society benefits are neither participating nor non-participating and the treatment of surplus allocations, for the purpose of calculating risk-free best estimate liability, is specified in LPS 112.
79.         In projecting the expected future cash flows, the life company makes assumptions about the expected future experience, taking into account all factors which are considered to be material to the calculation, including:
(a)          investment earnings;
(b)          inflation;
(c)          taxation;
(d)          expenses;
(e)          mortality and morbidity; and
(f)           policy discontinuance.
    The assumptions must reflect a best estimate of the likely experience.

Valuing liability options
80.         The best estimate liability and best estimate assumptions must have regard to any options or asymmetrical distribution of liability outcomes.
81.         Where the distribution of potential liability outcomes is equally likely to result in a gain or loss, then it will normally be sufficient to adopt the mean of the assessed distributions of future experience for the best estimate assumptions and calculate the best estimate liability accordingly.
82.         However, the life company needs to consider and assess the extent that variations in the assumptions may be correlated, and/or may compound one another, in adverse circumstances. In such cases the best estimate assumptions must be adjusted so that the best estimate liability is representative of the mean of the distribution of the potential liability outcomes.
83.         Where the benefits contain options that may be exercised against the company, then either the value of those 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.