Document ID: chunk:federal_register_of_legislation:F2023L00694:body:0:p10
Version: federal_register_of_legislation:F2023L00694
Segment Type: other
Provision Reference: 
Character Range: 24755–27768

the company's practice or stated philosophy.

The best estimate liability
46.         The best estimate liability must be calculated in accordance with the requirements outlined in Part D of this Prudential Standard.

New business – calculation of expected future profits
47.         When new policies are issued, the value at commencement of expected future profits must be determined on the basis of best estimate assumptions.
48.         The best estimate assumptions, with the exception of the acquisition expense assumption, must be determined as at a single date, but that date may be:
(a)          the beginning of the reporting period during which the new policies are issued;
(b)          the date of commencement of the business; or
(c)          the end of the reporting period during which the new policies are issued.
49.         The acquisition expense assumption is determined at the end of the reporting period during which the new policies are issued.
50.         The best estimate assumption for acquisition expenses at commencement must be the greater of:
(a)          'establishment fees' received at commencement; and
(b)          actual acquisition expenses incurred, less expenses which the life company considers to be 'one-off' in nature.
51.         Both must be consistently adjusted for tax in accordance with paragraphs 88 to 89.
Treatment of losses
52.         If the projection reveals a value of expected future profits at commencement for new business in a subcategory that is below the adequacy threshold, then that loss must either be recognised, or dealt with in accordance with the provisions of paragraph 53. Any losses at commencement so recognised must be accumulated. If the subcategory subsequently generates profits above the adequacy threshold, the cumulative losses must be offset (see paragraphs 64 to 69).
53.         Alternatively, new business may be grouped with existing in-force business for the same subcategory for the purpose of calculating future profits. Where new business is so grouped, any losses at commencement for that new business cannot be accumulated or subsequently offset.
54.         The approach used by the life company for treatment of losses on new business must be applied consistently over time.

Reporting date recalculations
55.         The recalculation methodology described in this section establishes how the policy liability changes and, hence, how profit emerges over the period. The objective of the methodology is to determine operating profit in accordance with the framework of the Act.
56.         Two important aspects of this framework are:
(a)          the allocation of operating profit is a distinct process from the distribution of retained profits. It is the value of declared bonuses and shareholder transfers out of the fund which are distributions of retained profits (inclusive of the operating profit allocated in the period). It is the operating profit which is the amount allocated between policy owners retained