Document ID: chunk:federal_register_of_legislation:F2023L00694:body:0:p13
Version: federal_register_of_legislation:F2023L00694
Segment Type: other
Provision Reference: 
Character Range: 32916–35829

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 this purpose, the reinsured policy liability will therefore consist of both a reinsured best estimate liability and the value of reinsured future profits. For the purpose of this Prudential Standard, inwards reinsurance is to be treated the same as direct insurance business.
71.         Where future profits are expected to arise in respect of a reinsurance arrangement (looked at from the reinsurer's perspective) the present value of those future profits is to be included in the reinsured policy liability as value of reinsured future profits. However, where losses are expected, these are to be recognised, except as allowed under paragraph 74.
72.         If the reinsurance relates directly and solely to the direct insurance business of a single subcategory then the reinsurance may be included within that same subcategory for the purposes of paragraphs 64 to 69. If the reinsurance does not relate directly and solely to the direct insurance business of a single subcategory then the reinsurance must be appropriately allocated to subcategories for the purposes of paragraphs 64 to 69. That allocation must reflect:
(a)          the insurance and financial risks to which the reinsurance relates; and
(b)          an appropriate relationship between those risks and the subcategories.
73.         In undertaking the allocation described in paragraph 72, regard must be had for a diligent assessment of:
(a)          the purpose of the company in entering the reinsurance; and
(b)          the contribution of that reinsurance to the business of the company.
74.         As a result of the allocation of reinsurance business to subcategories, losses expected in relation to the reinsurance business need only be recognised if they exceed the value of expected future profits in respect of the associated direct insurance business in the subcategory, and vice versa. However, the future profits in respect of the reinsurance must continue to be determined separately from the future profits in relation to the associated direct insurance business.

Part D – Best estimate liability (BEL)
75.         Part D of this Prudential Standard applies to all types of life insurance business. The best estimate liability is a component of the policy liability for participating business valued according to the VSA led method set out in Part C of this Prudential Standard. The method used in determining the best 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