Document ID: chunk:federal_register_of_legislation:F2023L00694:body:0:p9
Version: federal_register_of_legislation:F2023L00694
Segment Type: other
Provision Reference: 
Character Range: 21977–25030

of the liability; and
(b)          a uniform emergence of profit.
36.         The profit emerging in the reporting period must recognise both:
(a)          the expected profits for the period; and
(b)          the experience profit for the period.
37.         The valuation method must provide for the emergence of profit when it is earned. The emergence of earned profit must not be deferred; nor must unearned profit be prematurely recognised.
38.         Profits are earned on the later of:
(a)          the provision of a service to the policy owner; and
(b)          the receipt (or recognition) of income relating to that service.
39.         When the valuation results in expected future profits for a subcategory that are below the adequacy threshold, the value of the shortfall must be recognised immediately as a loss.
40.         Profit for the period must not otherwise be affected by a change in the best estimate assumptions in respect of future periods, except that where previously recognised losses exist for a subcategory and that change in best estimate assumptions results in expected future profits emerging, the present value of those profits must be released to the extent necessary to offset those previously recognised losses.
41.         In determining the best estimate liability and best estimate assumptions, the life company must have regard to the impact on the liability of the distribution of potential future outcomes. Where the benefits being valued contain options that may potentially be exercised against the company, or the potential liability outcomes have an adverse asymmetrical distribution, then the best estimate liability must include an appropriate value in respect of those options and/or asymmetries.
42.         Approximate methods may be used in determining the policy liability of the company where the result so produced is not material or not materially different from that which would result from a full valuation process.

The valuation of policy liabilities
43.         The policy liability is equal to the sum of:
(a)          the best estimate liability;
(b)          insurance policy payables less insurance policy receivables;
(c)          the value of future best estimate bonuses; and
(d)          the value of future best estimate shareholder profits.
44.         Declarations of bonus are an appropriation of profit for participating business. Accordingly, current year best estimate bonuses are excluded from the policy liability, allowing the emergence of this amount as operating profit in the period.
45.         The relationship between best estimate bonuses and best estimate shareholder profits must, in respect of each future year, be consistent with:
(a)          the policy conditions; and
(b)          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.