PIN 4.2.3 Guidance

1. PIN Rule 4.2.3(1)(a) applies at the time that a contract is effected. Circumstances may arise in which premiums subsequently prove to be inadequate. However, this does not create a breach of the requirement in that subparagraph. Neither does the fact that an individual contract might suffer a large loss.
2. An Insurer should be able to demonstrate that its procedures allow for prior assessment and periodic review of premium adequacy of Direct Long-Term Insurance contracts that it writes. The assessment will consider the adequacy of premiums taking into account projected revenues and expenses in respect of the relevant contracts, including the likely impact of any discretionary features. In making this assessment, credit should not be taken for the impact of voluntary discontinuance (lapse, surrender of or making the contract paid-up) by the policyholder. The DFSA does not consider it appropriate for the projected profitability of Direct Long-Term Insurance contracts to be dependent on 'lapse support'.
3. PIN Rule 4.2.3(1)(a) generally prevents an Insurer from writing 'loss leader' Direct Long-Term Insurance products. An Insurer that wishes to conduct business on a loss-leader basis would need to apply for an appropriate waiver. Such an Insurer would need to demonstrate that its resources are adequate to cover an appropriate level of technical provisions in respect of the contracts concerned, without detriment to its ability to comply with this Rule in respect of its other business.
[Added] RM46/2007 (Made 5th July 2007). [VER6/07-07]