PIN 5.6.7 Guidance

1. Because of PIN Rule 5.6.7(c), no policy may be treated as an asset in the valuation and policies must be valued individually, unless they form part of a homogeneous group of contracts. This means an Insurer may treat groups of homogeneous contracts together and not breach the requirements in that Rule, provided that the valuation in respect of that group of homogeneous contracts does not collectively represent an asset. The onus is on the Insurer to demonstrate that the contracts represent a homogeneous group. In deciding whether to treat a group of contracts as homogeneous, an Insurer should consider whether the group would remain homogeneous under realistic scenarios to which the Insurer could be exposed.
2. PIN Rule 5.6.7(d) prevents an Insurer from reducing the valuation by taking into account future lapses and surrenders, or future action by the policyholder to make the policy paid-up or to 'revive' a paid-up policy where the product features allow such action. Since persistency may be volatile, it is considered imprudent for an Insurer to rely upon 'lapse support' in its valuation. However, voluntary discontinuance of policies may increase a valuation as well as reduce it (for example, a guaranteed surrender value may exceed the actuarially-calculated liability for part of the life of the contract). In performing the valuation, the insurer should therefore make prudent allowance for the effect of lapses, surrenders, and related policyholder actions where these increase the valuation. The impact may vary over the life of a particular contract; for example, lapse at one stage in the contract life may represent a cost to the Insurer, whereas at another, it may represent a benefit.
3. PIN Rule 5.6.7(e)(iii) requires an Insurer to take into account bonuses not yet allocated in determining the liability for capital adequacy purposes. In essence, this Rule prevents an Insurer from counting as capital any surplus on participating contracts that is expected, under the terms of the contracts concerned, to inure to the policyholders in the future. Therefore, although attribution of surplus on participating contracts is discretionary, the Insurer must make a reasonable estimate, taking into account the perceived and reasonable expectations of policyholders. Assumptions made in reaching this estimate (for example, on future investment income) should be consistent with those made for other purposes of the valuation. However, the recognition of future bonuses or other forms of participation in this liability does not affect the determination of surplus for other purposes, such as allocation of bonuses of surplus prior to allocation of those bonuses.
4. For the purposes of PIN Rule 5.6.7(f), an Insurer should ensure that yields used to determine the discount rate are adjusted to take account of the risk that yields will decrease. High yields that represent compensation for risks such as credit or currency risk should be adjusted down to normalise for those elements of the yield.
[Added] RM46/2007 (Made 5th July 2007). [VER6/07-07]