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Application provision

1.1 Unless otherwise stated, this Part applies to a non-directive insurer which carries on long-term insurance business, other than a non-directive friendly society.

16.1

01/01/2016

  1. (1) When a firm establishes its mathematical reserves in respect of a contract of long-term insurance, the firm must include an amount to cover any increase in liabilities which might be the direct result of its policyholder exercising an option under, or by virtue of, that contract of insurance.
  2. (2) Where the surrender value of a contract is guaranteed, the amount of the mathematical reserves for that contract at any time must be at least as great as the value guaranteed at that time.

16.2

01/01/2016

  1. (1) Where a policyholder may opt to be paid a cash amount or a series of cash payments (including the amount or amounts likely to be paid on a voluntary discontinuance), the mathematical reserves for the contract of insurance established under 2.1 must be sufficient to ensure that the payment or payments could be made solely from:
    1. (a) the assets covering those mathematical reserves; and
    2. (b) the resources arising from those assets and from the contract itself.
  2. (2) For the purposes of (1), the firm must assume that:
    1. (a) the assumptions adopted for the current valuation remain unaltered and are met; and
    2. (b) discretionary benefits and charges will be set so as to fulfil the firm's regulatory duty to treat its customers fairly under any relevant provision of the FCA Handbook.
  3. (3) (1) may be applied to a group of similar contracts instead of to the individual contracts within that group, except where the cash amount or series of cash payments is the amount or amounts likely to be paid on a voluntary discontinuance.

16.3

01/01/2016

For the purposes of 16.2, a firm must assume that the amount of a cash payment secured by the exercise of an option is:

  1. (1) in the case of an accumulating with-profits policy, the lower of:
    1. (a) the amount which the policyholder would reasonably expect to be paid if the option were exercised, having regard to the representations made by the firm and including any expectations of a final bonus; and
    2. (b) that amount, disregarding all discretionary adjustments;
  2. (2) in the case of any other policy, the amount which the policyholder would reasonably expect to be paid if the option were exercised, having regard to the representations made by the firm, without taking into account any expectations regarding future distributions of profits or the granting of discretionary additions in respect of an established surplus.