Prudential Regulation Authority Rulebook

14.1

1. (1) A firm must make provision for expenses, either implicitly or explicitly, in its mathematical reserves of an amount which is not less than the amount expected, on prudent assumptions, to be incurred in fulfilling its contracts of long-term insurance.
2. (2) For the purpose of (1), expenses must be valued:
1. (a) after taking account of the effect of taxation;
2. (b) having regard to the firm's actual expenses in the last 12 months before the actuarial valuation date and any increases in expenses expected to occur in the future;
3. (c) after making prudent assumptions as to the effects of inflation on future increases in prices and earnings; and
4. (d) at no less than the level that would be incurred if the firm were to cease to transact new business 12 months after the actuarial valuation date.
3. (3) A firm must not rely upon an implicit provision arising from the method of valuing future premiums except to the extent that:
1. (a) it is reasonable to assume that expenses will be recoverable from future premiums; and
2. (b) the expenses would only arise if the future premiums were received.

14.2

The provisions for expenses (whether implicit or explicit) required by 14.1 must be sufficient to cover all the expenses of running off the firm's existing long-term insurance business including:

1. (1) all discontinuance costs (for example, redundancy costs and closure costs) that would arise if the firm were to cease transacting new business 12 months after the actuarial valuation date in circumstances where (and to the extent that) the discontinuance costs exceed the projected surplus available to meet such costs;
2. (2) all costs of continuing to service the existing business taking into account the loss of economies of scale from, and any other likely consequences of, ceasing to transact new business at that time; and
3. (3) the lower of:
1. (a) any projected valuation strain from writing new business for the 12 months following the actuarial valuation date to the extent the actual amount of that strain exceeds the projected surplus on prudent assumptions from existing business in the 12 months following the actuarial valuation date; and
2. (b) any projected new business expense overrun from writing new business for the 12 months following the actuarial valuation date to the extent the projected expenses exceed the expenses that the new business can support on a prudent basis.