Surplus Funds

1.1

Unless otherwise stated, this Part applies to a UK Solvency II firm carrying on with-profits insurance business.

1.2

In this Part, the following definitions shall apply:

surplus funds

means, in relation to a with-profits fund, accumulated profits which have not been made available for distribution to policyholders or other beneficiaries and which:

1. (1) satisfy the criteria for classification as Tier 1 own funds set out in Own Funds 3.1; and
2. (2) are represented by the output of the calculations set out in 3.

with-profits assets

means the assets in a with-profits fund except those meeting liabilities in respect of non-profit insurance.

2.1

A firm shall not treat surplus funds as insurance and reinsurance obligations when valuing payments to policyholders and beneficiaries in the calculation of technical provisions in accordance with Technical Provisions 2.

[Note: Art. 78(3) and Art. 91(2) of the Solvency II Directive]

2.2

In order to comply with 2.1, a firm must calculate the amount, if any, of its surplus funds in accordance with 3.

3.1

A firm must calculate the amount (if any) of its surplus funds in relation to each of its with-profits funds as follows:

1. (1) the value of with-profits assets;
2. less
3. (2) the value of with-profits policy liabilities;
4. less
5. (3) the amount of any tax or other costs which will arise on the recognition of future shareholder transfers properly attributable to that with-profits fund in accordance with any relevant provisions of the FCA Handbook, to the extent that such amounts are not included in (2);
6. less
7. (4) the value of any other liabilities (not being liabilities attributable to with-profits policies or any other policies in the with-profits fund) properly attributable to that with-profits fund in accordance with any relevant provisions of the FCA Handbook; and
8. less
9. (5) the value attributable to any future shareholder transfers (calculated by reference to the benefits referred to in 3.5(3) and in a manner consistent with the method of calculation specified in 3.4) relating to with-profits polices in that with-profits fund which may properly be made out of that with-profits fund in accordance with any relevant provisions of the FCA Handbook.

3.2

A firm must value its with-profits policy liabilities (other than future policy-related liabilities) in accordance with 3.3 unless:

1. (1) valuation under 3.3 does not adequately reflect the value of some or all of such liabilities; or
2. (2) the firm can demonstrate that valuation under 3.3 is impracticable in respect of some or all of such liabilities;

in which case the firm must value such liabilities in accordance with 3.4.

3.3

Unless the circumstances set out in 3.2 apply, a firm must calculate the value of its with-profits policy liabilities (other than future policy-related liabilities) as the aggregate of the retrospective value, in respect of each with-profits policy, of the following (treating items that increase the future liability to policyholders as positive values and treating items that reduce the future liability to policyholders as negative values):

1. (1) premiums received;
2. (2) any investment income on, and any increases (or decreases) in, asset values;
3. (3) any amounts representing permanent enhancements which the firm will take into account when determining the benefits ultimately payable;
4. (4) any past miscellaneous surplus (or deficit) which has been allocated;
5. (5) any expenses incurred (or deductions made in respect of expenses);
6. (6) any past deductions for the cost of guarantees and smoothing, options and provision of life cover and any other benefits provided;
7. (7) any partial benefits paid or due (other than benefits in respect of which deductions have been made under (6));
8. (8) any tax paid or payable which is properly attributable to that with-profits policy in accordance with any relevant provisions of the FCA Handbook;
9. (9) any amounts received (or paid) under contracts of reinsurance or arrangements which have a similar financial effect, which relate to that with-profits policy (other than in respect of benefits for which deductions have been made under (6)); and
10. (10) any past shareholder transfers which are properly attributable to that with-profits policy in accordance with any relevant provisions of the FCA Handbook, but deducting from that aggregate value any implicit allowance for the value of future shareholder transfers.

3.4

Where the circumstances set out in 3.2 apply, a firm must calculate the value of its with-profits policy liabilities (other than future policy-related liabilities) on a prospective basis as the aggregate of the net present values of the following expected future cash-flows in respect of each with-profits policy:

1. (1) future premiums;
2. (2) expenses expected to be incurred (or deductions expected to be made in respect of expenses);
3. (3) planned deductions for the cost of guarantees and smoothing, options and provision of life cover and any other benefits;
4. (4) any benefits payable of the type (or substantially similar to the type) specified in 3.5;
5. (5) any amounts receivable (or payable) under contracts of reinsurance or arrangements which have a similar financial effect which relate to that with-profits policy but excluding amounts in respect of benefits:
1. (a) which have been allowed for under (3); or
2. (b) for which deductions have previously been made with the result that they do not fall under (3); and
6. (6) tax payable which is properly attributable to that with-profits policy in accordance with any relevant provisions of the FCA Handbook.

3.5

The benefits referred to in 3.4(4) are:

1. (1) all guaranteed benefits, including amounts guaranteed to be payable on death and maturity (or on other events), guaranteed surrender values and paid-up values;
2. (2) declared bonuses to which the policyholder is contractually entitled; and
3. (3) future discretionary additions to guaranteed benefits and discretionary payments, in addition to the guaranteed benefits, which are expected to be made when the benefits under the with-profits policy becomes payable but only if and to the extent they are additions to benefits or payments which, if the firm had been able to effect the calculation required by 3.3, are consistent with those for which allowance would have been made in accordance with that calculation.

3.6

A firm must not attribute any charges to a with-profits policy for the purposes of this Part unless permitted to do so by any relevant provisions of the FCA Handbook.

4.1

A firm must ensure that the valuations included in the calculations required to be carried out in accordance with 3.1 are consistent with the valuation methodologies adopted for the calculation of its technical provisions in accordance with Technical Provisions 2.