(Cap 41, section 59) [27 October 1995] L.N. 484 of 1995 (L.N. 327 of 1995) Cap 41E s 1 (Omitted as spent) (Omitted as spent) (Enacted 1995) Cap 41E s 2 Interpretation In this Regulation, unless the context otherwise requires- "asset" (资产) includes part of an asset; "deposit back arrangement" (回存安排), in relation to any contract of reinsurance, means an arrangement whereby an amount is deposited by the reinsurer with the cedant; "equity share" (权益股) means a share of equity share capital; "equity share capital" (权益股本) means, in relation to a company, its issued share capital excluding any part thereof which, neither as respects dividends nor as respects capital, carries any right to participate beyond a specified amount in a distribution; "fixed interest securities" (定息证券) means securities which under their terms of issue provide for fixed amounts of interest; "index linked benefits" (与指数相连的利益) means benefits- (a) provided for under any contract the effecting of which constitutes the carrying on of long term business; and (b) determined by reference to fluctuations in any index of the value of property (whether specified in the contract or not);"linked assets" (相连资产) means long term business assets of an insurer which are, for the time being, identified in the records of the insurer as being assets by reference to the value of which property linked benefits are to be determined; "long term business assets" (长期业务资产) means assets of an insurer which are, for the time being, identified as representing the long term fund or funds maintained by the insurer in respect of its long term business; "long term liabilities" (长期负债) means liabilities of an insurer arising under or in connection with contracts for long term business, including liabilities arising from deposit back arrangements; "property linked benefits" (与财产相连的利益) means benefits (other than index linked benefits)- (a) provided for under any contract the effecting of which constitutes the carrying on of long term business; and (b) determined by reference to the value of, or the income from, property of any description (whether specified in the contract or not);"securities" (证券) includes shares, debentures, treasury bills, tax reserve certificates and certificates of tax deposit; "share" (股份) includes stock; "valuation date" (估值日期), in relation to an actuarial investigation, means the date to which the investigation relates. (Enacted 1995) Cap 41E s 3 Application This Regulation shall apply with respect to the determination of the amount of liabilities of an insurer in respect of its long term business. (Enacted 1995) Cap 41E s 4 Determination of long term liabilities (1) Subject to this Regulation, the amount of liabilities of an insurer in respect of long term business shall be determined in accordance with generally accepted accounting concepts, bases and policies or other generally accepted methods appropriate for insurers. (2) The determination of the amount of long term liabilities (other than liabilities which have fallen due for payment before the valuation date) shall- (a) be made on actuarial principles which have due regard to the reasonable expectations of policy holders; (b) make proper provision for all liabilities on prudent assumptions that shall include appropriate margins for adverse deviation of the relevant factors; and (c) take account of all prospective liabilities as determined by the policy conditions for each existing contract, taking credit for premiums payable after the valuation date.(3) Without prejudice to the generality of subsections (1) and (2), the amount of the long term liabilities shall be determined in compliance with each of sections 5 to 16 and shall take into account, inter alia, the following factors- (a) all guaranteed benefits, including guaranteed surrender values; (b) vested, declared or allotted bonuses to which policy holders are already either collectively or individually contractually entitled; (c) all options available to the policy holder under the terms of the contract; and (d) expenses, including commissions. (Enacted 1995) Cap 41E s 5 Method of calculation (1) Subject to subsections (2), (3) and (4), the amount of the long term liabilities shall be determined separately for each contract by a prospective calculation. (2) A retrospective calculation may be applied to determine the liabilities where a prospective method cannot be applied to a particular type of contract or benefit, or where it can be demonstrated that the resulting amount of the liabilities would be no lower than would be required by a prudent prospective calculation. (3) Appropriate approximations or generalisations may be made where they are likely to provide the same, or a higher, result than individual calculations of the same amount of the liabilities in respect of each contract. (4) Where necessary, additional amount shall be set aside on an aggregated basis for general risks which are not individualised. (5) The method of calculation of the amount of the liabilities and the assumptions used shall not be subject to discontinuities from year to year arising from arbitrary changes and shall be such as to recognise the distribution of profits in an appropriate way over the duration of each policy. (Enacted 1995) Cap 41E s 6 Currency matching Where the liabilities of an insurer in any particular currency are not matched by assets expressed in or capable of being realised without any exchange risk into that currency, a prudent provision shall be included in the liabilities of the insurer against the effects of changes in exchange rates on the adequacy of the assets. (Enacted 1995. 80 of 1997 s. 102) Cap 41E s 7 Avoidance of future valuation strain The amount of the liability determined in respect of a group of contracts of insurance shall not be less than such amount as, if the assumptions adopted for the valuation were to remain unaltered and were fulfilled in practice, would enable liabilities similarly determined at all times in the future to be covered from resources arising solely from the contracts and the assets covering the amount of the liability determined at the current valuation. (Enacted 1995) Cap 41E s 8 Rates of interest (1) The rates of interest to be used in calculating the present value of future payments by or to an insurer shall be no greater than the rates of interest determined from a prudent assessment of the yields on existing assets attributed to the long term business and, to the extent appropriate, the yields which it is expected will be obtained on sums to be invested in the future. (2) For the purposes of subsection (1), the assumed yield on an asset attributed to the long term business, before any adjustment to take account of the effect of taxation, shall not exceed the yield on that asset calculated in accordance with subsections (3), (4) and (5), reduced by 2.5% of that yield. (3) For the purposes of calculating the yield on an asset, the asset shall be valued in accordance with section 8(4) of the Ordinance. (4) The yield on an asset, subject to subsection (5), shall be- (a) in the case of fixed interest investments (that is to say, investments which are fixed interest securities), that annual rate of interest which, if used to calculate the present value of future payments of interest before the deduction of tax and the present value of repayments of capital, would result in the sum of these amounts being equal to the value of the asset; (b) in the case of variable interest investments (that is to say, investments which are not fixed interest securities) that are equity shares or land, the ratio to the value of the asset of the income before the deduction of tax which would most likely be expected to be received in the 12 months following the valuation date on the assumption that the asset will be held throughout that period; (c) in the case of variable interest investments (that is to say, investments which are not fixed interest securities) other than equity shares or land, that annual rate of interest which, if used to calculate the present value of future payments of interest, before deduction of tax, and the present value of repayments of capital, where applicable, would result in the sum of these amounts being equal to the value of the asset.(5) In calculating the yield on an asset under this section- (a) if the asset does not consist of equity shares or land- (i) a prudent adjustment shall be made to exclude that part of the yield estimated to represent compensation for the risk that the income from the asset might not be maintained or that capital repayments might not be received as they fall due; and (ii) in making that adjustment, regard shall be had wherever possible to the yields on risk-free investments of a similar term in the same currency;(b) for assets which are equity shares or land, adjustments to yields shall be made as appropriate to exclude that part, if any, of the yield from each category of asset that is needed to compensate for the risk that the aggregate income from that category of asset, taking one year with another, might not be maintained; for the purposes of this paragraph, a "category of asset" comprises assets of a similar nature, type and degree of risk.(6) To the extent that it is necessary to make an assumption about the yields which will be obtained on sums to be invested in future, the yield shall be determined in accordance with subsections (7) and (8). (7) The yield assumed, before any adjustment to take account of the effect of taxation- (a) on any investment to be made more than 3 years after the valuation date shall not exceed the lowest of- (i) a prudent assessment of the yield, current on the valuation date, of long term fixed interest securities issued by the national government of the country in which currency the liabilities are denominated; or (ii) 6% per annum, increased by one quarter of the excess, if any, of the yield referred to in subparagraph (i) over 6% per annum; or (iii) 7.5% per annum;(b) on any investment to be made at any time not more than 3 years after the valuation date shall not exceed the assumed yield determined under subsection (2) adjusted linearly over the said 3 years to the yield determined in accordance with paragraph (a).(8) In no case shall a rate of interest determined for the purposes of subsection (1) exceed the adjusted overall yield on assets calculated as the weighted average of the reduced yields on the individual assets arrived at under subsection (2); and when that weighted average is calculated- (a) the weight given to each investment shall be its value as an asset determined in accordance with section 8(4) of the Ordinance; and (b) except in relation to the rate of interest used in valuing payments of property linked benefits, both the yield and the value of any linked assets shall be omitted from the calculation.(9) For the purpose of determining the rates of interest to be used in valuing a particular category of contracts the assets may, where appropriate, be notionally apportioned between different categories of contracts. (Enacted 1995) Cap 41E s 9 Contracts not to be treated as assets No contract for long term business shall be treated as an asset. (Enacted 1995) Cap 41E s 10 Options and guarantees (1) Provision shall be made on prudent assumptions to cover any increase in liabilities caused- (a) by policy holders exercising options under their contracts; and (b) by the operation of any guarantee included in a contract.(2) Where a contract includes an option whereby the policy holder could secure a guaranteed cash payment within 12 months following the valuation date, the provision for that option shall be such as to ensure that the value placed on the contract is not less than the amount required to provide for the payments that would have to be made if the option were exercised. (Enacted 1995) Cap 41E s 11 Rates of mortality and disability The amount of the liability in respect of any category of contract shall, where relevant, be determined on the basis of prudent rates of mortality and disability. (Enacted 1995) Cap 41E s 12 Expenses (1) Provision for expenses, whether implicit or explicit, shall be not less than the amount required, on prudent assumptions, to meet the total net cost, after taking account of the effect of taxation, that would be likely to be incurred in fulfilling contracts if the insurer were to cease to transact new business 12 months after the valuation date. (2) The provision mentioned in subsection (1) shall have regard to, among other things, the insurer's actual expenses in the last 12 months before the valuation date and to the effects of inflation on future expenses on prudent assumptions as to the future rates of increase in prices and earnings. (Enacted 1995) Cap 41E s 13 No credit for profits from voluntary discontinuance Allowance shall not be made in the valuation for the voluntary discontinuance of any contract if the amount of the liability so determined would thereby be reduced. (Enacted 1995) Cap 41E s 14 Valuation of future premiums (1) Where further specified premiums are payable by the policy holder under a contract (not being a linked long term contract) under which benefits (other than benefits arising from a distribution of profits) are determined from the outset in relation to the total premiums payable thereunder, then, subject to section 15- (a) where the premiums under the contract are at a uniform rate throughout the period for which they are payable, the premiums to be valued shall be not greater than such level premiums as, if payable for the same period as the actual premiums under the contract and calculated according to the rates of interest and rates of mortality or disability which are to be employed in calculating the liability under the contract, would have been sufficient at the outset to provide for the benefits under the contract according to the contingencies upon which they are payable, exclusive of any additions for profits, expenses or other charges; (b) where the premiums under the contract are not at a uniform rate throughout the period for which they are payable, the premiums to be valued shall be not greater than such premiums as would be determined on the principles set out in paragraph (a) modified as appropriate to take account of the variations in the premiums payable by the policy holder in each year,save that a premium to be valued shall in no year be greater than the amount of the premium payable by the policy holder. (2) Where the terms of the contract have changed since the contract was first made (the terms of the contract being taken to change for the purposes of this section if the change is indicated in an endorsement on the policy but not if a new policy is issued), then, for the purposes of subsection (1) it shall be assumed that those changes from the time they occurred were provided for in the contract at the time it was made. (3) Where under a contract (not being a linked long term contract)- (a) each premium paid increases the benefits (other than benefits arising from a distribution of profits) provided under the contract; or (b) the amount of a premium payable in future is not determinable until it comes to be paid,future premiums and the corresponding liability may be left out of account so long as adequate provision is made against any risk that the increase in the liabilities of the company resulting from the payment of future premiums might exceed the amount of the premiums. (4) An alternative valuation method to that described in subsections (1) to (3) may be used where it can be demonstrated that the alternative method results in reserves no less, in aggregate, than would result from the use of the method described in those subsections. (Enacted 1995) Cap 41E s 15 Acquisition expenses (1) In order to take account of acquisition expenses, the maximum annual premium to be valued under section 14 may (subject to subsection (2)) be increased by an amount not greater than the equivalent, taken over the whole period of premium payments and calculated according to the rates of interest and rates of mortality or disability employed in valuing the contract, of the lower of- (a) (i) in the case of long term business carried on in or from Hong Kong, 150% of the annual premium to be valued under section 14; and (ii) in the case of any other long term business, 3.5% of the relevant capital sum under the contract; or(b) the defined percentage of the relevant capital sum under the contract.(2) For the purposes of subsection (1), "the defined percentage" (界定百分率) is the percentage arrived at by taking (for all contracts of the same type as the contract in question for which an adjustment is made) the average of the percentages of the relevant capital sum under each such contract that represent the acquisition costs incurred which, after allowing for the effects of taxation, might reasonably be expected to be recovered from the premiums payable under the contract. (3) The increase permitted by subsection (1) shall be subject to the limitation that the amount of a future premium valued shall not in any event be greater than the amount of the premium actually payable by the policy holder. (4) For the purposes of this section, "relevant capital sum" (有关资本额) means, in the case of- (a) whole life assurances, the sum assured; (b) policies where a sum is payable on maturity (including policies where a sum is also payable on earlier death), the sum payable on maturity; (c) deferred annuities, the capitalised value of the annuity at the vesting date (or the cash option if it is greater); (d) capital redemption contracts, the sum payable at the end of the contract period; and (e) temporary assurances, the sum assured,excluding in all cases any vested reversionary bonus. (Enacted 1995) Cap 41E s 16 Nature and term of assets The determination of the amount of long term liabilities shall take into account the nature and term of the assets representing those liabilities and the value placed upon them and shall include prudent provision against the effects of possible future changes in the value of the assets on- (a) the ability of the insurer to meet its obligations arising under contracts for long term business as they arise; and (b) the adequacy of the assets to meet the liabilities as determined in accordance with sections 5 to 15. (Enacted 1995)
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