Principles Proposed by US and Japanese Insurers

• Principle 1: The Net Insurance Liability (or Liability) should be based on the present value of all future cash flows associated with the portfolio of insurance contracts being valued.
• Principle 2: The Net Insurance Liability at all times must be sufficient to provide for payment of all expected future obligations with adequate provision for risk and uncertainty.
• Principle 3: Profit should be recognized in line with the release from risk.
• Principle 4: On initial issue there should be no accounting gain or loss.
• Principle 5: A policyholder intangible (or Deferred Acquisition Cost) asset should be established when a policy (or block of policies) is issued and amortized over time into earnings in line with the policy's profit profile.
• Principle 6: Insurance liabilities should reflect the inherent risk and uncertainty of future cash flows.
• Principle 7: Assumptions underlying the measurement of insurance liabilities and intangible assets should be periodically reviewed and changed, if appropriate.
• Principle 8: Liabilities should reflect the value of all financial options and guarantees.
• Principle 9: Measurement should be based on a portfolio of exposures.
• Principle 10: Policyholder behavior should be reflected in the measurement of all liabilities.
• Principle 11: Renewal options or provisions that obligate the insurer to continue to provide coverages should be recognized to the extent they are included in the contract or required by law or regulation.
• Principle 12: The credit standing of an entity should not be considered in the valuation of insurance liabilities.
• Principle 13: Entities should have the ability to measure assets and liabilities on a consistent basis to reflect the way companies manage risk.
• Principle 14: Liabilities supported by a separate account, a unit-linked fund or a similar dedicated portfolio should reflect the expected returns on that portfolio.
• Principle 15: Liabilities for participating contracts must include provision for the expected payout of policyholder dividends, additional benefits provided or any other result of the participating mechanism.
• Principle 16: Insurance policies with flexible premiums should only be unbundled in the event that the separation would result in material differences in the overall value of the contract and either
  • a. The deposit and insurance components of the contract are separately priced and separately managed by the insurer; or
  • b. Separate measurement of a deposit component is necessary to recognize rights and obligations of the insurer and the policyholder.