Prudential Regulation Authority Rulebook

14.1

A firm must make provision on prudent assumptions to cover any increase in liabilities caused by policyholders exercising options under their contracts.

14.2

Where a contract includes an option whereby the policyholder may secure a guaranteed cash payment within twelve months following the valuation date, the provision for that option must 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.

14.3

Where a contract includes an option whereby the policyholder may secure a cash payment but 14.2 does not apply, the provision for that option must be such as to ensure that, if the assumptions adopted for the valuation of the contract are fulfilled in practice:

1. (1) the resulting value is not less than the amount required to provide for the payment which would have to be made if the option were exercised; and
2. (2) the payment when it falls due is covered from resources arising solely from the contract and from the assets covering the amount of the liability determined at the current valuation.

14.4

For the purposes of 14.3 the amount of a cash payment secured by the exercise of an option is assumed to be:

1. (1) in the case of an accumulating with-profits policy, the lower of:
1. (a) the amount which would reasonably be expected to be paid if the option were exercised, having regard to the representations of the firm; and
2. (b) the amount in (a), disregarding all discretionary adjustments; and
2. (2) in the case of any other policy to which this Chapter applies, the amount which would reasonably be expected to be paid if the option were exercised, having regard to the representations of 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 or in anticipation of such additions.