Prudential Regulation Authority Rulebook

22.1

For the purposes of Technical Provisions 2.5(2)(a), reliability must be assessed pursuant to 22.2 and 22.3 and technical provisions must be valued pursuant to 22.4.

22.2

A firm shall consider the replication of cash-flows to be reliable where those cash-flows are replicated in amount and timing in relation to the underlying risks of those cash-flows and in all possible scenarios. The following cash-flows associated with insurance or reinsurance obligations cannot be reliably replicated:

1. (1) cash-flows associated with insurance or reinsurance obligations that depend on the likelihood that policyholders will exercise contractual options, including lapses and surrenders;
2. (2) cash-flows associated with insurance or reinsurance obligations that depend on the level, trend, or volatility of mortality, disability, sickness and morbidity rates;
3. (3) all expenses that will be incurred in servicing insurance and reinsurance obligations.

22.3

Financial instruments shall be considered to be financial instruments for which a reliable market value is observable where those financial instruments are traded on an active, deep, liquid and transparent market. Active markets must also comply with 6.4 of the Valuation Part.

22.4

A firm must determine the value of technical provisions on the basis of the market price of the financial instruments used in the replication.