Prudential Regulation Authority Rulebook

3.1

The boundaries of a contract of insurance are defined in accordance with 3.2 to 3.7.

3.2

All obligations relating to the contract, including obligations relating to unilateral rights of the firm to renew or extend the scope of the contract and obligations that relate to paid premiums, must belong to the contract unless otherwise stated in 3.3 to 3.6.

3.3

Obligations which relate to insurance or reinsurance cover provided by the firm after any of the following dates do not belong to the contract, unless the firm can compel the policyholder to pay the premium for those obligations:

1. (1) the future date where the firm has a unilateral right to terminate the contract;
2. (2) the future date where the firm has a unilateral right to reject premiums payable under the contract;
3. (3) the future date where the firm has a unilateral right to amend the premiums or the benefits payable under the contract in such a way that the premiums fully reflect the risks.

3.3(3) applies where a firm has a unilateral right to amend at a future date the premiums or benefits of a portfolio of insurance or reinsurance obligations in such a way that the premiums of the portfolio fully reflect the risks covered by the portfolio.

However, in the case of long-term insurance business obligations where an individual risk assessment of the obligations relating to the insured person of the contract is carried out at the inception of the contract and that assessment cannot be repeated before amending the premiums or benefits, a firm must assess at the level of the contract whether the premiums fully reflect the risk for the purposes of (3).

A firm must not take into account restrictions on the unilateral right as referred to in (1), (2) and (3) of this paragraph and limitations on the extent to which premiums or benefits can be amended that have no discernible effect on the economics of the contract.

3.4

Where the firm has a unilateral right as referred to in 3.3 that only relates to a part of the contract, the same principles as defined in 3.3 must apply to that part of the contract.

3.5

Obligations that do not relate to premiums which have already been paid do not belong to a contract of insurance if all of the following requirements are met:

1. (1) the contract does not provide compensation for a specified uncertain event that adversely affects the insured person;
2. (2) the contract does not include a financial guarantee of benefits; and
3. (3) the firm cannot compel the policyholder to pay the future premium for those obligations.

For the purpose of (1) and (2), a firm must not take into account coverage of events and guarantees that have no discernible effect on the economics of the contract.

3.6

Where a contract of insurance can be unbundled into two parts and where one of those parts meets the requirements set out in 3.5(1), (2) and (3), any obligations that do not relate to the premiums of that part and which have already been paid do not belong to the contract.

3.7

A firm must, for the purposes of 3.3, only consider that premiums fully reflect the risks covered by a portfolio of insurance or reinsurance obligations, where there is no circumstance under which the amount of the benefits and expenses payable under the portfolio exceeds the amount of the premiums payable under the portfolio.