Central Bank of Jordan: Appendix 3 - Basis for Calculating the Policy Reserve for Life Insurance

CENTRAL BANK OF JORDAN
البنك المركزي الأردني

Appendix (3)
Basis for Calculating the Policy Reserve for Life Insurance

First: Principles for Determining the Policy Reserve 1- The value of the policy reserve for life insurance liabilities is determined based on actuarial principles that take into account the reasonable expectations of life insurance policyholders and the liabilities arising from these expectations, based on conservative assumptions including adequate margins for any expected adverse deviations*. 2- When determining the policy reserve, all potential liabilities according to the terms of each active policy are considered, in addition to considering the value of insurance premiums due after the valuation date. 3- When determining the value of the policy reserve, the following matters are considered as a minimum:
a- All guaranteed benefits. b- All dividends or surpluses due to policyholders according to the policy, whether collectively or individually, including declared, earned, or allocated dividends or surpluses. c- All options available to the policyholder according to the policy provisions. d- Expenses, including initial and future commissions. e- All allowances and deductions. f- Any rights under reinsurance contracts. g- Future dividends or surpluses of policyholders declared through any policy-related bulletins.

Second: Method for Calculating the Policy Reserve 1- The value of the policy reserve is determined separately for each insurance policy through prospective calculations, ensuring that the method of calculating this reserve and the assumptions used are consistent from year to year, except in the following cases:
a- Retrospective calculation if the prospective method cannot be applied to a specific type of policy or benefit, or if it is proven that the resulting reserve value will not be lower than required through prospective calculations. b- Application of appropriate estimates or generalizations only if they result in a value equal to or higher than separate calculations for each policy. c- Recording an additional reserve on a gross basis to address general non-individual risks, when necessary. 2- When calculating the policy reserve for policies where the policyholder participates in dividends or surpluses, the following are considered as a minimum:
a- The value of policy premiums. b- Investments corresponding to liabilities arising from the policies.

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• For the purpose of determining the policy reserve value according to the provisions of this Appendix, life insurance liabilities do not include liabilities that became due before the valuation date.
• The reasonable expectations of policyholders lie in the authority available to the insurance company to estimate the value of benefits due to policyholders, as policyholders expect the company to conduct the estimation in a fair, transparent, and responsible manner. There are many sources through which the reasonable expectations of policyholders are formed, including the insurance contract and its appendices, sales explanations, dividend/surplus distribution policy, communication with policyholders, the company's history and past practices, any announcements or press reports, and practices adopted in the insurance sector regarding life insurance.

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Form (09/01/1/1)

CENTRAL BANK OF JORDAN
البنك المركزي الأردني

c- The company's policy regarding the method and timing of distributing dividends or surpluses or granting additional options.

Third: Avoiding Future Valuation Pressures
1- For the purpose of evaluating the adequacy of the policy reserve for a specific group of policies and avoiding any future valuation pressures, the actuary must consider whether the investments accumulating in the future are sufficient to cover the policy reserve being evaluated, which is determined for the same state at all times. 2- For the purpose of paragraph (1) of this section, investments accumulating in the future consist of investments covering the value of the policy reserve determined in the valuation, plus resources arising from that group of policies only (including premiums and investment returns based on the interest rate in the valuation, etc.), minus any payments for benefits or expenses, etc., as present in the valuation.

Fourth: Evaluation of Future Premiums
1- The provisions in this section apply to all life insurance policies except investment-linked policies.
2- In the event that the policy determines future premiums and benefits (excluding benefits arising from dividend or surplus distribution) based on the total of due premiums, the premium value for a year must not exceed the premium actually payable under the policy, subject to the following:
a- If life insurance premiums are in the form of uniform payments throughout the payment period, the premium value must not exceed the value sufficient from the inception of the policy to provide the predetermined benefits, without considering amounts required to generate profits, expenses, or other costs, and the value of these premiums must be calculated according to the same assumptions regarding the period and mortality and morbidity rates used in calculating the policy reserve. b- If life insurance premiums are not in the form of uniform payments throughout the payment period, the premium value must not exceed the value determined according to the provisions of item (a) of this paragraph, adjusted to account for differences in premiums due each year. 3- In the event that changes are made to the terms of the insurance policy through additional appendices, and for the purpose of implementing the provisions of paragraph (2) of this section, it can be assumed that these changes were included in the base policy from the time they were made. 4- An alternative evaluation method to that stated in paragraphs (2) and (3) of this section may be used if it is proven that the result of the alternative method for calculating the policy reserve does not, in general, fall below the result of using the method explained in those paragraphs.

Fifth: Acquisition Costs
1- In the event that an adjustment to the valuation is made for the purpose of calculating acquisition costs throughout the full premium payment period, the maximum premium value is increased by an amount not exceeding 5% (or a specified percentage if less than 5%) of the total relevant capital under the policy, and this increase is calculated over the full premium payment period according to the interest rate and mortality or morbidity rates used in the policy valuation.

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The maximum premium value is calculated according to the provisions of Section (Fourth) of this Appendix and considering paragraph (2) of this section.

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Form (09/01/1/1)

CENTRAL BANK OF JORDAN
البنك المركزي الأردني

2- The increase in the premium under any circumstances resulting from the addition of acquisition costs must not cause the value of future premiums to exceed the value of premiums actually payable under the policy.
3- The steps below are followed for the purpose of arriving at the specified percentage mentioned in paragraph (1) of this section for all policies of the same type as the policy on which an adjustment was made according to the provisions of that paragraph:
a- Calculate the total value of acquisition costs expected to be recovered from premiums payable under those policies, after tax deduction. b- Calculate the total value of relevant capital for each policy, which represents the following:

• For life insurance policies: the total sum insured.
• For policies payable at maturity or death: the amount payable at maturity or death.
• For deferred annuity policies: the net present value of annuities at maturity or the cash option value, whichever is greater.
• For term life insurance policies: the total sum insured at the valuation date.
  c- Specified Percentage = Total Value of Acquisition Costs / Total Value of Relevant Capital.

Sixth: Interest Rates
1- Interest rates used in calculating the present value of future cash flows must not exceed interest rates determined by a conservative evaluation of returns on investments corresponding to the policy reserve for life insurance business, and must not exceed by an appropriate amount the expected returns on amounts to be invested in the future. 2- For the purpose of paragraph (1) of this section, the assumed rate of return on investments, before any adjustment resulting from tax deduction, must not exceed the rate of return on those investments calculated according to the provisions of paragraph (3) of this section after reducing it by 2.5% (i.e., Rate of Return x 97.5%). 3- For the purpose of estimating the return on investments, investments are evaluated according to the provisions of "Instructions on Accounting Policies to be Followed by the Company and Forms Necessary for Preparing Reports and Financial Statements" in effect, and in accordance with the provisions of "Instructions on Investment Principles of Insurance Company Funds and Determining the Nature of Insurance Company Assets and Locations Corresponding to its Insurance Liabilities" in effect, subject to the following:
a- The return on investments for fixed-income investments represents the annual interest rate whose use results in the market value of investments being equal to the sum of the present value of future interest payments (before tax deduction) and the present value of principal repayment. b- The return on investments for variable-interest investments represents the ratio of the expected income value from those investments over a twelve-month period from the valuation date, before tax deduction, to the investment value, assuming the investment will be held throughout that period and factors affecting income will remain unchanged, subject to any changes in factors before the valuation date. c- When calculating the return on investments consisting of stocks or land, adjustments must be made for each category of those investments as appropriate to exclude the portion of the estimated return that represents compensation for the risk of not maintaining total income from one year to another. Each category for the purposes of this paragraph includes investments with similar nature, type, and degree of risk, and the resulting return is called the risk-adjusted return. d- When calculating the return on investments other than stocks or land, the return is adjusted as appropriate to exclude the portion estimated to represent compensation for the risk of not maintaining income from investments or not receiving the principal value, and the resulting return is called the risk-adjusted return, considering wherever possible returns on risk-free investments with the same maturity and currency. 4- For the purpose of determining the weight in calculating the risk-adjusted return as the weighted average of returns on individual investments according to the provisions of paragraph (2) of this section, and when calculating the weighted average, the following are considered:
a- The weighting value for all investments must be consistent with the instructions referred to in paragraph (3) of this section. b- The return on investment-linked investments and the value of investment-linked investments are excluded from the weighted average calculation.

5- For the purpose of determining interest rates to be used in evaluating a specific category of insurance policies, investments must be divided among different policy categories, and in such cases, the limit according to paragraph (4) of this section is applied based on a measure of the general return on investments. 6- For the purpose of paragraph (1) of this section, the interest rate used with respect to liabilities denominated in Jordanian Dinar must not exceed under any circumstances the maximum interest rates listed below, before any tax deduction:
a- (6.5%) annually. b- The return available on long-term fixed-income government bonds issued by the Jordanian Government maturing within a period not exceeding fifteen years; for the purposes of this paragraph, this return is called "Return (B)". c- The return resulting from the following equation:
{(3%) + (2/3) × Max between (Return (B) - (3%)) and (0%)} This applies when taking an assumption about returns resulting from future investments.
7- For the purpose of paragraph (1) of this section, the interest rate used with respect to liabilities denominated in currencies other than the Jordanian Dinar must not exceed the interest rates denominated in Dinar determined on a less conservative basis than stipulated in paragraph (6) of this section, before any tax deduction. 8- The insurance company must calculate reserves on the basis mentioned above. Other evaluation methods, including asset-liability matching, may be presented and will be considered by the Central Bank of Jordan if their adequacy is proven.

Seventh: Mortality and Morbidity Rates
1- The amount of the policy reserve for any category of policies is determined based on conservative mortality and morbidity rates, with the rates used based on relevant mortality and morbidity tables, and considering the company's mortality and morbidity experience regarding any similar policies issued by the company previously.

2- For the purpose of determining the value of payments under life annuity insurance policies or similar benefits, the value of future improvement in mortality rates must be included.

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Form (09/01/1/1)

CENTRAL BANK OF JORDAN
البنك المركزي الأردني

Eighth: Expenses
1- The total expense reserve, whether implicit or explicit, must not be less than the value required to face the total net cost likely to be incurred to fulfill all active insurance policies, assuming the cessation of underwriting for any new business for twelve months from the valuation date, after tax deduction. 2- When calculating the reserve mentioned in paragraph (1) of this section, the effects of inflation on future expenses and the company's actual expenses in the twelve months preceding the valuation date are considered, and conservative assumptions are applied regarding future price and profit increase rates.

Ninth: Future Dividends or Surpluses
Future dividends or surpluses, whether implicit or explicit, for policy participants are calculated in accordance with the future assumptions taken in the valuation and the current method of distributing dividends or surpluses.

Tenth: Additional Benefits
1- To cover any increase in liabilities arising from policyholders exercising benefits in their policies, a reserve based on conservative assumptions is recorded.
2- If the benefits include a guaranteed benefit payable within twelve months after the valuation date, the reserve recorded to cover this benefit must confirm that the policy value does not fall below the amounts to be paid in execution of this benefit. 3- If the policy surrender value is guaranteed, the policy value must not fall below the policy surrender value at any time.

Eleventh: Benefits of Investment-Linked Policies If the benefits due under the policy are investment-linked, whether fully or partially, the value of the policy reserve determined for those benefits must not be less than the value of investments set aside to face those benefits.

Twelfth: General Provisions
1- Life insurance policies must not be treated as investments by calculating a negative policy reserve for those policies.
2- When determining the amount of the policy reserve for life insurance business, it is considered that these are investments with the nature, maturity, and currency of the investments representing these liabilities and their value, and must include a conservative reserve corresponding to potential future changes in the value of investments that affect the company's ability to fulfill liabilities arising from life insurance policies, or the adequacy of investments to fulfill the policy reserve as determined according to Sections (Second) to (Eleventh) of this Appendix. 3- The policy reserve for any policy must not be reduced to face the possibility of voluntary lapse of that policy.

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Form (09/01/1/1)