Net premium rule IPSB

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For conventional with-profits business,one adjustment to cash flows is the so called ‘net premium rule ’. Firms deduct from the present value of future premiums to be received on in force business,that element of the current premium price that relates to the payment of future discretionary bonuses.

This is a relatively insensitive adjustment,as it assumes that the current premium fully reflects how future bonuses may be increased,or reduced,in the light of future market circumstances.

Another problem with mathematical reserves is their sheer complexity.The interactions of the various adjustments to expected cash flows and the layered adjustments to the discount rate are intricate.And while much of the risk based capital supporting with-profits business is incorporated in mathematical reserving provisions,the overall prudence of the end result is often not wholly transparent.The Life Assurance Directive also requires an additional capital.