PPS Integrated Report 2021 143 | Group Accounting Policies 4.2 Valuation and recognition 4.2.1 Long-term Insurance contracts Principles of valuation and profit recognition The accounting policy for the measurement of liabilities in respect of insurance contracts has been determined having regard to the Standard of Actuarial Practice (SAPs) and Advisory Practice Notes (APNs) issued by the Actuarial Society of South Africa (ASSA). Of particular relevance to the insurance liability calculations, are the following actuarial guidance notes: SAP 104: Life Offices – Valuation of Long-Term Insurers APN 102: Life Offices – HIV/AIDS APN 105: Recommended AIDS extra mortality bases Valuation The insurance contracts are valued in terms of the financial soundness valuation (‘FSV’) basis contained in SAP 104 issued by the ASSA. A liability for contractual benefits that are expected to be incurred in the future, (the non-DPF component of the policy liabilities) is recorded in respect of the existing policy book when the premiums are recognised. The liability is determined as the sum of the expected discounted value of the benefit payments and the future administration expenses that are directly related to the contract, less the expected discounted value of the premiums to be paid in terms of the policy contract. The liability is based on best-estimate assumptions as to mortality, persistency, maintenance expenses and investment income that are established at the time the contract is issued and updated on an annual basis at reporting date to reflect current expectations. The policy liabilities also make provision for future profit declarations to policyholders. The profits provided for are in line with the Group’s interpretation of policyholder reasonable benefit expectations. The policy liabilities are discounted using an asset-backed rate. Compulsory margins for adverse deviations are included in the assumptions as required in terms of SAP 104. The contracts issued contain a DPF component that entitles the holder to receive, as a supplement to the sickness and permanent incapacity benefits, additional benefits or profits. These non-vesting profits are declared annually. The terms and conditions of these contracts set out the bases for the determination of the amounts on which the additional discretionary benefits are based (the DPF component of the policy liabilities) and within which the Group may exercise its discretion as to the quantum and timing of their payment to contract holders. These benefits consist of a non-vesting allocation of profits or losses of PPS Insurance and investment returns thereon, as determined by the Group. Where the same policy includes both insurance and investment components and the policy is classified as an insurance policy in terms of IFRS 4, the liability for the insurance benefits and investment benefits are valued. To avoid premature recognition of future profit, in the policy valuation, compulsory margins are added to the best estimate assumptions. For new business, profits are only recognised to the extent of the initial acquisition costs, thus no separate deferred acquisition cost is recognised. The Group has an obligation upon death or retirement to pay contract holders the DPF component of their benefits (the members’ apportionment and special benefit account) with a certain deduction on resignation. This deduction that is not paid out is retained as a liability for the benefit of all contract holders until paid to them individually in future periods. The premium component relating to the DPF element cannot be determined and separated from the fixed and guaranteed terms and is therefore recognised as revenue as described below.
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