COBS 20.3 Principles and Practices of Financial Management

(1) Amount payable under a with-profits policy

General

(a) Circumstances under which any historical assumptions or parameters, relevant to methods used to determine the amount payable, may be changed;

General

(e) For each major class of with-profits policy, methods establishing the main assumptions or parameters that decide the output of methods that determine the amount payable;

(f) Degree of approximation allowed when assumptions or parameters are applied across generations of with-profits policyholders or across different types or classes of with-profits policies;

(g) Formality with which the methods, parameters or assumptions used are documented;

(h) Target range, or target ranges, that have been set for maturity payments;

(i) Factors likely to be regarded as relevant to address policyholders' interests or security when determining excess surplus; and

Investment return, expenses or charges and tax

(j) How investment return, expenses or charges and tax are brought into account and how the impact of those items is determined on the amount payable. In particular:

• any distinctions made in recognising the investment return from a subset of the total assets of a with-profits fund;
• whether expenses are apportioned between all the policies in a with-profits fund or apportioned in some other way;
• the relationship between the liability to tax attributed to a with-profits fund and the tax that the firm imputes to determine the amount payable;
• impact on the amount payable of any attributed liability to tax of a with-profits fund as a result of the firm making a transfer to shareholders; and
• how any other items are brought into account.

Bonus rates

(b) General aims in setting bonus rates and the constraints to which the firm may be subject in changing economic circumstances;

(c) How the range of with-profits policies or generations of with-profits policies over which the firm believes a single bonus rate would be appropriate is determined and the circumstances under which it believes a new bonus series would be necessary; and

Bonus rates

(k) Current approach to setting bonus rates, including the weight given to recent economic experience. For final bonus rates, the description should include any distinctions made between with-profits policies that remain in force until contractual dates, or dates on which no market value reduction applies (for example, maturity or retirement dates) and policies that are surrendered or transferred at other dates;

(l) Frequency at which bonus rates are re-set or expected to be re-set and the circumstances under which changes in the economic environment would cause the time between re-setting to change;

(m) Maximum amount by which annual bonuses would alter if annual bonus rates were reset;

(n) Approach to setting any interim bonus rates before the next declaration of annual bonus rates;

(o) Relationship or interaction between final bonus rates and any market value reductions, if both can apply at the same time;

(p) How final bonus rates influence the value of with-profits policies that have formulaic surrender or transfer bases (for example, older conventional policies rather than unitised policies); and

Smoothing

(d) Statement as to whether smoothing is intended to be neutral over time.

Smoothing

(q) Any differences in approach for:

• the various types of with-profits policy;
• different categories of payout, such as between surrendered policies and maturing policies; and
• different generations of with-profits policyholders.

(2) Investment strategy

(a) How the types, classes or mix of assets are determined; and

(b) Strategy in respect of derivatives and other instruments.

(c) Whether and to what extent there is hypothecation of assets;

(d) Period between formal reviews of investment strategy;

(e) Approach to investment in different asset classes, and assets of different credit or liquidity quality, including assets not normally traded; and

(f) Details of any external support available to the with-profits fund and how this affects the investment strategy.

(3) Business risk

(a) Where a firm explicitly excludes business risk from a class of with-profits policies but there are residual risks, clarification where these risks such as guarantee and smoothing costs are borne; and

(b) Define where compensation costs from a business risk would be borne.

(c) Current limits which apply to the taking on of business risk; and

(d) Whether and to what extent particular generations of with-profits policyholders or classes of with-profits policies bear or might bear particular business risks, including for example, crystallised or contingent guarantees to other classes of policyholders or whether the out-turn from all business risk is pooled across all with-profits policies.

(4) Charges and expenses

(a) Factors that would drive any change to the basis on which the firm applies charges to or apportions its actual expenses amongst with-profits policies, or exercises any discretion to apply charges to particular with-profits policies.

(b) Charges currently applied and the expenses currently apportioned to major classes of with-profits policies;

(c) Relationship between the firm's actual charges and expenses, as applied to determine the amounts payable under with-profits policies, and the charges and expenses borne by the with-profits fund;

(d) Circumstances under which expenses will be charged to the with-profits fund at an amount other than cost, and the reasons why; and

(e) Interval for reviewing any arrangements for out-sourced services, including those provided by connected parties, giving a broad indication of the terms for termination.

(5) Management of inherited estate

(a) Preferred size or scale of inherited estate and implications for the values of the with profits policies; and

(b) Any existing division of the inherited estate between with-profits funds; and

(c) Any constraints on the freedom to deal with the inherited estate as a result of previous dealings.

(d) How the inherited estate is used, for example, in meeting costs;

(e) Whether the investment strategy for the inherited estate differs from the rest of the with-profits fund; and

(f) Any current guidelines in place as to the size or scale of the inherited estate or as to how and over what time period the inherited estate would be managed, if it becomes too large or too small.

(6) Equity between the with-profits fund and any shareholders

(a) Arrangements for, and any changes to, profit sharing between shareholders and with-profits policyholders.

(b) Current basis on which profit between with-profits policyholders and shareholders is divided; and

(c) Whether the pricing of any policies being written, and particular policies open to new business, appear to be significantly and systematically reducing the inherited estate if the shareholder transfer is taken into account.