My first Publication ocbc_ar17_fullreport_english | Page 174

NOTES TO THE FINANCIAL STATEMENTS
For the financial year ended 31 December 2017
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
2.16 INSURANCE CONTRACTS (continued)
Life Assurance Fund contract liabilities (continued)
The liability in respect of participating insurance contract
is based on the higher of the guaranteed benefit liabilities or
the total benefit liabilities at the contract level derived as
stated above.
In the case of life policies where part of, or all the premiums are
accumulated in a fund, the accumulated amounts, as declared to
policyholders are shown as liabilities if the accumulated amounts
are higher than the amounts as calculated using the gross
premium valuation method.
In the case of short-term life policies covering contingencies
other than death or survival, the liability for such life insurance
contracts comprises the provision for unearned premiums and
unexpired risks, together with provision for claims outstanding,
which includes an estimate of the incurred claims that have not
yet been reported to the Group.
Adjustments to liabilities at each reporting date are recorded
in the respective income statements. Profits originating
from margins for adverse deviations on run-off contracts are
recognised in the income statements over the lives of the
contracts, whereas losses are fully recognised in the income
statements during the first year of run-off.
The liability is extinguished when the contract expires, is
discharged or is cancelled.
The Group issues a variety of short and long duration insurance
contracts which transfer risks from the policyholders to the
Group to protect policyholders from the consequences of insured
events such as death, disability, illness, accident, including
survival. These contracts may transfer both insurance and
investment risk or insurance risk alone, from the policyholders
to the Group.
For non-participating policy contracts, both insurance and
investment risks are transferred from policyholders to the
Group. For non-participating policy contracts other than medical
insurance policy contracts, the payout to policyholders upon
the occurrence of the insured event is pre-determined and
the transfer of risk is absolute. For medical insurance policy
contracts, the payout is dependent on the actual medical costs
incurred upon the occurrence of the insured event.
Contracts which transfer insurance risk alone from policyholders
to the Group are commonly known as investment-linked
policies. As part of the pricing for these contracts, the insurance
subsidiaries within the Group include certain charges and fees to
cover for expenses and insured risk. The net investment returns
derived from the variety of investment funds as selected by the
policyholders accrue directly to the policyholders.
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OCBC ANNUAL REPORT 2017
A significant portion of insurance contracts issued by subsidiaries
within the Group contain discretionary participating features.
These contracts are classified as participating policies. In addition
to guaranteed benefits payable upon insured events associated
with human life such as death or disability, the contracts entitle
the policyholder to receive benefits, which could vary according
to the investment performance of the fund. The Group does
not recognise the guaranteed components separately from the
discretionary participating features.
The valuation of insurance contract liabilities is determined
according to:
(a) Singapore Insurance Act (Chapter 142), Insurance (Valuation
and Capital) Regulations 2004 for insurance funds regulated
in Singapore (“MAS Regulations”); and
(b) Risk-based Capital Framework for Insurers for insurance
funds regulated in Malaysia.
Each insurance subsidiary within the Group is required under
the respective insurance regulations and accounting standards
to carry out a liability adequacy test using current estimates of
future cash flows relating to its insurance contracts; the process
is referred to as the gross premium valuation or bonus reserve
valuation, depending on the jurisdiction in which the insurance
subsidiary operates.
The liability adequacy test is applied to both the guaranteed
benefits and the discretionary participating features; the
assumptions are based on best estimates, the basis adopted
is prescribed by the insurance regulations of the respective
jurisdiction in which the insurance subsidiary operates. The
Group performs liability adequacy tests on its actuarial reserves
to ensure that the carrying amount of provisions is sufficient to
cover estimated future cash flows. When performing the liability
adequacy test, the Group discounts all contractual cash flows
and compares this amount against the carrying value of the
liability. Any deficiency is charged to the income statement.
The Group issues investment-linked contracts as insurance
contracts which insure human life events such as death or
survival over a long duration; coupled with an embedded
derivative linking death benefit payments on the contract to
the value of a pool of investments within the investment-linked
fund set up by the insurance subsidiary. As this embedded
derivative meets the definition of an insurance contract, it
need not be separately accounted for from the host insurance
contract. The liability valuation for such contracts is adjusted
for changes in the fair value of the underlying assets at
frequencies as stated under the terms and conditions of the
insurance contracts.