Hong Kong Regulations

INSURANCE COMPANIES (DETERMINATION OF LONG TERM LIABILITIES) REGULATION - SECT 8

Rates of interest

(1) The rates of interest to be used in calculating the present value of
future payments by or to an insurer shall be no greater than the rates of
interest determined from a prudent assessment of the yields on existing assets
attributed to the long term business and, to the extent appropriate, the
yields which it is expected will be obtained on sums to be invested in the
future.

(2) For the purposes of subsection (1), the assumed yield on an asset
attributed to the long term business, before any adjustment to take account of
the effect of taxation, shall not exceed the yield on that asset calculated in
accordance with subsections (3), (4) and (5), reduced by 2.5% of that yield.

(3) For the purposes of calculating the yield on an asset, the asset shall be
valued in accordance with section 8(4) of the Ordinance.

(4) The yield on an asset, subject to subsection (5), shall be-

   (a)  in the case of fixed interest investments (that is to say, investments
        which are fixed interest securities), that annual rate of interest
        which, if used to calculate the present value of future payments of
        interest before the deduction of tax and the present value of
        repayments of capital, would result in the sum of these amounts being
        equal to the value of the asset;

   (b)  in the case of variable interest investments (that is to say,
        investments which are not fixed interest securities) that are equity 
        shares or land, the ratio to the value of the asset of the income
        before the deduction of tax which would most likely be expected to be
        received in the 12 months following the valuation date on the
        assumption that the asset will be held throughout that period;

   (c)  in the case of variable interest investments (that is to say,
        investments which are not fixed interest securities) other than
        equity  shares or land, that annual rate of interest which, if used to
        calculate the present value of future payments of interest, before
        deduction of tax, and the present value of repayments of capital,
        where applicable, would result in the sum of these amounts being equal
        to the value of the asset.

(5) In calculating the yield on an asset under this section-

   (a)  if the asset does not consist of equity shares or land-

        (i)    a prudent adjustment shall be made to exclude that part of the
               yield estimated to represent compensation for the risk that the
               income from the asset might not be maintained or that capital
               repayments might not be received as they fall due; and

        (ii)   in making that adjustment, regard shall be had wherever
               possible to the yields on risk-free investments of a similar
               term in the same currency;

   (b)  for assets which are equity shares or land, adjustments to yields
        shall be made as appropriate to exclude that part, if any, of the
        yield from each category of asset that is needed to compensate for the
        risk that the aggregate income from that category of asset, taking one
        year with another, might not be maintained; for the purposes of this
paragraph, a "category of asset" comprises assets of a similar nature, type
and degree of risk.

(6) To the extent that it is necessary to make an assumption about the yields
which will be obtained on sums to be invested in future, the yield shall be
determined in accordance with subsections (7) and (8).

(7) The yield assumed, before any adjustment to take account of the effect of
taxation-

   (a)  on any investment to be made more than 3 years after the
        valuation date shall not exceed the lowest of-

        (i)    a prudent assessment of the yield, current on the valuation 
               date, of long term fixed interest securities issued by the
               national government of the country in which currency the
               liabilities are denominated; or

        (ii)   6% per annum, increased by one quarter of the excess, if any,
               of the yield referred to in subparagraph (i) over 6% per annum;
               or

        (iii)  7.5% per annum;

   (b)  on any investment to be made at any time not more than 3 years after
        the valuation date shall not exceed the assumed yield determined under
        subsection (2) adjusted linearly over the said 3 years to the yield
        determined in accordance with paragraph (a).

(8) In no case shall a rate of interest determined for the purposes of
subsection (1) exceed the adjusted overall yield on assets calculated as the
weighted average of the reduced yields on the individual assets arrived at
under subsection (2); and when that weighted average is calculated-

   (a)  the weight given to each investment shall be its value as an asset
        determined in accordance with section 8(4) of the Ordinance; and

   (b)  except in relation to the rate of interest used in valuing payments of
        property linked benefits, both the yield and the value of any
        linked assets shall be omitted from the calculation.

(9) For the purpose of determining the rates of interest to be used in valuing
a particular category of contracts the assets may, where appropriate, be
notionally apportioned between different categories of contracts. (Enacted
1995)