This question relates to the allocation of UL/IL business (between with and without options/guarantees), for UL business with an option to surrender the policy at any time where surrender value (SV) equals bid value of units (i.e. SV basis is pre-determined, amount received on surrender is not guaranteed).

Your response to CP-14-052 Q&A #3 (dated 06/11/2015) states that this UL business should be reported under the column without any options and guarantees – this reasoning given is that, “if the surrender is defined as the value of the units, in principle it does affect the value of technical provisions”.  However, I would suggest that it’s not as clear cut as this.

The S.12.01 Log states that “Contracts with options or guarantees should include contracts that have either financial guarantees, contractual options, or both as far as the technical provision calculation reflect the existence of those financial guarantees or contractual options”.   For UL business with an option to surrender (where SV basis pre-determined but amount not guaranteed):
§    The option to surrender is deemed to represent a contractual option, where the policyholder has the right to fully or partially surrender the policy, on terms which are guaranteed in advance (i.e. SV basis is pre-determined);
§    This is seen as consistent with the EIOPA Draft Technical Specifications issued in 2014, which states that:
o    “A contractual option is defined as a right to change the benefits, to be taken at the choice of its holder (generally the policyholder), on terms that are established in advance. Thus, in order to trigger an option, a deliberate decision of its holder is necessary.”
§    - The option to surrender does change the benefits (e.g. it impacts unit-fund value), and the terms of surrender are established in advance.
§    - The option to surrender does impact technical provisions, for projected BEL cash flows and PVIF (e.g. future run-off, future cash flows, future profits are all impacted by the existence of this surrender option).
§    - Therefore, a strict interpretation of the Log guidance would place this unit-linked business (with option to surrender) under the “with options and guarantees” column.

Please can you confirm where UL/IL business with this surrender option (and no other option) should be disclosed under S.12.01?  Where this is not under “with options and guarantees”, can you please clarify why not?