A number of our UK insurance company clients provide unit-linked pensions policies to occupational pension schemes.  For these companies, the policies give the insurer the unilateral and unconditional right to terminate the policies at any time subject to a three month notice period. In the event of the insurer exercising this right, the policyholder would be paid the value of units at the end of the three month notice period and the insurer’s liability would then cease completely at that point.  If the insurer does not terminate the policy it will continue in-force until the death or retirement of the members of the occupational pension scheme or until the policyholder chooses to transfer the value of the units to another provider.

The policies are written as insurance business but they are simply savings policies.  There are no insurance benefits and no investment performance or other guarantees.  The obligation under the policy at all times is the value of the unit liabilities.  There is no obligation on the policyholder to pay future premiums and the policyholder is free to transfer the value of their units to another provider at any time.  There is no limit on the charges that may be taken by the insurer from the policy .

Our question is how should such policies be projected for the purposes of calculating the technical provisions?

Our understanding is that:
1.     Article 18 paragraph 3(a) of the Delegated Regulation sets the contract boundary for all obligations under this policy (i.e. those that relate to both paid premiums and any future premiums that belong to the contract in accordance with Article 18 paragraph 5) as three months - being the notice period referred to above.
2.     Since Article 18 paragraph 3(a) defines the contract boundary for these policies to be three months, Article 18 paragraph 2 requires that the obligations under this policy that relate to the paid premiums (i.e. the unit liabilities in respect of the past premiums and the associated administration and investment management costs) do not belong to the contract after three months.
3.     Article 18 paragraph 5 of the Delegated Regulation requires that future premiums, which are non-contractual for these policies, and the associated obligations should not be included in the calculation of technical provisions of this contract.
4.     As a consequence of points 1 to 3 above, the cash flow projection used in the calculation of the best estimate in accordance with Article 28 should stop after three months and the best estimate is, therefore, the value of the unit liabilities attaching to the contract at the valuation date plus the present value of the cash-flows (expenses less charges) arising in the next three months.

Please can you confirm whether our understanding as set out above is correct.