Contract boundaries are defined as:
Under Solvency II, the boundary for existing insurance contracts is set at the point at which the company:
can unilaterally terminate the contract, refuse to accept a premium, or
amend the benefits or premiums in such a way that the premiums fully reflect the risks.
This contract boundary sets the point at which premiums can be recognised on existing contracts. Within the boundary period, both contractual recurring premiums and premiums arising from policyholder options to renew or extend their policies should be considered on a best estimate basis.
For example, if a non-life insurance undertaking is one year into a three year contract at the balance sheet date, allowance needs to be made for expected premiums and claims, on a best estimate basis, during the remaining two years of the contract. This could potentially have the effect of increasing or reducing technical provisions, depending on whether the contract is expected to be profitable.
If I'm understanding this correctly, you can only count a contract under solvency II when you can unliaterally terminate the contract, refuse to accept a premium or amend the benefits or premiums in such a way that the premiums fully reflect the risks. In most cases, is this not the expiry date of the policy?
If this is the case, what about an annual policy (say motor) which incepts at 1/10 in the year and our valuation is at 31/12. Given at 31/12 we cannot unilaterally terminate the contract, does this policy just not get included at all? Or does the core reading mean that we should only recognise premiums up until the boundary point and none after?
I am just confused because the core reading says "this contract boundary sets the point at which premiums can be recognised on existing contracts", which would imply we can only recognise premiums after that point, and in the above example means after the policy has expired which would mean that that policy would not be recognised at all despite it incepting in 1/10.
