B.1 Universal Life (FAS 97)

Question 1

FAS 97: applicability

and definition of UL

Answer 1

applied to UL, certain deferred annuity and investment contracts, limited pay long duration contracts

UL contracts include any of the following:

• contract assessments made by the insurer that are not fixed and gtd by the terms of the contract
• amounts accrued to the benefit of the policyholder are not fixed and gtd
• premiums may be varied by policyholder w/o consent of the insurer
• account balance with non-gtd credits/charges
• contract elements change based on IRs or market conditions, rather than group experience

Question 2

SOP 03-1 significance test

FAS 97

Answer 2

requires that contracts are based at inception as either insurance or investment contracts, based on the significance or mortality/morbidity

significance ratio: pv(excess payments) / PV(total assessments)

• excess payments = payments larger than PH account
• all amounts assessed against the PH
• higher ratio = more significant insurance risk
• may require multiple scenarios to evaluate
• deterministic is fine if UL product isnt subject to capital market volatility

if no significant insurance risk; FAS 91
else if terms not fixed and gtd; FAS 97
else; FAS 60

Question 3

FAS 97 balance sheet and income statement presentation

Answer 3

• benefit reserve is on the liability side
• DAC on asset side
• NII = revenue
• premiums on FAS 97 are NOT reported as revenue
• revenue = COI, SCs, policy fees

expenses:

• Benefit claims in excess of Account Balance
• credited interest
• DAC amortization
• does NOT include resreve increases or surrender benefits

Question 4

FAS 97 Benefit Reserve

Answer 4

Benefit reserve = Account balance, for any given duration,. ignoring SCs

UL acct balance = premiums, credited int, bonuses, minus charges, fees, wds

Question 5

FAS 97 Unearned revenue liability

Answer 5

If revenue is collected to compensate the insurer for services to be provided in later year(s), set up a URL, and the amortization of URL is included in revenue
ex: high FEL, COI charges not following a normal mortality pattern

Question 6

Treatment of bonuses and special benefits

Answer 6

examples: sales inducements such as day 1 bonuses, persistency bonuses

SOP 03-1: hold an additional sales inducement liability (or asset). defer these the same way as DAC