B.2 New Accounting, Long Duration Contracts

Question 1

TI: Traditional Contract requirements

Answer 1

• net level premium approach
• reserve premiums = constant % of GP
• BenLiab = PVFB - NPR*PVGP
• Net Premium Ratio (NPR) is calculated at policy issue
• represents the ratio of the PV (actual and future expected benefits) over the PV (actual and future expected GPs)
• use at inception discount rates
• benefits do not include acquisition costs
• maintenance and admin expenses are expensed when incurred
• cannot be grouped with contracts in different issue years
• Discount Rates should be updated quarterly to reflect current upper-medium grade yields
• changes to income due to updated IRs is recorded in OCI
• OCI is based on comparing to at-inception discount rates

Question 2

TI: DAC rules

Answer 2

• DAC is amortized at a constant level, straight line
• no interest accretion
• recognize experience adjustments immediately in income
• DAC is written off immediately on death/lapse
• no impairment testing required
• deferrable acquisition costs are not capitalized until incurred
• modified retro approach: Opening DAC balance = existing DAC balance, then amortized prospectively using straight line method

Question 3

TI: Market Risk Benefits

ex: GMxBs

Answer 3

ASU 2018-12 requires additional benefit features classified into 3 categories:

1. Market risk Benefits (GMxBs)
   - significant Capital market risk
   - offers insured protection from capital market loss. transfers potential loss from policyholder AV to insurer
   - does not include DBs
2. Bifurcated embedded derivatives
   - index credits on indexed annuities and IUL
3. Annuitization, death
   - excess annuitization or DBs continue using benefit ratio model

• measure MRBs at fair value and record FV changes
• FV measurement should reduce accounting mismatch compared to legacy approach
• can be an asset or liability
• MRB can be calculated as an option, G/L = 0 at issue
• MRB liability is released on annuitization
• MRBs are required to be FULLY retro approaches

Question 4

TI: Transition Requiremetns

Answer 4

fully retroactive and modified retroactive approaches at transition

fully retro:

• recalc all balances under ASU 2018-12
• bring all balances from issue to the transition date and record the AOCI reflecting the difference in IRs at transition vs issue

modified retro:

• insurers may not have enough data for fully retro, or may be too costly/impractical
• open reserves at trans date = closing rsv before trans date
• remove items previously recorded in AOIC related to shadow loss rsv
• the revised amount is called the carryover basis
• the NPR will pivot off the carryover basis
• initial NPR = (PVFB - Carryover Basis) / PVGP
• NPR = 100% cap, can be negative
• transition date = issue date under mod retro

Question 5

TI: Presentation/disclosure requirements

Answer 5

• separate presentation of liability remeasurement gain/loss
• separate presentation of MRBs and changes in FV
• disaggregated roll forwards
• key judgement and assumptions disclosures
• transitiions disclosures

Question 6

TI: Changes from FAS 60

Answer 6

• Assumptions are not locked in at issue
• revise NPR using historical experience
• can update NPR every quarter but must update NPR at least once per year
• TI: assumptions are best estimates
• FAS 60: assumptions are best estimates + PADs
• TI does not require premium deficiency testing, NPR capped at 100%
• TI liability for policy benefits is floored at zero (not floored under FAS 60)
• more detailed records and disclosures
• Only non-level claims-related expenses are included in the benefit liability
• FAS 60: al expected expenses are reflected in liability
• DPL% has to be updated each reporting date to reflect actual experience

Question 7

TI: Discount Rate Assumptions

Answer 7

Discount rates reflect A-grade upper medium bonds

• reflect duration characteristics of the liability (yield curve, not a single discount rate)
• maximize use of observable inputs, minimize use of unobservable inputs
• long duration liabilities may exceed longest asset yields available and require judgement
• discount rates should be updated quarterly to reflect latest A-grade bonds
• the impact of updating discount rates is captured in OCI
• the difference in discount rates is compared with the original discount rates at issue