GHVR 831-23: Supplemental Notes on GHVR 819-18

Question 1

Introduction

Answer 1

1. Study Note GH-819-18 is a Practice Note written by an American Academy of Actuaries committee, discussing issues arising under both U.S. statutory and GAAP accounting relating to contract reserves for health insurance products
2. In 2018 the U.S. Financial Accounting Standards Board (FASB) adopted ASU 2018-12, commonly referred to as the LDTI (“long-duration targeted improvements”) standard
   a. LDTI changes the U.S. GAAP accounting guidance for long-duration insurance contracts, including those health insurance contracts for which contract reserves are held

b. Per revised FASB guidance adopted in 2020, the effective date of LDTI is now 2023 for public companies and 2025 for non-public companies

3. Certain portions of GH-819-18 discuss concepts relevant under U.S. GAAP as it existed in 2010 when the Practice Note was written, but are not relevant under U.S. GAAP after LDTI.

Question 2

Portions of GH 819-18 that are not relevant under US GAAP after the implementation of LDTI

Answer 2

1. Two concepts discussed under Q2 go away under LDTI
   a. the concepts that GAAP contract reserve must contain provisions for adverse deviation

b. GAAP contract reserve assumptions are locked-in at policy issuance and left unchanged unless a premium deficiency exists

2. Q5 discusses the use of the net level premium methodology for GAAP, which continues under LDTI but with the added nuance that the net premium ratio is updated to reflect both emerging experience and changes in expected future experience
3. Q7 and Q8 discuss the concept of a premium deficiency that could lead to the unlocking of GAAP contract reserves and/or writing off a portion of the DAC asset
   a. Under LDTI, the concept of premium deficiency testing goes away, with contract reserve assumptions no longer being locked-in but instead being adjusted periodically

b. DAC assets are no longer potentially subject to impairment

4. Q11, Q12, and Q13 discuss the concepts of loss recognition testing and DAC recoverability testing, which no longer exist under LDTI
5. Q14 and Q15 discuss the profits-followed-by-losses concept and the potential need to establish an additional GAAP “loss reserve” over and above the locked-in contract reserves
   a. The potential need for a separate loss reserve no longer exists under LDTI