LDTI & MRB

Question 1

LDTI

Answer 1

Long Duration Contracts (Insurance) Target Improvements

Question 2

LDTI version

Answer 2

• ASU 2018-12 as of Aug 2018
• updates by FASB as of Sept 2019

Question 3

FASB

Answer 3

Financial Accounting Standard Board
* Accounting Standards Codification (ASC, or Codification)
* Generally Accepted Accounting Priciples (US GAAP)

Question 4

FASB

Answer 4

Financial Accounting Standard Board
* Accounting Standards Codification (ASC, or Codification)
* Generally Accepted Accounting Priciples (US GAAP)

Question 5

LDTI four key areas amended by ASU

Answer 5

Question 6

Deliberation

Answer 6

the deliberations ended in June 2018

Question 7

PAD

Answer 7

No provision for adverse deviation (PAD) is allowed.

Question 8

MRB

Answer 8

Market Risk benefit – is a contract or contract feature issued by an insurance entity that protectes the contract holder from other-than-nominal capital market risk and also exposes the insurer to other-than-nominal capital market risk.

Question 9

MRBs

Answer 9

• are measured at fair value.
• GMxBs

Question 10

OCI

Answer 10

Change in credit risk are recognized in other comprehensive income

Question 11

DAC

Answer 11

• amortized on a straight-line basis, over the epxected life of the contract, independent of profitability.
• no interest accretion and no impairment test.

Question 12

income statement

Answer 12

Related changes in fair value recorded within the income statement and statement of other comprehensive income.

Question 13

scope of LDTI

Answer 13

The updated guidance is specific to investment contracts and contracts with mortality, longevity, or morbidity risk.

Question 14

LFPB

Answer 14

Liability for future policy benefits

• Traditional “FAS 60” and limited payment long-duration insurance contracts

Question 15

Discount rate

Answer 15

The discount rate is required to be an upper-medium grade (low credit risk) fixed-income corporate instrument yield, (eg. “Single A” rate)., rather than expected investment yields.

• required to be updated at each reporting date.
• effect on liability recorded in OCI

Question 16

Discount rate

Answer 16

• is required to be updated at each reporting date
• effect on liability recorded in OCI

Question 17

Cohort grouping

Answer 17

Move to issue-year cohort grouping
* cohort grouping – priciples based
* for acquired contracts, the acquisition date is considered the “issue date” for cohort purposes.

Question 18

Net Level Premium principle

Answer 18

Net premium ratio = (PV total benefits and related expenses) / (PV total gross premiums), at contract inception.

• excluding Aquisition cost and other non-claim-related costs.
• no provision for adverse deviation (PAD)
• maintenance costs are required to be excluded from liability and recognized as incurred.

Question 19

Discount rate “at inception”, LDTI

Answer 19

the discount rate “at inception” of the contract is used in the subsequent periods for the recalculation of the net premium ratio and accretion of interest on the liability.

Question 20

AOCI

Answer 20

liability remeasured through “accumulated other comprehensive income (AOCI) using current discount rate.
* must update at each reporting date

Question 21

AOCI, OCI

Answer 21

The diff between the liab measured using the original issue date discount rate and the liability measured at the current rate is presented in AOCI, and the change for the period is presented in OCI and not as a period expense.

Question 22

DAC Amortization rate

Answer 22

= (DAC balance) / (total expected in-force over the (remaining) life of the group, assuming a changing persistency)

• other basis:
  – Face amount
  – premium deposits
  – Need to be a constant level basis to achieve a straight-line pattern.

Question 23

PVFP

Answer 23

Present Value future profits

Question 24

impairment

Answer 24

impairment test

Question 25

MRB

Answer 25

Insurance Instruments that protect contract holder from “other-than-nominal capital market risk and also expose the insurer to such risk.

• FASB now requires application of the fair value model to all market risk benefits (such as GMxBs)

Question 26

MRB

Answer 26

• Changes in fair value (MRB’s) are recognized in net income
• separate presentation in steament of financial position, stement of operations and statement of OCI

Question 27

Other-than-nominal risk

Answer 27

presumed to be Other-than-nominal if the benefit would vary more than an insignificant amount in response to capital market volatility.

Question 28

Initial measurement of an embedded MRB feature and its host

Answer 28

ED/MRB may
* equal zero at inception (e.g. GMxB in VA) Or
* be an option with value at inception (e.g. GMxB in FA)

Question 29

Attributed Fee method

Answer 29

a common valuation approach for a feature
* Estimate Fair Value of expected benefits — e.g. stochastic risk neutral scenarios, plus a risk charge (optional?)
* at inception
- GMxB attributed fee % = (GMxB attributed fees (=fair value of benefit at inception) / (total expected fees at contract inception)
– GMxB attrib fee % is fixed over life of contract.
– GMxB attributed fees (=fair value of benefit at inception

Question 30

MRB fair value

Answer 30

= Fair value attributed fees - Fair value expected future benefits