U.S. GAAP - Chapter 5 - TRAD LIFE (SFAS 120)
Overview
- mutual co's par products have similarities to both F60 and F97 UL products
- earnings emerge in a manner similar to UL
- product features are similar to Trad Life
- actively managed dividend scales cause earnings to emerge w/r to margins vs level of premiums
- F60 and by reference F97 specifically exclude mutuals
- SOP95-1 adn F120 address this
- model assumes dividend fund exists to determine divs
- Dividend Fund DF(t) = DF(t-1) + DP(t) + DI(t) - DQ(t) - DE(t)
- DF(0) = 0
- DI(t) - interest credited to DF
- DP(t) - gross prem credited to DF
- DE(t) - expense charges to DF
- DQ(t) - mort costs
- Div(t) - Dividend Paid
- M(t) - Margin to enterprise
- DF'(t) - same formula as DF(t) , but w/ actuals instead of modeled
- Div(t) - (DF'(t) - DF(t)) - M(t)
Scope and Applicability
- SOP95-1 - mutuals exected to pay divs to PO based on contribution principle
- only applicabel to mutuals
- F120 - stock cos can use it on blocks that meet provisions of SOP
- must be long duration, par and expected to pay divs based on "actual experience of ins enterprise"
- SOP model assumes earning emerge relative to earnings net of PO divs
- Par policy considered UL (F97) if any of the following are true
- PO may vary prems w/in contract limits w/o insurer consent
- stated account balance w/ credits and debits wehre amounts of cr/dr not guaranteed
- contract charges expected to be interest/market based rather than experience bases (group/block of pols)
- F120 specifically says to follow F60/F97 guidance if not par
Overview of Acct Model
- where F60 and F120 are the same
- prems recognized when due
- expenses - non-deferrable recognized when incurred
- benefits as incurred
- where F60/F120 are different
- Policyholder benefits - both use NLP to accrue PO benefit liab
- F60 - useing assumptions based on anticipated exp as issue
- F120 - only guar mort and div fund int assumptions
- Annual PO Divs
- F120 - recognized as such amounts are earned by PO
- F60 - either element of PO benefits and accrued based on NP
- or accrual of def div liab when profits to shareholders are limited
- Acq Costs - identification and deferral smae
- F120 - amortized based on constant % of PV of EGM expected to be realized over life of contract
- adjusted to reflect actual adn current estimates of future experience
- Terminal Divs - recognized as level amt w/r to EGM based on amt expected to be paid
- adjusted to reflect actual and current estimates of future experience
Amortization Methods
- EGMs - primary basis for recognizing earnings
- comparable to F97 EGPs
- EGMs shoud include estimates of (SOP95-1)
- + Expected Premiums GP(t)
- + INvestiment INcome on PO balances I(t)
- - Expected paid benefit claims B(t)
- - Contract Admin costs (incl nondef aqui costs) E(t)
- - Expected change NLP Benefit Reserve NLP(t) - NLP(t-1)
- - Expected PO Divs Div(t)
- +/- other expected assessments/credits
- NLP(t) = NLP(t-1) + P(t) + IR(t) - BR(t) where
- P => increase in reserves due to prems
- IR => increase in reserves due to interest
- BR => decrease in reserves due to benefits
- EGB(t) = GP(t) + I(t) - B(t) - E(t) - (NLP(t) - NLP(t-1))
- = (GP(t) - P(t)) + (I(t) - IR(t)) + (BR(t) - B(t)) - E(t) - Div(t)
- DE(t) => deferrable expenses
- PV()(t) => present value @ time t
- [t]EGM(t+1) => gross margins expected in period t+1 as projected # time t
- k(t) = [PV(DE(s>t)(0) = PV(DE'(s<=t)(0)] / [PV([t]EGM(s>t)(0) = PV([t]EGM'(s<=t)(0)]
- Amort(t) = k(t)*[t]EGM(t)
- if significant EGMs in any period, need to select alt amort base
- possible alternatives: PV(EGMs before divs), est gross prems, life inforce
Selection of Assumptions
- two main classes of assumptions:
- those underlying PO benefit liab
- those for estimating future gross margins
- Benefit Reserve Assumptions
- NLP method - requires mortality and interest assumption
- SOP95-1
- use div fund int rate (if determinable)
- mort - rateas guar in contract for calcing CV
- Mortality - contractually specified
- if substd - include extra liab
- Interest - hierarchy - if not avail, drop to next level
- div fund rate at issue
- guar csv rate
- NAIC min nonf rates
- if rates vary by duration, then reflect that in reserve calc
- Method
- NLP
- timing s/b consistent w/ financials
- Estimate Gross Margin Assumptions
- best estimate basis w/o PADs
- Mortality - best estimate mort assumptions
- look at div scale mort/pricing mort/recent co experience
- Interest
- div fund int rate
- inv int rate on PO liabs
- base on yield rate on invested assets
- net of inv expenses
- int rate used to discount future EGMs
- rate used to estimate gross margins in first year of contract is expected inv yield
- discount rate - once chosen, must stick with it
- either use inv yield rate at issue
- OR current yield each year
- Dividend
- Gross margins don't include expected terminal divs
- EGMs must show effect of elected div option (PUA/Accum/1YrTerm/Cash/ReducePrem)
- best estimate assumptions to show how PO expected to use divs
- Lapse Rates
- sensitive to changes in div scale
- if ETI/RPU are par, need to reflect that
- Expenses
- costs expected to be incurred for contract admin (including non-capitalized acq)
- Groupings
- policy-by-pol or group methods can be sued
- need grouping for recoverability testing and loss recognition
- groupings s/b consistent w/ way co acquires/services/etc LOBs etc
- issue year groupings at a minimum
- Example p. 123
True-up and Unlocking
- can be done at LOB level or lower level (consistent w/ groupings)
- EGMs adjusted to reflect actual results
- future EGMs s/b adjusted if necessary as well
- True-up - current period effect on amort of DAC or accrual of term div liabs
- difference between actual and expected Gross Margins for period, w/ k held constant
- Unlocking - current period effect on amort of DAC or accrual of term div liabs of a change in k
- caused by current period true-up or change in estimated EGMs
- DAC(t+1) = DAC(t) + AmountsCapitalized(t) + Interest(t) - Amort(t)
- Interest(t) = DAC(t)*i(t)
- k(t) = [PV(DE(s>t)(0) = PV(DE'(s<=t)(0)] / [PV([t]EGM(s>t)(0) = PV([t]EGM'(s<=t)(0)]
- Amort(t) = k(t)*[t]EGM(t) + [k(t+1)*[t+1]EGM'(t) - k(t)*[t]EGM(t)] <- true up term
- +(1+I){k(t+1)*[v*[t+1]EGM'(t) + PV([t+1]EGM(s>t)(t)] - k(t)*PV([t]EGM(s>t+1)(t)} <- unlocking term
- DAC(t) = k(t)*PV(EGM(s>t)(t) - PV(DE(s>t))(t)
- if we assume no deferrable expenses after year 1
- DAC(t+1) = DAC(t) + i(t)*DAC(t) - Amort(t)
- Unlocking = k(t+1)*PV([t+1]EGM(s>t+1))(t+1) - k(t)*PV([t]EGM(s>t+1))(t+1)
- first term reflects revused future expectaions
- True-Up = k(t)*([t+1]EGM'(t) - [t]EGM(t))
- if both unlocking and true-up, allocation of amort among components is judgemental
Realized Capital Gains
- an element of gross margin
- will affect the amortization charge
- p. 128 for example of impact of realized capital gain
Recoverability and Loss Recognition
- recoverability testing - PV amts to be capitalized vs PV EGMs
- Loss recognition - ongoing evaluation
- k(0) < 100% - amts being capitalized are recoverable
- for terminal div liab accural, k_DAC(0) + k_TermDiv(0) < 100%, then recoverable
- Loss recognition
- evaluating whether existng net liab combined w/ anticipated future revenues is adequate to provide future obligations
- if not adequate, premium deficiency
- SOP95-1 - liab for future policy benefits = sum of
- NLP reserve for death & endow policy benefits
- liability for terminal dividends
- any probable loss (prem def)
- Prem Def must be recognized if defiency exists on an entire LOB (minimum)
- Test for Prem Def
- + PV future benefit pmts & related settlement/maint costs using revised assumptions based on actual and anticipated experience
- - PV future gross premiums - using revised assumptions
- = liab for future policy benefit using revised assumptions
- - (liab for future policy benefits @ valn - unamortized acq costs)
- = premium deficency
- for par products, divs can be reduced to adjust for adverse experience making a prem def unlikely
Policyholder Benefit Liabilities
- SOP95-1 - PO benefit liabs be calced using NLP
- net prem ratio - levelp proportion of each gross premium payment necessary to provide contract benefits
- only considers mortality and interest
- use guaranteed mortality and div fund int rate
DAC and Terminal Div Liabilities
- Acq costs both variable and directly related to acq new and renewa ins/ann contracts are capitalized and amortized into income over life of assoc contract
- amort determined relative to PV EGMs
- terminal div payments and accrual of term div liab excluded from EGM calc
- terminal div payments charged against accrued liablity
Additional Considerations
- Policy Riders
- not specifically addressed in SOP95-1
- if rider viewd as sep contract, may have features that place them w/in scope of F120 and SOP95-1
- if rider intertwined w/ policy
- consider them one and include all acq costs etc from both coverages
- develop benefit Vx sep and add together
- w/ PUA divs to purchase PUAs, EGMs show divs as expense and income
- later durs, EGMs reflect CV surrender from PUA to purchase Term Ins
- if rider not intertwined and not w/in scope, treat it under F60 or whatever is appropriate
- if rider detached from base for acctg purposes, not part of same block
- Reinsurance
- depends on contract adn treaty
- paying ceding commission - use to offset acq costs otherwise capitalized
Examples p. 137+
- Base Case
- Dividend fund different than NLP reserve
- Experience diffent than best-estimate assumptions
- alternate discount rates
-
Copyright © 2004 Steve Welander.
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