U.S. GAAP - Chapter 6 - UNIVERSAL LIFE INSURANCE
Background
- Account for UL - 198 AAA
- AICPA 1984 Issues Paper
Applicability
- UL-type contracts, investment contracts adn limited pay long dur contracts that would be F60 if not mentioned in F97
- EOY1998 w/ restatements for prior years fin statements
- amended F60 for reporting req for realized g/l
- AICPA Practice Bulletin 8 - 1990 - provided guidance
- only looking at fixed (general acct) UL
Definition
- UL - long dur contract w/ death or annuity benefits w/ terms that are not fixed and guaranteed
- contract assessments made by insurer that are not fixed and guar by terms of contract
- amounts that accrue to benefit of PO that are nto fixed and guar by terms of contract
- prems that may be varied by the PO w/o consent fo the insurer
- sometimes requires judgement
- some normal looking contracts s/b accounted for as UL
- existence of account balance for which amounts assessed or credited is not fixed & guar
- expectation fo insurer that changes in any contract elemetn woudl be based onchanges in mkt conditions or int rate and not group experience
- par contracts w/ ability of PO to vary prems w/o consent fo insurer
Typical Product Designs
- prems treated as deposits
- credited rate - rate used to increase fund balance (account balance) aka account value
- surrender charege - penalty for w/d funds
- cash surr value = fund value - surrender charge
- fund is decreased w/ various charges (mort, maint, risk, etc)
- partial surrenders usually allowed
- prems may be fixed or variable - sometimes has a Target Prem that guarantees a certain level of benefits if paid
- many allow extra "dump-in" prems
- may be FEL, left % load, no load (fees taken from account balances)
- enough mortality benefit is provided to qualify as Life Ins under IRC
- mort benefit can be level (Type A) or level NAR (type B) or other pattern
- COI charge - normally monthly to NAR
- might have persistency bonus
Presentation of Results
- retrospective deposit method must be used to account for UL
- benefit reserve - F60: PVFB - PVFP F97:Account Balance (plus adjustments)
- Balance sheet - similar to F60
- Income statement - significantly different
- prems are not revenue
- payments to PO that are return of PO balances not reported as expenses
- revenue
- amounts assessed against PO (COI charges, SC, pol fees, other charges)
- reported in period rec'd - unless deferrable, then repoarted as URL and amortized into income using same methods/assumptions as DAC
- expenses
- benefit claims in excess of acct balances
- costs of contract admin
- int credited to PO balances
- amortization of DAC
Benefit Reserves
- liab for future benefits must be established on balance sheet
- account balance products - retro deposit method
- account balance is basic benefit reserve liab
- UER balance and refundable assesments must be held as liab
- additional liab if prem def exists
- unearned COI held as liab by some co's (not mentioned in F97)
- other products
- if no explicit acct balance, benefit reserve is implicit acct balance or CV
Capitalization and Amortization of Acquisition Expenses
- Amortization method used EGPs
- Estimated Gross Profits (EGPs)
- made up of margins from mort and contract admin, inv earnings spread, SC and other expected assessments/credits
- Mortality
- mort margin - excess of COI over amt paid as benefit claims (in excess of PO balances)
- can estimate if admin system doesn't split DB between NAR and AV
- if level COI or "reverse S&U", excess over std COI needs to be deferred and amortized as URL
- Costs of Contract Admin
- margin - excess of expected admin assessments over expected admin costs
- contract admin costs
- non-DAC policy related costs (policy admin, settlement and maint costs)
- non-DAC acq costs (prem tax and ult ren commission)
- DO NOT include non-DAC, non-policy costs such as mktg and adv
- Investment Earnings
- spread - amount expected to be earned from PO balances - int credited to PO balances
- expected realized g/l s/b estimated and included
- includes amortization of discount or premium on bonds
- includes estimates of equity growth rates
- Surrender Charges
- total SC expected to be collected each year
- diff between account balance for surrendered pol and CSV paid in each year
- product design taken into account when estimating future SC
- Other Assessments and Credits
- rider charges
- reinsurance - consider excess claim recoveries & ceding allowances voer reins prems in EGPs (historically and prospectively)
- treatment varies in practice
- some treat as F60 offset
- Nondeferred Acq Costs
- expensed in year incurred
- if policy related, they affect gross margins
- Expense Capitalization
- same expenses as F60
- except acq costs that vary in constant relationshiop to prems or ins inforce and recurring in nature shall be charged to expenses in period incurred
- under F60, since prems are amort basis, this isn't an issue
- commissions in excess of ultimate level are capitalized
- Amortization of DAC
- k-factor - ratio of present value of deferrable expenses to EGPs usnig int rate that accres to PO balances - at issue
- after issue - actual gross profits replace EGPs and future projections are reviewed/updated
- realized g/l included in investment earnings
- k-factor is recalculated
- all changes in DAC reported in the period
- unlocking - this cumulative catchup amount
- common to use 30 years instead of life of contract
- Negative Gross profits
- est gross revenues, gross costs, or balance of ins inforce substituted for gross profits
- if significant neg gross profits expected for any period
- example p. 154-161
- Selection of Assumptions and Unlocking
- selectoin of assumptions
- best estimates w/o PADs
- includes mort, persistency, prem persistency (or future prem pattern), expenses,future inv earnings, future crediting strategy
- at issue, pricing assumptions generally used as best estimates
- need to understand what underlies pricing assumptions
- if policy maintained at acct value/face levels similar to term, expect persistency to be similar to term
- FIT is not part of DAC process or benefit reserves
- True-up for Actual Experience/Retrospective Unlocking
- replace projected w/ actual at end of each reporting period
- include realized g/l
- unrealized g/l needed for F115
- w/o changing future assumptions - retrospective unlocking
- assumptions and prospective unlocking
- updating future assumptions - prospective unlocking
- retro/pro unlocking examples p 164-165
Deferral of Unearned Revenue
- unearned revenue liab (URL)
- front end loads (FEL) or excess COIs - deferred as unearned revenue and grought into income during period earned
- done via same logic as DAC
- example p. 166
Treatment of Bonuses and Other Special Benefits
- types of special benfits
- day-one bonuses/persistency bonuses/enhanced int rate bonuses
- initial bonuses most common w/ single prem or rollover products
- persistency bonuses are usually either retro int rate increase or refund of COI
- examples
- calculate two streams to establish a liab for the special benfit
Recoverability and Loss Recognition
- same principles as F60
- discount rate for recoverability testing s/b best estimate of earned rate, not crediting rate
- once recoverability has occurred or loss recognition - appropriate to use earned rate to amortize any remaining DAC
- DAC is reduced until k-factor is 100% using earned rate and gross prem approach appropriate thereafter
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Copyright © 2004 Steve Welander.
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