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

Copyright © 2004 Steve Welander.
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