U.S. GAAP - Chapter 8 - VARIABLE AND EQUITY-BASED PRODUCTS
Introduction
- variable products - products that effectively provide for PO to bear substantially all the inv risk on all or a portion of the assets suporting the savings elemtn of their prem payments
- frequently acct model for variable version of product is same as non-variable version of product
Variable Products
- Product Descriptions
- VUL
- A UL product that allows PO to direct all or a portion of their acct balnce into an investment that effectivley passes risk/reward bask to PO
- Does not guarantee inv performance
- Despite added volatility, acctg for VUL saem as UL
- Extra accounting for extra features (secondary guarantees)
- Variable Deferred Annuities
- classified as investment contract unless significant mort benefits, then UL
- Lots of extra features
- GMDB
- Guar Min Maturity Value
- GMIB
- if any of these features establish significant mortality risk, then may require UL-type acctg
- Variable Payout Annuities
- Income benefit indexed to performance of investments underlying variable account
- Ins company may need to +/- assets backing block depending on emergence of mort experience
- Contract Classification
- Life Insurance
- variable feature prohibits classifying them as trad life
- trad life w/ variable features -> UL-type contract -> F97
- variable UL doesn't change it from being UL -> UL-type contract -> F97
- Deferred Annuities
- typically accounted for as investment contracts
- GMDB may cause it to be classified as UL-type contract
- F97 essentially considers GMIB & Guar Min mat value as pricing risk and not mort risk
- Payout Annuities
- limited pay contract w/ variable features can no longer be classified as limited pay contract & classified as UL-type
- since don't ahve stated account balance or explicit charge for mort benefits, accounting requires judgement
- PO Acct balance = PV expected income stream using pricing basis mortality adn discount rate = rate elected by PO @ annuitization
- mort assessments - expected benefit payments calced using same mort rates used to calc PO balances less amt annuity values incr through survivorship
- mort component of EGP - excess of actual benfits paid over amt of mort assessments, then reduced by amt of req'd additions to assets supportin gcontract due to mort exp different from pricing basis
- contract admin assessment based on purchase rate calc
- g/l relative to mort exp - considered part of mort component or "other expected assessments"
- Assumptions
- Contract Interest Rates
- the rate of int that accrues to PO balances (contract rate)
- this rate is then used
- in estimating the amt of future PO acct balances
- as rate credited to PO balances in investment element of EGP
- as discount rate used in determining PV of EGP
- variety of alternatives in developing int assumptinos
- range from estimating rate for all perods to a single rate for all future periods
- usually incorporate element of recent inv results in establishing assumptions for future periods
- regardless of method, needs to be actuary's best estimate of the future based on underlying investment
- one method uses investment horizons
- need to know lenght of investment horizon and est long term rate
- then need to estimate where we are in inv horizon to determine future yields
- Mortality Rates
- for VUL and Var Life, s/b same conderations as non-variable versions
- for Var DA w/ mort adn variable payout annuities
- since not u/w (generally) mort s/b similar to unselect populations (worse than u/w UL contracts)
- Other Assumptions
- expense assumptions s/b same as non variable forms
- may include expense elements for PO activity (moving funds, etc)
- Methods
- In general, consistent w/ nonvariable forms of contract
- exception: variable payout annuity classified as UL
- A - initial deposit x - contract IA
- t - time from contract initiation (t >= 0) i - premium int rate
- p(x+t) - prob surr x+1 to x+t+1 [t]p(x) - prob survival x to x+t
- v = 1/(1+i) s(x) = sum(v^t*[t]p(x))
- uv(t) = accum inv perforance from issue to time t
- I(t) - inv income rate earned on inv in var acct for period ending @ t
- I(t) = (uv(t) / uv(t-1)) - 1 uv(0) = 1
- P = (A - loading) / a(x) => income units purchased
- IUV - Income unit value IA(t) - ann income payable at t
- IA(0) = P*IUV(0) = P (IUV(0) = 1.00)
- IA(t) = P* IUV(t) IUV(t) = UV(t) / (1+i)^t
- PAB(t) - PO acct balance - principal element of liab for var payout ann
- = IUV(t)*P*a(x+t)
- rollforward of this acct balance generates elements of EGP used to amort DAC
- a(x+t+1) = [a(x+t) - 1]/(v*p(x+t))
- IUV(t+1) = IUV(t)*[UV(t+1)/UV(t)]/(1+i) = IUV(t)*(1+I(t))*v
- PAB(t+1) = IUV(t+1)*P*a(x+t+1)
- = PAB(t) - IUV(t)*(1+I(t+1))*P + I(t+1)*PAB(t) + [1/p(x+t) - 1]*[PAB(t) - IUV(t)*(1+I(t+1))*P + I(t+1)*PAB(t)]
- or
- mort assessent = (IUV(t)*P*PAB(t))/p(x+t) - PAB(t)
- int credited = I(t+1)*[(IUV(t) + P + PAB(t)) / p(x+t)]
- allocated inv performance on benefit payouts to int credited component
- methods may need to be developed for unearned mort assessments for any db features
- added to any variable def ann
- most common is to recognize revenue as assessments are deducted and recognize DB as they are paid
- examples p 215-240
Equity-Indexed Annuities
- Nature of Product
- simplest form - on SPDA chassis
- NAIC SNF - value fo policy @ any point = 90% of prems accum @ 3%
- equity indexing feature rides atop SPDA
- often a cap or participation rate to actual growth rate of index befroe applying to premium
- variations on indexing
- choice of index may be provided
- designated period may be changed
- SC may be applied to indexed value if not annuitized
- DB may or may not include unrealize gains in index @ time of death
- flex prems may be allowed (each prem has own indexing)
- equity indexing may be provided as transfer option w/in VA
- index growth may be averaged across several day/weeks/mo to prevent "all or nothing" scenarios
- the underlying (3%) floor my be reset periodically to the current index value
- may be blendingof indexed and guar values
- other index patterns may be used such as lowest value or highest value during designated period
- assets used to support contract primarily bonds to support the guarnatee
- this is lower than costs of bonds for a normal DA
- extra funds used to puchase call options to hedge index risk
- Acctg for Deriviatives
- SFAS133 (1998) - not only derivative assets, but derivatives embedded in host contracts
- embedded derivative object s/b separated from host contract & acct for as derivative
- once separated, host contract acctd based on non-derivative version
- g/l on derivative used as hedge adn hedged item recognized currently in earnings in same acctg period
- Derivatives Implementation Group (DIG) - formed to offer guidance on F133 Implementation
- intial value of host contract on fund-type cntract = premium paid less valued of embedded derivative
- Establish GAAP Methodology for DAC and Reserves
- F133 - EGPs s/b claced using F97 procedures - w/o consideration of equity benefit
- F115 - unrealized gains from assets available for sale s/b processed thorugh EGP calc to produce shadow DAC
- considerations for reporting EIAs
- host contract treated as F97 DA. Fund value = guar fund value
- when index credit is applied, fund value steps up to reflect
- unrealized g/l on embedded policy derivative and hedging assets become components of EGP
- in GAAP projection, assume exact hedge intent is accomplished
- since value of host contract is balancing item @ issue, unearned FEL normally created by 10% load at issue disappears
- open issues regarding reporting of EIAs under GAAP
- floor of csv or prem paid could emerge as floor for benefit reserve
- choices as to how derivatives enter EGP for amortizing DAC
- cost of underlying asset s/b amort linearly to 0 over life of mat period
- amortize cost using EGM prior to insertion of derivative
- only unrealized gains fo both asset and offsetting liab derivative shoudl only enter shadow DAC calc (consistent w/ many co's F115 practice)
- most F97 calcs can be generated using single set of expected values
- because of importance of value of options, may need to forcast multitude of scenarios and take advantage of results to generate DAC and related items
- Numerical Example 242-247
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Copyright © 2004 Steve Welander.
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