developments in deferred acquisition costs dac for variable annuities secession 59pd may 29 2003 n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Developments in Deferred Acquisition Costs (DAC) for Variable Annuities Secession 59PD - May 29, 2003 PowerPoint Presentation
Download Presentation
Developments in Deferred Acquisition Costs (DAC) for Variable Annuities Secession 59PD - May 29, 2003

Loading in 2 Seconds...

play fullscreen
1 / 47

Developments in Deferred Acquisition Costs (DAC) for Variable Annuities Secession 59PD - May 29, 2003 - PowerPoint PPT Presentation


  • 222 Views
  • Uploaded on

Developments in Deferred Acquisition Costs (DAC) for Variable Annuities Secession 59PD - May 29, 2003. Bradley Barks, FSA, CPA, MAAA CFO and Senior Vice President Global Preferred Holdings, Inc. Presentation Summary. Recent Results of Public Companies

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

Developments in Deferred Acquisition Costs (DAC) for Variable Annuities Secession 59PD - May 29, 2003


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
developments in deferred acquisition costs dac for variable annuities secession 59pd may 29 2003

Developments in Deferred Acquisition Costs (DAC) for Variable AnnuitiesSecession 59PD - May 29, 2003

Bradley Barks, FSA, CPA, MAAA

CFO and Senior Vice President

Global Preferred Holdings, Inc.

presentation summary
Presentation Summary
  • Recent Results of Public Companies
  • Comparison of Methods to Address Equity Market Volatility
  • Sales Inducements - Long Duration SOP
  • Loss Recognition Issues
  • Internal Replacements SOP
recent results of public companies1
Recent Results of Public Companies

Summary

  • Methods and Assumptions
  • DAC “Adjustments”
comparison of methods to address equity market volatility1
Comparison of Methods to Address Equity Market Volatility

Summary

  • Basis of Long-term Assumptions and Methods
  • How Far Out on the Tail Are We?
  • How Bad Might It Be 5 to 10 Years from Issue?
  • “Ideal Method” – Achieves Best Matching
  • Comparison of Methods to the “Ideal”
comparison of methods to address equity market volatility11
Comparison of Methods to Address Equity Market Volatility

Principles of Amortization Methods

  • Match Revenue and Expense
  • Revenue is EGP
  • Expense is DAC (GMDB, Sales Inducements)
  • Problem: We don’t know what the future EGPs will be AND they are extremely volatile in the short-term but less volatile in the long-term.
comparison of methods to address equity market volatility12
Comparison of Methods to Address Equity Market Volatility

How to Compare Different Methods?

  • If we knew what the EGPs would be, we would have a perfect match of Revenue and Expense.
  • The Ideal Method would be the “Crystal Ball” Method
  • Comparison Can Be Made Relative to The “Crystal Ball” Method.
comparison of methods to address equity market volatility13
Comparison of Methods to Address Equity Market Volatility

Numerical Comparisons

Assumptions

  • Single Premium $10,000
  • Avg. Long-term Fund Performance 9%
  • M&E Charges 140 b.p.
  • Expenses 50 b.p.
  • Issue Expenses 7% of Prem.
  • Surrender Charges 7%,6%,5%,4%,3%,2%,1%,0% thereafter
  • Surrender Rates 4% except 15% in year 8
comparison of methods to address equity market volatility14
Comparison of Methods to Address Equity Market Volatility

Numerical Comparisons

Summary of Methods

  • Crystal Ball – Assumes that actual gross profits were known at issue. Results in perfect matching.
  • Traditional Method – Assumes that expected gross profits are based on the current fund value projected at the average long-term fund performance rate.
  • Mean Reversion (modified for simplicity) – Traditional method except that the average long-term fund performance rate is increased or decreased to a cap (14%) or floor (0%) until the FV equals the FV projected at issue. Thereafter, the average long-term fund performance rate is used.
  • Credibility Method – Assumes that EGPs projected at each valuation date are given 10% weight with the the rest of the weight given to the original EGPs. All EGPs given equal weight after year 10.
comparison of methods to address equity market volatility18
Comparison of Methods to Address Equity Market Volatility

Numerical Comparisons

Observations:

  • Crystal Ball – Results in perfect matching.
  • Overall
    • All methods perform well when market performance is constant.
    • 75% of the 12–month periods had returns greater than 15% or less than 5%.
    • 85% of 3-month periods were outside of this range.
    • (Using S&P 500 for periods starting at beginning of the month from 1950 thru 2002.)
  • Traditional Method –Results in very poor matching in volatile markets.
  • Mean Reversion – Effectively dampens poor matching associated with the Traditional method. Tends to become volatile toward end of amortization period.
  • Credibility Method – Good matching over entire amortization period.
sales inducements to contract holders non traditional long duration statement of position ntld sop

Sales Inducements to Contract Holders - Non-traditional Long-duration Statement of Position (NTLD SOP)

sales inducements ntld sop
Sales Inducements - NTLD SOP

Summary

  • Definition of Sales Inducements
  • Accounting Treatment
  • Disclosures
  • Effective Date and Transition
sales inducements ntld sop1
Sales Inducements - NTLD SOP

Definition

  • Insurer must demonstrate that amounts are
    • Incremental to amounts credited on similar contracts without sales inducements, AND
    • Higher than the contract’s expected ongoing crediting rates for periods beyond the inducement, as applicable, AND
    • Must be part of the original contract
  • Examples: Day-one bonus, persistency bonus, enhanced credited rate
  • Applies to UL and Investment Contracts (Deferred Annuities)
sales inducements ntld sop2
Sales Inducements - NTLD SOP

Accounting Treatment

  • Recognized as part of the liability for policy benefits
  • Cannot reflect surrenders in determining amounts to defer or amounts included in Liability for Policy Benefits
  • Deferred and amortized
    • New item: “Deferred Sales Inducements”
    • Amortization same methodology and assumptions as DAC
    • Amortization is included as a component of benefit expense
  • Surrender assumption is included in amortization.
sales inducements ntld sop3
Sales Inducements - NTLD SOP

Disclosure Requirements

  • Nature of costs capitalized and amortization method
  • Amounts capitalized and amortized
  • Unamortized balances
sales inducements ntld sop4
Sales Inducements - NTLD SOP

Transition Rules and Effective Date

  • Effective for fiscal years beginning after December 15, 2003
  • Initial costs deferred prior to adoption are not adjusted
  • Unamortized balances amortized according to SOP at initial application
  • Cannot retroactively capitalize sales inducements not previously deferred
  • Prospective  No cumulative effects
  • Must Adopt Retroactive to Beginning of a Fiscal Year
loss recognition issues1
Loss Recognition Issues

Summary

  • Impact of GMDB Cost
  • Sales Inducements
  • Effect: Loss Recognition is permanent vs. DAC unlocking can be recaptured
dac on internal replacements
DAC on Internal Replacements

Summary

  • Background
  • Supporting Literature
  • Definition of Internal Replacement
  • Accounting Treatment
  • Effective Date and Transition
dac on internal replacements1
DAC on Internal Replacements

Background

  • Proposed Statement of Position released 3/14/03
  • Comments Due 5/14/03
  • Applies to DAC, Unearned Revenue Liability and Sales Inducements
  • Note: Sales Inducements incurred because of a modification (i.e., were not contemplated in the original contract) can be deferred if the new contract is “Not Substantially Different.” (Contrary to NTLD - SOP)

FINAL STATEMENT MAY CHANGE

dac on internal replacements2
DAC on Internal Replacements

Supporting Literature

  • SFAS 60, Par. 28
  • SFAS 97, Par. 26,70-72
  • AICPA Practice Bulletin #8 (11/90)
  • SFAS 91-Accounting for Non-refundable Fees and Costs Associated with Originating and Acquiring Loans and Indirect Costs of Leases
  • SFAS 120 – Accounting and Reporting by Mutual Life Insurance Enterprises and for Certain Participating Contracts
  • SFAS 140 – Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
  • EITF # 96-19 – Guidance on Extinguishment of Debt Instruments
dac on internal replacements3
DAC on Internal Replacements

Definition of Internal Replacement:

  • Modification of the Contract
  • “Substantially Different”
  • “Inherent Nature” Changed
dac on internal replacements schematic of statement of position
DAC on Internal ReplacementsSchematic of Statement Of Position

Is the Modification an Internal Replacement?

Is there a Modification to the Contract?

Yes

No

No

Yes

Is at least one of the criteria of “substantially different” (Par. 11) met? Also use examples in Par. 13-18.

No

“Not Substantially Different” Accounting Treatment

Yes

“Substantially Different” Accounting Treatment

dac on internal replacements4
DAC on Internal Replacements

Modifications not considered an Internal Replacement

  • Both Contemplated in the Original Contract AND Does Not Change the Inherent Nature of the Contract
  • Examples in the SOP (Safe Harbors):
    • Changes in Rates or Charges within Ranges Outlined in Original Contract without Changes in Benefits
    • Changes in Allocations among investment alternatives (100% allocation is all right)
    • Addition of Investment Alternative (only if Contract already has multiple alternatives)
    • Election of an Inflation Adjustment Benefit
    • Purchasing Paid-Up Additions
dac on internal replacements5
DAC on Internal Replacements

“Not Substantially Different”(must meet all conditions)

  • No additional deposit, premium or charge is required above amounts contemplated in the contract
  • No net decrease in Policy Balances
  • No change from SFAS 60 to SFAS 97 or to SFAS91 or visa versa
  • New Benefit does not become Primary Benefit
  • Modification does not change “Inherent Nature” of Contract (more subjective)
dac on internal replacements6
DAC on Internal Replacements

“Inherent Nature” of Contract

  • Consider any change including rider, amendment, exchange of contract or “election of a feature within an existing contract”
  • Most significant Factors
    • Kind and Degree of Mortality or Morbidity Risk
    • Rights and Provisions for Determining Investment Return
  • Legal Form of Change does not matter
  • “Election of Existing Feature” may be Problematic
dac on internal replacements7
DAC on Internal Replacements

“Inherent Nature” – Safe Harbors (examples)

  • Additional Investment Alternatives (same as above)
  • Addition of MVA provision (change only effects surrender charge)
  • Addition of LTC Rider to Disability Contract (No Change in Primary Benefit)
  • Addition of Enhancement of GMIB, GMAB or Annuitization Guarantee (Only Affects Benefits After Termination)
dac on internal replacements8
DAC on Internal Replacements

“Inherent Nature” – Failures (examples)

  • Replace Term Life with Whole Life (adding Significant Component)
  • Add GMDB to Contract with Insignificant Death Benefit or Visa Versa
  • Replace Disability Contract with LTC Contract (Changes nature of Morbidity Risk)
  • Replace UL with Life Contingent Payout Annuity
  • Change from Discretionary to Formulaic Investment Crediting Methodology
  • Replacement of Variable Contract with Fixed Contract or Visa Versa
dac on internal replacements9
DAC on Internal Replacements

Transition

  • Effective Date: For Replacements in Fiscal Years beginning on or after December 15, 2003
  • Prospectively applied
  • Prior balances should not be adjusted prior to year of adoption
  • Must Adopt Retroactive to Beginning of a Fiscal Year