an introduction to us gaap ldti - noca

An Introduction to US GAAP LDTI

Priya Sibal14 December 2020

Disclaimer

This material has been prepared for general informational purposes only and is not intended to be relied upon as professional advice. Please refer to your advisors for specific advice. No representation or warranty is given as to the accuracy or completeness of the information contained in this publication. Any views expressed in this presentation are those of the presenter and not necessarily of the presenter’s employer(s) or NoCA

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Agenda

BackgroundNew

RequirementsTransition

Operational Implications

Questions

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Current US GAAP

• SEC Requirement for public traded & regulated companies

• Separate accounting for short and long duration contracts

• Reserves calculated on an accrual basis

Statement of Financial Accounting Standards (SFAS or FAS) for insurers

• FAS 60 – General principles

• FAS 97 – Applies to Universal Life type contracts, limited payment contracts & investment contracts

• FAS 120 – Participating Life products

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Background New Requirements FPB MRB DAC P&D Transition Operational Implications

Objectives

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Recognition Measurement Presentation & Disclosure

ASU 2018 – 12 : Targeted Improvements to the Accounting for Long Duration contracts


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1Liability for Future Policyholder Benefits (FPB)Assumption setting & frequency, discount rate methodology

2Market Risk Benefits (MRB)New concept, separate reporting for such contract features

3Deferred Acquisition Costs (DAC)Simplified amortisation method

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Presentation & Disclosures (P&D)Enhanced requirements for presenting information


New Requirements

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CURRENT GAAP LDTI

Grouping✓ Individual contract basis or by

contract groups

✓ Contract groups ✓ Same issue year✓ Quarterly or annual cohort groups

Assumptions✓ Locked-in at contract issuance

unless premium deficiency occurs✓ Provisions for adverse deviations

✓ Best estimate i.e. no PADs✓ Reviewed annually at same time

Net Premium Ratio ✓ Locked in at contract issuance✓ Based on expected future

cashflows

✓ Based on actual experience and current assumptions

✓ Cannot exceed 100%

Discount Rate ✓ Expected net investment yield✓ Upper-medium grade fixed

income instrument yield


Future Policyholder Benefits

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PV (Actual Benefits & Expenses) + PV (Expected Future Benefits & Expenses)

PV (Actual Gross Premiums) + PV (Future Gross Premiums on current basis)NPR (LDTI) =

PV (Future Benefits & Expenses)

PV (Future Gross Premiums) NPR (Current GAAP) =

NPR ILLUSTRATION

Policy Term = 10 Years Expenses = 0 Interest Rate = 0%

Net Premium Ratio

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NPR Calculation – Initial Measurement

Year Time PeriodBenefits

(A)Gross Premiums

(B)Net Premiums

(B) x NPR

2013 1 100 175 126

2014 2 90 162 117

2015 3 80 133 96

2016 4 70 95 69

2017 5 60 77 56

2018 6 50 50 36

2019 7 40 33 24

2020 8 30 20 14

2021 9 20 11 8

2022 10 10 5 4

PV (i = 0%) 550 761

NPR = 550 / 761 = 72%

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NPR Calculation – Subsequent Measurement

Year Time PeriodBenefits

(A)Gross Premiums

(B)Net Premiums

(B) x NPR

2013 1 100 175

2014 2 95 150 111

2015 3 80 133 99

2016 4 70 95 70

2017 5 60 77 57

2018 6 50 50 37

2019 7 40 33 24

2020 8 30 20 15

2021 9 20 11 8

2022 10 10 5 4

PV (i = 0%) 555 749

NPR = 555 / 749 = 74%

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NPR Calculation – Accounting EntriesYEAR 1 YEAR 2

Cash 75 55

Benefit Expenses 126 111

Liability remeasurement (gain) / loss 3

201 169

Premium income 175 150

Liability for FPB 26 19

201 169

Notes:

• Cash = Premiums collected less benefits paid

• Benefit Expenses = Benefits paid plus change in reserves• Liability remeasurement gain/loss = Change in liability for future benefits• Liability for FPB = Liability remeasurement gain/loss plus current period change in reserve

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MARKET RISK BENEFITS (MRBs) are defined as a contract or contract feature in a long duration contract issued by an insurance entity that both

protects the contract holder from other-than-nominal capital market risk and exposes the insurance entity to other-than-nominal capital market risk.

Identification

Criteria depends on the contract features. ASC 944-40 provides the following guidance:

Protection✓ Transfer of loss✓ Shortfall of account balance Death benefit component of

a life insurance contract

Nominal risk✓ risk of insignificant amount✓ remote probability of

occurring

Features in Scope

• Guaranteed Minimum Income Benefits

• Guaranteed Minimum Death Benefits

• Guaranteed Minimum Income Benefits

• Guaranteed Minimum Accumulation Benefits

• Guaranteed Minimum lifetime withdrawal benefits

Measurement

Fair Value approach• Ascribed fee method • option based valuation

approach

Multiple MRBs valued as a single MRB

Change in FV reported in Net Income state

Change in ‘instrument-specific’ credit risk reported in OCI

Disclosures

Additional and separate reporting of MRBs

Year to date tabular disaggregated roll-forward from beginning of period to end of period balances

Reconciliation between MRBs that are in asset & liability position to the aggregate carrying amounts

Significant inputs, judgements, assumptions & methods used

Current GAAP

Measurement depends on features of contract

Two ways of measuring such contracts:• Fair value for embedded

derivatives• SOP 03-1 model

Different ‘features’ valued separately

Deferred Acquisition Costs (DAC)

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Current GAAP LDTI

Amortization Several complex methods Straight line basis

Impairment Test Yes No

Shadow DAC Yes No

Interest AccretionApplied to unamortised

DACNot applied


Presentation Requirements

• Balance Sheet• Market risk benefits

• Statement of Comprehensive Income• Net Income

• Liability remeasurement gain or loss

• Change in fair value related to MRBs not attributable to a change in the instrument-specific credit risk

• Other Comprehensive Income

• Change in discount rate assumptions related to the liability for FPB

• Change in fair value related to MRB attributable to a change in the instrument-specific credit risk

Disclosure Requirements

• Deferred acquisition costs

• Balances amortized on a basis consistent with DAC

• Liability for FPB for traditional and limited-payment contracts

• Additional liability for annuitization, death, or other insurance benefits

• Liability for policyholders’ account balances

• Market risk benefits

• Liability recognized as a result of premium deficiency and loss recognition testing

• Separate accounts

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Disaggregated tabular rollforwards

FPB, MRB & DAC

Modified Retrospective approach

can use full retrospective approach, provided certain criteria met

Full Retrospective approach

MRB calculated retrospectively back to

inception

Transition

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FPB

Modified Retrospective approach

can use full retrospective approach, provided certain criteria met

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MRB

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DAC

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Disclosures

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Original/Legacy discount rate used to calculate NPR.

AOCI adjusted for the difference in liabilities calculated on legacy & new discount rate.

Shadow adjustments removed

AOCI adjusted for the difference in liabilities calculated on legacy & new discount rate.

Use of hindsight permitted if observable data unavailable

instrument-specific credit risk recognised in the AOCI. Opening retained earnings adjusted for difference between FV and carryover basis

Qualitative & quantitative information on transition amounts relating to:• AOCI• Opening balance of retained

earnings• Net premiums > gross

premiums• Premium deficiency

LDTI effective for periods beginning after 15 December 2022*

*For most SEC filers; for other companies LDTI is effective for periods beginning after 15 December 2024

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Operational Implications

Data Data availability & quality, implications for actuarial and accounting data, storage, historic data for transition requirements, availability at level of granularity required for reporting & disclosures

SystemsUpdate current actuarial & finance systems, model changes in line with overall architecture & BAU processes, alignment with other transformation/ compliance projects

Training & CommunicationEducation for BAU teams, training around new processes and systems, technical workshops for understanding calculations under LDTI

ProcessesImpact on current E2E processes, for e.g. new processes for MRB, enhanced disclosures & AoC process, updated process for NPR calculations, impact on working day timetable, governance & compliance

Priya [email protected]

Q&A

an introduction to us gaap ldti - noca

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