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.2212 Certain long-duration participating life insurance contracts
Publication date: 31 May 2022
us Insurance for insurers ARM 9632.2212
The DAC amortization method for participating contracts is also consistent with that for universal life-type contracts, which is more fully described in ARM 9632.2211. However, GAAP guidance specific to certain participating contracts (refer to ASC 944-30-35-11) requires that the present value of estimated gross margins and accretion on the DAC balance be computed using the "expected investment yield." If significant negative gross margins are expected in any period, then the present value of gross margins before annual dividends, estimated gross premiums, or the balance of insurance in force should be substituted as the base for computing amortization.
The guidance in ASC 944-30-35-13 addresses the computation of estimated gross margins, which should include best estimates of the following, without provision for adverse deviation:
- Amounts expected to be received from premiums, plus
- Amounts expected to be earned from investment of policyholder account balances, less
- Benefits claims expected to be paid, less
- Contract administration costs (including certain non-capitalizable acquisition costs), less
- Expected changes in the net level premium reserve for death and endowment benefits, less
- Expected annual policyholder dividends, plus or less
- Other expected assessments and credits, however characterized.
Although participating contracts have gross margins similar to gross profits of universal life-type contracts, the individual components of these items differ. This is due to the different ways in which charges and credits are structured, and in which the policy values are communicated to policyholders. Gross margin estimates should be periodically evaluated and the total DAC amortization recorded to date should be adjusted. The guidance specifies a methodology for the evaluation and adjustment that is consistent with that for universal life-type contracts.
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