ASC 944-40-30-7 requires that the following assumptions be incorporated into the calculation of the present value of future net policyholder benefits and related policy maintenance costs:

Absent a premium deficiency, the originally selected interest, mortality, or morbidity, lapse and expense assumptions in determining the reserve for future policy benefits are "locked-in." That is, the same assumptions are used at each subsequent valuation date throughout the period that the group of policies remains in force. ASC 944-40-30-7 requires that the above assumptions include a provision for the risk of adverse deviation. These provisions are intended to provide for the accrual of sufficient reserves at each future valuation date to provide for possible unfavorable deviations from the locked-in assumptions. This has been considered by some to be a departure from the normal GAAP concept of incorporating the best estimate of the most probable future event when accruing estimated liabilities.

The selection of more conservative factors will generally result in the recording of higher future policy benefit reserves in early years and, thus, the deferral of the recognition of profits to later years. Considerable judgment needs to be exercised in assessing the propriety of the assumptions which are locked-in. Although the consistent use of locked-in factors significantly reduces the extent to which annual earnings for a group of policies can be "managed," care needs to be exercised to ensure that there is a reasonable level of internal consistency between the reserve factors selected in subsequent years for different groups of policies.

Note that, in evaluating whether or not a premium deficiency exists, current best estimate assumptions for all contract-related costs need to be used, rather than those assumptions locked-in at inception. Refer to ARM 9632.24.

ASC 944-40-30-9 through ASC 944-40-30-15 provides general guidance as to the factors to be considered in determining the interest, mortality, morbidity, lapse, and expense assumptions.

Interest rate assumption: The interest rate assumptions should be based on estimates of expected investment yields expected at the time insurance contracts are made. There is no specific guidance on how assets should be assigned to groups of contracts to determine expected investment yields. We believe assets should represent those that economically support the business, which pay includes various types of financial instruments, including derivatives that may be used to lengthen the life of fixed income investments. For the claim liability component of a long duration disability policy, there is no specific guidance on whether the discount rate should be a locked-in or an updated rate, resulting in diversity in practice.

Other assumptions: Lapse rates are usually based on anticipated experience. Expense factors should reflect historical trends, adjusted for any significant anticipated changes in future policy costs and increases attributable to the rate of inflation.