The guidance for determining the existence of a premium deficiency for long-duration contracts other than universal life-type and investment contracts is covered in ASC 944-60-25-7 through ASC 944-60-25-9. The calculation is illustrated in the following example:

In a life insurance company, the premium sufficiency/deficiency calculation is usually performed when current and anticipated experience varies significantly from the original assumptions. One indication that current and anticipated experience may be varying from original assumptions is when the insurance company significantly changes assumptions used for new business from those used in the prior period. The life insurance company should assess at each reporting date whether the assumptions are still appropriate. The significant assumptions are:

If current experience indicates that the assumptions are now inappropriate (i.e., a premium deficiency exists), a recalculation of policy reserves and/or DAC is necessary. These calculations are generally complex and are usually performed by the insurance company's life actuary.

Once a premium deficiency is recognized, the liability for future policy benefits should be based on the revised assumptions used in determining the premium deficiency (i.e., new locked-in assumptions) (ASC 944-60-35-5).

ASC 944-60-25-9 notes that "In some instances, the liability on a particular line of business may not be deficient in the aggregate, but circumstances may be such that profits would be recognized in early years and losses in later years. In those situations, the liability shall be increased by an amount necessary to offset losses that would be recognized in later years." There is no detailed guidance indicating how that liability should be measured or over what period it should be recognized.

An example of a profits followed by losses situation is a long-term care product, where claim costs are now expected to increase in the future at rates in excess of originally locked-in assumptions, and premium rate increases in excess of originally locked-in assumptions are approved to cover such increased costs. Since the assumptions are locked in (absent a premium deficiency), this results in the recognition of the additional premiums received in the earlier years as income with no related increase in benefit expense at that time. At some point in the future, the liability will be insufficient as no portion of additional premium was allocated to the liability when it was recognized. Overall, the product is profitable, so no premium deficiency currently exists.

In a profits followed by losses situation for contracts with locked-in assumptions, we are aware of at least two alternative approaches for accruing the additional liability. An approach used by entities has been to accrue a liability over the profitable periods in a systematic and rational manner such that the additional liability is fully established by the date that the losses are expected to emerge. This method is consistent with the benefit expense recognition approach for traditional long-duration contracts under ASC 944, which accrues a liability over time. At the point in time when losses are expected to emerge, the liability would be fully established. The accrual is meant to zero out the future loss periods and not to develop a new benefit ratio to be used over the remaining life of the contract.

With respect to the systematic and rational manner in which to accrue the liability, broad approaches include either a locked-in or dynamic method with multiple sub-methods within these approaches.

In December 2015, at an AICPA Insurance Expert Panel meeting with the SEC staff, the staff indicated that, with regard to traditional insurance contracts with locked in assumptions, they did not object to a registrant accruing a liability over the profitable periods in a dynamic manner. However, they also noted that recording an immediate liability, a second alternative, was also acceptable. In this case any liability established would not be reversible. The SEC staff would expect entities to apply a consistent accounting policy for profits followed by losses and describe the specific calculation method selected.