Expand
Resize
Add to favorites
The default method for adoption of the provisions relating to the liability for future policy benefits and deferred acquisition costs (DAC) (including other financial statement line items amortized on a basis consistent with DAC) is the modified retrospective approach; however, the full retrospective approach can be elected provided specified criteria are met. The transition method for market risk benefits is full retrospective.

11.3.1 Transition for liability for future policy benefits

The new measurement guidance for traditional and limited-payment contract liabilities is required to be applied to contracts in force as of the transition date on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI. This is referred to as a modified retrospective transition approach. An entity may elect a full retrospective transition approach if actual historical experience information is available as of contract inception.

11.3.1.1 Modified retrospective adoption of ASU 2018-12

During the deliberations of ASU 2018-12, the FASB received comments from insurance entities that applying the new guidance on a retrospective basis would be challenging given that many of the contracts were written decades ago. In an effort to alleviate these concerns, the default method for adoption of the provisions relating to the liability for future policy benefits is a modified retrospective approach. Under this approach, an insurer would “pivot” off, or carry over, the existing liability at the transition date.
An insurer would apply the guidance to all in-force contracts at the transition date using the existing carrying amount of the liability, adjusted for the removal of any amounts in AOCI (e.g., any “shadow” premium deficiency liabilities recognized). Separately, after the net premium ratio is recalculated and any additional liability recognized relating to loss recognition, a balance sheet remeasurement will be required using the current upper-medium grade discount rate. 
Figure IG 11-1 details how to “pivot” off the transition date balances for a traditional insurance contract.
Figure IG 11-1
Pivoting off of the balance at transition – traditional insurance contract
Start with the pre-adoption liability for future policy benefits (inclusive of any related premium deficiency). For a calendar year-end SEC filer (other than an SRC), this would be the balance at 12/31/20 (the transition date would be 1/1/21).
Step 1: Remove any previous AOCI adjustment
Step 2: Determine appropriate cohorts and their respective carrying amounts
Step 3: Allocate any existing premium deficiency to identified cohorts
Step 4: Calculate revised net premium ratio (using expected cash flows from transition date forward) for each cohort
Revised net premium ratio
=
Present value* of the updated future benefits and related claim expenses from transition date forward - carrying amount of the transition date liability (after removal of AOCI adjustment)
______________________________________________________________________
Present value* of the updated future gross premiums from transition date forward
*Present value is determined using the carryover locked-in interest rate assumption rather than the transition date upper-medium grade yield.
Step 5: If net premium ratio >100%, record loss for excess of net premiums over gross premiums as a debit to opening retained earnings (except that for limited-payment contracts, the deferred profit liability would first be reduced to zero).
Step 6: Remeasure liability using current single A discount rate and adjust AOCI (see Example IG 11-3).

At transition, the discount rate would not be reset for purposes of calculating the net premium ratio and future net premiums and interest accretion. As such, an insurer will continue to use the carryover locked-in interest rate assumption for determining benefit expense in current and future periods.
For existing traditional insurance contracts at transition, to the extent that the revised net premiums exceed revised gross premiums (i.e., a loss is expected), the liability for future policy benefits will be increased and the opening retained earnings balance would be decreased.
Existing liabilities will need to be divided into cohorts at transition that are subject to an annual cohort limitation. As such, it is possible that upon applying the annual cohort limitation to contracts that are currently grouped at a level above the annual cohort for premium deficiency purposes, a net premium ratio in excess of 100% could occur even though unamortized DAC is no longer included in the premium deficiency test. In this case, there would be a charge to opening retained earnings.
In periods subsequent to transition, in updating assumptions on a retrospective catch-up basis for contracts that were in force at transition, the transition date would be considered the revised contract issue date. For example, if an updated net level premium ratio was calculated in the fourth quarter of 2024 for business that was in force at an insurer’s January 1, 2021 transition date, the calculation would include historical benefit expense and gross premiums from 2021 through the date of the update, future benefits and gross premiums for 2025 and beyond, and total benefits would be reduced by the January 1, 2021 transition liability.
Question IG 11-1 discusses the subsequent accounting for a net premium ratio in excess of 100% at transition.
Question IG 11-1
When the net premium ratio at transition is greater than 100%, would the transition date carrying amount used subsequent to transition to recompute the net premium ratio be inclusive of the loss recognized at the transition date?
PwC response
No. For existing traditional insurance contracts at the transition date, when the updated present value of future benefits and related claim expenses less the transition date carrying amount exceeds the present value of future gross premiums, this results in a net premium ratio at transition greater than 100%, resulting in a loss for the cohort. In this situation, the liability for future policy benefits is increased and the opening retained earnings balance is decreased at the transition date. Additionally, the net premium ratio would be reset to 100% by including both the transition liability and the additional liability recognized at the transition date in the numerator of the net premium ratio until the next measurement date. However, that transition date increase in the liability for future policy benefits is not part of the transition date liability in subsequent updated calculations of the net premium ratio. See Example IG 11-1 for a numerical example.

Example IG 11-1 provides a numerical example of the accounting at transition and subsequently when the net premium ratio is greater than 100% at the transition date.
EXAMPLE IG 11-1
Net premium ratio exceeds 100% at transition
Insurer will adopt ASU 2018-12 on January 1, 2023, with a transition date of January 1, 2021. For a given cohort at the transition date:
PV of future benefits and related claim adjustment expenses
$210
PV of future gross premiums at the transition date
$100
Transition date liability
$102
How would Insurer calculate the net premium ratio at the transition date and subsequently when a loss is recognized at the transition date?
Analysis
At transition, in accordance with ASC 944-40-65-2(d)(2), the present value of future benefits and related expenses less the transition date carrying amount would be compared to the present value of future gross premiums to calculate the updated net premium ratio.
NPR calculation at the transition date:
Net premium ratio
=
(PV of future benefits and related claim adjustment expenses – transition date liability)
                     PV of future gross premiums
Net premium ratio
=
($210 - $102)
       $100
Net premium ratio
=
108%
Because the net premium ratio is greater than 100%, Insurer would recognize a charge to retained earnings and an increase in the liability for future policy benefits for $8 million, the amount the numerator exceeds the denominator, bringing the total liability for future policy benefits at the transition date to $108 million. The net premium ratio would be reset to 100% by including both the $102 million transition liability and the additional $8 million in the numerator until assumptions are updated at the next measurement date.
NPR calculation at the transition date after recognizing additional liability:
Net premium ratio
=
(PV of future benefits and related claim adjustment expenses – transition date liability – additional liability)
                     PV of future gross premiums
Net premium ratio
=
($210 - $102 - $8)
           $100
Net premium ratio
=
100%
In calculating the updated net premium ratio in periods subsequent to transition, the numerator in the updated net premium ratio for this cohort would include the transition date liability of $102 million (i.e., the transition date liability remains $102 million; it is exclusive of any loss recognized at transition). To the extent the updated calculation resulted in an additional loss (i.e., the net premium ratio is above 108%), it would be immediately recognized in income, with an increase to the liability for future policy benefits. To the extent the updated calculation resulted in a loss less than originally expected (i.e., net premium ratio decreases from 108% but still remains above 100%), the liability for future policy benefits would be reduced and the reversal of the loss would be immediately recognized in income. If the net premium ratio decreases to an amount below 100%, the entire reversal of the additional liability recognized at transition would be immediately recognized in income, while the remaining benefit of the net premium ratio decrease would be recognized through the retrospective catch up adjustment in the current period and future periods’ revised margins.
Subsequent to the transition date:
Updated PV of future benefits and related claim adjustment expenses (historical and future) from the transition date forward
$205
PV of future gross premiums at the transition date
$100
Transition date liability
$102
In accordance with ASC 944-40-65-2(d)(2), the present value of future benefits and related expenses less the transition date carrying amount would be compared to the present value of future gross premiums to calculate the updated net premium ratio:
NPR calculation subsequent to the transition date:
Net premium ratio
=
(Updated PV of future benefits and related claim adjustment expenses – transition date liability)
                     PV of future gross premiums
Net premium ratio
=
($205 - $102)
       $100
Net premium ratio
=
103%
The updated loss is $3 million rather than $8 million, resulting in a reduction in the liability for future policy benefits and an immediate credit to income of $5 million to reflect the updated estimate of the liability in the current period. The net premium ratio would be reset to 100% by including both the $102 million transition liability and the additional $3 million in the numerator until assumptions are updated at the next measurement date:
NPR calculation subsequent to the transition date after recognizing additional liability:
Net premium ratio
=
(Updated PV of future benefits and related claim adjustment expenses – transition date liability – additional liability)
                     PV of future gross premiums
Net premium ratio
=
($205 - $102 -$3)
           $100
Net premium ratio
=
100%

Question IG 11-2, Question IG 11-3, Question IG 11-4, Question IG 11-5, and Question IG 11-6 address the transition date liability for future policy benefits.
Question IG 11-2
Insurer adopts the new guidance for the liability for future policy benefits on a modified retrospective basis. If the “at inception” original assumptions (including the provision for adverse deviation) were more conservative than the new updated assumptions, the existing liability could be higher than the present value of the future benefits at the transition date, resulting in a negative net premium ratio.
How would this impact the calculation of the liability in future periods?
PwC response
The transition guidance requires an adjustment to the existing liability if future gross premiums are insufficient to cover future benefits. In this fact pattern, the existing liability is greater than what is ultimately needed. In future periods, the negative net premium ratio would be applied to gross premiums received, in effect creating a negative benefit expense that would reduce the liability over time to the amount needed for benefit payments.
Question IG 11-3
Under the modified retrospective transition approach, may an insurer change its methodology from using a single equivalent level investment yield rate to an investment yield curve (forward or spot) at the transition date? May it change from using an investment yield curve (forward or spot) to a single equivalent level investment yield rate?
PwC response
No, to both questions. As described in ASC 944-40-65-2, the modified retrospective approach requires that for the purposes of calculating the net premium ratio and future net premiums and interest accretion, an insurance entity should retain the discount rate assumption that was used to calculate the liability immediately before the effective date. As such, an insurance entity will continue to use the carryover locked-in interest rate assumption (be it a single rate, a spot curve, or a forward curve) to determine the rate at which interest accretes throughout the expected lifetime of the cohorts. It may not change from a rate to a curve or a curve to a rate.
Question IG 11-4
Under the modified retrospective transition approach, how would an insurance entity determine the locked-in carryover discount rate (or curve) for a cohort comprised of individual policies each having different discount rates?
PwC response
Given that under existing guidance and employing a seriatum approach, the insurance entity previously had a single rate or a curve for each policy (i.e., prior locked-in investment yield rates), it must now determine the discount rate or curve that is appropriate for the cohort (i.e., the new group of policies). We believe that a reporting entity could determine the carry over locked-in investment yield discount rate (or curve) for the cohort by calculating a weighted average rate or curve for the cohort based on the previously locked-in rates or curves and expected cash flows at transition. Such rate or curve would be utilized for calculating the net premium ratio at transition and future net premiums and interest accretion relating to the liability for future policy benefits for the cohort. As noted in Question IG 5-7, in some instances an entity may instead deem it appropriate to use a discount rate or curve applicable for the issue date of each contract within the cohort.
Question IG 11-5
The new guidance amended ASC 944-40-30-15 to clarify that the expense assumptions used in estimating the liability for future policy benefits include termination and settlement costs, but exclude non-claim related costs such as policy maintenance costs. Prior to the adoption of the new guidance, some insurance entities may have included certain policy maintenance costs in the calculation of the present value of future policy benefits. How are policy maintenance costs previously included in estimating the liability for future policy benefits accounted for under the modified retrospective transition approach?
PwC response
Under the modified retrospective transition approach, the existing liability for future policy benefits at the transition date is carried over as of the transition date, adjusted for removal of any amounts in AOCI (i.e., any “shadow” premium deficiency liabilities recognized). There is no additional transition adjustment for the removal of previously included policy maintenance costs from the transition date liability for future policy benefits. However, for purposes of calculating the liability for future policy benefits at transition (and going forward), expected cash flows from the transition date forward exclude policy maintenance cost estimates. Maintenance costs after the transition date will be expensed as incurred.
Question IG 11-6
The new guidance amended ASC 944-40-30-7 to eliminate the requirement for a provision for adverse deviation (PAD) from the calculation of the present value of future policy benefits. How is the PAD previously utilized in estimating the liability for future policy benefits accounted for under the modified retrospective transition approach?
PwC response
Under the modified retrospective transition approach, the existing liability for future policy benefits at the transition date is carried over as of the transition date, adjusted for removal of any amounts in AOCI (i.e., any “shadow” premium deficiency liabilities recognized). There is no additional transition adjustment for the removal of the PAD from the transition date liability for future policy benefits. However, for purposes of calculating the liability for future policy benefits at transition (and going forward), expected cash flows from the transition date forward exclude any PADs, with the exception of any PADs applied to the discount rate.
In practice, some insurance entities apply a PAD to each individual assumption, including the discount rate (except for groups of contracts in premium deficiency). At transition, the discount rate is not reset for purposes of determining the benefit expense and for determining interest accretion on the liability balance subsequent to transition in accordance with ASC 944-40-65-2(d)(1). As such, an insurance entity will continue to use the carryover locked-in interest rate assumption, inclusive of any PAD, for accreting interest on the liability and determining benefit expense in periods subsequent to transition for existing blocks of business at transition.
Question IG 11-7
Should insurance entities include claim liabilities in the liability for future policy benefits transition balance and expected cash flows relating to incurred claims in net premium ratio calculations?
PwC response
Yes, cash flows used to derive the net premium ratio should include all cash flows, including those for claim liabilities. Therefore, the liability for future policy benefits transition balance should include what was previously carried as a claim liability.
Question IG 11-8
How would an insurance entity determine the carryover discount rate for claim liabilities under the modified retrospective transition approach?
PwC response
The transition relief in ASC 944-40-65-2(d)(1) extends to claim liabilities that are linked to the measurement of the net premium and liability for future policy benefits as of the transition date. The required transition may effectively be achieved by calculating a weighted average rate for the combined cash flows of the liability for future policy benefits and claim liability. As an alternative, an entity may retain the existing separate transition date discount rates when discounting future cash flows on claims incurred prior to the transition date. Claims reported after the transition date would, instead, be measured using the transition date liability for future policy benefits discount rate throughout the life of the contracts.
For business in-force at the transition date when the modified retrospective transition method is applied, subsequent to transition, presenting the claim liability separately or as part of the liability for future policy benefits should produce substantially similar results; differences could potentially arise depending on whether weighted discount rates or separate rates are used for the claim liability and liability for future policy benefits.

11.3.1.2 Full retrospective adoption election of ASU 2018-12

As described in ASC 944-40-65-2(e), if the necessary criteria are met, an insurer can make an entity-wide election to adopt the new liability for future policy benefit guidance through retrospective application. Under this approach, the cumulative effect of the change on periods prior to the transition date would be reflected in the carrying amounts of assets and liabilities at the transition date. An offsetting adjustment would be made to the opening balance of retained earnings at the transition date. AOCI would also be impacted (1) to the extent that any “shadow” premium deficiency adjustment is being reversed or (2) for the impact of switching to a current upper-medium grade discount rate for remeasurement of the liability for future benefits for balance sheet purposes at transition.
An insurer has the option to elect the retrospective transition approach for contract issue years only when actual historical information for an issue year cohort is available for all periods back to original contract inception for all applicable products entity wide. The election would be applied entity-wide (i.e., applied to all products and contracts) for that contract issue year and all subsequent contract issue years. Estimates of historical experience cannot be substituted for actual historical experience. Retrospective application for all contract issue years would likely be extremely challenging for most entities, as it will require information relating to terminated contracts.
An entity can choose an election year later than the earliest year it has the necessary historical information. For contract issue years preceding the election year that are still in force at the transition date, an entity would apply the modified retrospective approach, using the carrying amount of the liability at the transition date (January 1, 2021 for calendar year-end SEC filers other than smaller reporting companies) to compute the revised net premium ratio and not at the election date.
If retrospective adoption is elected, it must be applied entity-wide and consistently to both the liability for future policy benefits and related DAC. Therefore, actual historical information relating to DAC would also be needed for all issue years for which retrospective application is elected.
Example IG 11-2 illustrates the retrospective adoption election.
EXAMPLE IG 11-2
Retrospective adoption election
Insurer A, a calendar year SEC filer that is not an SRC, has 3 product lines: whole life, term, and disability. Full historical data is available for disability contracts back to the beginning of 2000; however, full historical data is only available for its whole life contracts back to the beginning of 2010 and for its term life contracts back to the beginning of 2012.
Can Insurer A apply the retrospective transition method?
Analysis
Insurer A would have the option to apply the retrospective transition method to the 2012 issue year cohorts and all subsequent issue year cohorts for all 3 product lines. If it elected this approach, it would be required to apply the modified retrospective approach for contracts issued prior to 2012 using the carrying amount of the liability at the transition date (January 1, 2021).
Alternatively, Insurer A could decide not to apply the retrospective transition method at all; or, alternatively, it could select an election date of any year beginning in 2013 through 2020. To the extent the retrospective approach is applied, it would be required to be applied to any DAC balances for the same issue years.

11.3.2 Balance sheet remeasurement

For balance sheet remeasurement purposes at transition under either the modified retrospective or full retrospective approach, the liability for policy benefits will be remeasured using the current upper-medium grade fixed-income corporate instrument yield at the transition date. The difference in the liability measurement will be an adjustment to opening AOCI.
Example IG 11-3 illustrates the balance sheet remeasurement at transition.
EXAMPLE IG 11-3
Balance sheet remeasurement at transition
Assume the carryover locked-in interest rate assumption is 4% for the existing transition date liability for future policy benefits and the revised upper-medium grade discount rate is 3.2%.
How would the balance sheet liability for future policy benefits at the transition date be remeasured?
Analysis
Present value of updated future benefits and related claim expenses from transition date onward @ 3.2%
$6,280
Less: Present value of updated future net premiums from transition date onward @ 3.2%
(5,130)
Liability for future policy benefits @ 3.2%
$1,150
Less: Existing transition date liability for future policy benefits @ 4%
(after removal of AOCI adjustments)
(1,000)
$150
The adjustment would be recognized in AOCI at transition using the following entry:
Dr. AOCI
$150
Cr. Liability for future policy benefits
$150

11.3.3 Transition for limited-payment contracts

For limited-payment contracts, premiums are paid over a period shorter than the period over which benefits are provided. Profit margin associated with premiums received is deferred and recognized as a liability (DPL). For limited-payment contracts for which the modified retrospective adoption approach is used, the determination of transition date adjustments to the liability for future policy benefits and DPL will depend on whether the contracts in force at the transition date are expected to have future premium receipts. For limited-payment contracts with premiums expected in the post transition date period, absent a net premium ratio greater than 100%, the liability for future policy benefits and DPL balances will not be adjusted at the transition date, consistent with traditional payment contracts. For limited-payment contracts with no remaining premiums expected, absent a situation when the present value of future expected benefits and related claim adjustment expenses exceed the transition date liability for future policy benefits, the difference between the updated liability for future policy benefits and the carrying amount at the transition date would be recognized at the transition date, offset by a corresponding change in the DPL.
The decision tree in Figure IG 11-2 illustrates the potential transition date adjustments for these two types of limited-payment contract situations.
Figure IG 11-2
Decision tree for limited-payment contracts at transition
Under the modified retrospective approach, the present value of future premiums (if any) and future benefits and related claim adjustment expenses at transition and in future periods is determined using the carryover locked-in interest rate assumption rather than the new discount rate. The separate adjustment to AOCI for the remeasurement of the liability for future policy benefits using the current upper-medium grade discount rate is also required. Unamortized DPL will be accreted at the carryover locked-in interest rate assumption. The change in the remeasurement of the liability for future policy benefits due to using the upper-medium grade rate at transition will be recognized in the opening balance of AOCI and not as an adjustment to DPL.
Example IG 11-4 illustrates the transition of a single premium limited-payment insurance contact under the modified retrospective transition method.
EXAMPLE IG 11-4
Pivoting off of the balance at transition (limited-payment insurance contract):
Assume a single premium policy for which the premium was received prior to transition. Assume that the updated present value of future policy benefits at the transition date (January 1, 2020) is $4,500 and the transition date liability for future policy benefits is $4,800.
How would the adjustment to the liability for future policy benefits be calculated at transition assuming the modified retrospective transition approach is elected?
Analysis
Present value of updated future policy benefits and related claim expenses
$4,500
Less: Transition date liability for future policy benefits (after removal of AOCI adjustments)
4,800
($300)
The adjustment to the liability for future policy benefits and DPL at transition would be recognized using the following entry:
Dr. Liability for future policy benefits
$300
Cr. DPL
$300

11.3.4 Transition for other annuitization benefits

Certain deferred annuity contracts contain non-traditional annuitization benefits that are required to be accounted for under ASC 944-40-30-26.
Under current guidance, the periodic future annuitization benefits expected to be paid during the annuitization phase are discounted back to the future annuitization date using an estimated investment yield to determine the excess benefit upon annuitization. This amount is then discounted to the current period using the contract liability discount rate. Use of the expected investment yield to discount the periodic payments is consistent with the rate used to discount future periodic annuity payments under the limited-payment model prior to adoption of ASU 2018-12. However, consistent with the change for the limited-payment model, the new guidance replaces the investment yield with the upper-medium grade (low credit risk) fixed-income instrument yield.
Unlike the limited-payment model, the discount rate is not locked-in for annuitization benefits subject to ASC 944-40-30-26. The rate is required to be updated each period consistent with other components of the annuitization benefit cash flows. Changes in the discount rate applied to the future annuitization payments will be reflected in the benefit ratio and recognized over time as the benefit ratio is applied to total assessments.
The transition date adoption methodology for the discount rate change is not specifically mentioned in the transition guidance in ASC 944-40-65. In the absence of any specific guidance, ASC 250 requires retrospective application, as outlined in ASC 250-10-45-3 through ASC 250-10-45-5. Under this approach, the cumulative effect of the change on periods prior to those presented would be reflected in the carrying amount of the liability at the transition date. An offsetting adjustment would be made to the opening balance of retained earnings. Because the existing annuitization benefit accounting is a retrospective catch up method, the cash flows needed to calculate the retrospective transition adjustment at the January 1, 2021 transition date should be available. The additional information required for the transition date adjustment would be the upper-medium grade fixed income instrument yield at the transition date.
Question IG 11-9 discusses the changes in the calculation of assessments.
Question IG 11-9
How did the new guidance change the calculation of assessments used as the denominator in the benefits ratio for the additional liability for death or other insurance benefits (commonly referred to as the “SOP 03-1 liability”)? How is this change reflected at the transition date?
PwC response
There are two potential changes in the assessments, as described further below. The transition date adoption methodology for the changes in assessments is not specifically mentioned in the transition guidance in ASC 944-40-65. In the absence of any specific guidance, ASC 250 requires retrospective application, as outlined in ASC 250-10-45-3 through ASC 250-10-45-5. Under retrospective application, the cumulative effect of the changes in assessments would be recognized as an adjustment to the SOP 03-1 liability and opening retained earnings at the transition date.
The first change in assessment relates to investment margins. ASC 944-40-30-22 was amended to clarify that investment margins included in total expected assessments should only be from policyholder balances. ASC 944-40-30-22 references ASC 944-40-25-14 for the term “policyholder balances,” which describes the policyholder accrued account balance or contract holder’s account. There is currently diversity in practice, with some insurance entities also including investment margins from the SOP 03-1 liability, which is a liability separate from the accrued account balance. The other change in assessments relates to the revised amortization pattern for any unearned revenue liability (URR) included in the assessments. ASC 944-605-35-2 requires URR to be amortized using the same method as DAC; therefore, the new guidance changed the amortization of URR to the simplified DAC model (constant level basis). The cumulative effect of the change in the other insurance benefit liability is recognized in opening retained earnings at the transition date under both the modified and full retrospective adoption methods. Under the full retrospective adoption method, all URR assessments will use straight-line amortization from contract inception. Under the modified retrospective adoption method, pre transition date URR assessments will not change (using amortization based on estimated gross profits) and post transition assumptions will use projected straight-line amortization.

11.3.5 Transition for DAC and other balances amortized consistent with DAC

The same transition method utilized for the liability for future policy benefits (modified retrospective or retrospective) is required to be applied to DAC (and balances amortized on a basis consistent with DAC). Under the modified retrospective transition approach, the existing unamortized DAC amount at the transition date is carried over as of the transition date (as are all other balances that are amortized on basis consistent with the amortization of DAC, either as required by ASC 944 or as a result of an accounting policy election), adjusted to remove any amounts in AOCI relating to "shadow DAC” (and other similar “shadow” adjustments). The adjusted carrying amounts at transition will no longer accrete interest, and will be amortized on a constant basis over the remaining expected life of their related insurance contracts/cohorts.
Question IG 11-10 discusses how to account for future renewal commissions under the modified retrospective transition approach.
Question IG 11-10
How are future renewal commissions that were previously factored into the amortization pattern, even though not yet incurred, accounted for under the modified retrospective transition approach?
PwC response
Under the modified retrospective transition approach, the existing unamortized DAC amount at the transition date is carried over as of the transition date, adjusted for removal of any amounts in AOCI relating to "shadow DAC.” There is no additional transition adjustment for an insurance entity that previously factored the future renewal commissions into the DAC amortization schedule. Upon transition, the adjusted carrying amount at transition will no longer accrete interest, and will be amortized on a constant basis over the remaining expected life of the contracts. Future renewal commissions will be capitalized when those costs are incurred, and will be subsequently amortized over the expected term of the related contracts.

11.3.6 Full retrospective transition for DAC and other balances amortized consistent with DAC

If retrospective adoption is elected rather than modified retrospective adoption, the unamortized DAC would be recalculated from original contract issuance for the issue years elected using a constant level amortization methodology.
Any previous DAC impairments (write-downs) would be reversed, as DAC is no longer subject to impairment. Capitalizable expenses would be included in DAC amortization only as expenses are incurred, no interest would accrue to the balance, and the pattern would be straight line (adjusted for expected terminations).
For contract intangible assets acquired in business combinations that are amortized on a basis consistent with DAC (e.g., the present value of future profits “PVFP”), the acquisition date is considered the contract issuance date. Under the retrospective approach, the cumulative effect of the change on periods prior to the transition date would be reflected in the carrying amounts of the asset at the transition date. An offsetting adjustment would be made to the opening balance of retained earnings (and AOCI, as applicable) at that date. AOCI would be impacted to the extent that any “shadow” PVFP adjustments are being reversed.
An insurer has the option to elect the retrospective transition approach for contract issue years only when actual historical information is available for all periods back to original contract inception (see Example IG 11-2). Estimates of historical experience cannot be substituted for actual historical experience. Retrospective application for all contract issue years would likely be extremely challenging for most entities.
Question IG 11-11 discusses when to apply the retrospective adoption method.
Question IG 11-11
Insurer M is a mutual insurance company whose business consists principally of participating life insurance contracts that are not impacted by the amended guidance for the liability for future policy benefits under ASU 2018-12. May Insurer M adopt the new DAC amortization guidance relating to its participating business using retrospective application?
PwC response
Yes, Insurer M may adopt the new DAC amortization guidance relating to its participating business, using retrospective application for those issue years in which it has all actual historical information necessary to do a retrospective application back to contract inception for all of its policies, both participating and nonparticipating. For example, to the extent that it has existing nonparticipating business, it would need to have the necessary historical information for any DAC and other balances amortized consistent with DAC, as well as any liabilities subject to the new guidance relating to the liability for future policy benefits. It would need to apply the retrospective adoption method to the same issue years for all businesses and balances that are subject to the new guidance entity wide.

11.3.7 Transition for market risk benefits

ASC 944-40-65-2(d) requires market risk benefits to be measured at fair value at the transition date via a retrospective application. The contract features that now meet the definition of a market risk benefit (MRB) may have previously been accounted for at fair value as a derivative or embedded derivative under ASC 815 or as an additional liability for annuitization benefits or death or other insurance benefits under ASC 944. The transition adjustment representing the difference between the pre-adoption carrying amounts of contract features that meet the definition of an MRB and any pre-adoption host adjustments for features accounted for as derivatives and fair value of the MRB at the transition date, excluding the effect of changes in the instrument-specific credit risk relating to the MRB valuation, is recognized as an adjustment to the opening balance of retained earnings. For example, if an insurance entity identifies an option-based MRB (i.e., it has a fair value of other than zero at inception), the transition adjustment should reflect any adjustments to the host insurance or investment contract as well as the reversal of any previously existing SOP 03-1 liability. The cumulative effect of changes in the instrument-specific credit risk of the MRB between contract issuance date and the transition date is recognized in the opening balance of AOCI.
If an insurance entity adopted the new DAC guidance using a modified retrospective transition approach, we do not believe that DAC amortization prior to the transition date is required to be adjusted to reflect the revised estimated gross profits pattern that would have resulted from full retrospective adoption for MRBs. Similar considerations would apply to other balances amortized on a basis consistent with DAC, either as required or as a result of a policy election, such as PVFP. Question IG 11-15 in IG 11.3.8 addresses the retrospective transition impact on PFVP affected by MRBs.

11.3.8 The terms of MRBs and considerations for deriving attributed fees

Reporting entities will need to develop the terms of each MRB that were not previously measured at fair value at inception of each contract and its fair value at the transition date. If the entity uses the attributed fee method of identifying the terms of the MRB, the basis points attributed as the fee for the benefits will be determined based on the fair value of the future benefits at contract inception, which will be some point in the past. As this attributed fee becomes a fixed term of the MRB, it is needed for the fair value measurement of the MRB in all subsequent periods. In addition, the entity-specific credit risk component will need to be identified in order to establish the adjustment to opening AOCI at the transition date.
In determining the original contract issue date attributed fee, an insurer should maximize the use of relevant observable information as of contract issuance and minimize the use of unobservable information for the appropriate date. The use of hindsight is permitted when assumptions in a prior period are unobservable or otherwise unavailable and cannot be independently substantiated.
Question IG 11-12 addresses the use of hindsight in applying retrospective method for MRBs.
Question IG 11-12
When and how can an insurance entity use hindsight when deriving the attributed fee in applying the retrospective transition for MRBs?
PwC response
In response to preparers’ concerns over the difficulties of determining the MRB attributed fees at inception, the FASB decided that insurance entities may use hindsight when assumptions in a prior period are unobservable or otherwise unavailable and cannot be independently substantiated. The overall objective in deriving the attributed fee is premised on fair value concepts, and therefore represents an accounting estimate that would have been generated at contract inception to determine the attributed fee, using all available market and internal information.
Before implementing the use of hindsight, reasonable efforts should be made to determine whether retrospective information is available from other sources, pricing models, or other models. The determination of whether the use of hindsight is allowed should be made separately for each assumption and input. When hindsight is utilized, actual historical experience (i.e., a single deterministic approach) cannot be used as the sole basis for deriving the attributed fee as to do so would be inconsistent with fair value principles, since it would ignore market participants’ consideration of volatility. As a result, when hindsight is used, considerations around volatility should be incorporated.
The information available to derive the attributed fee will vary from entity to entity, but it is important to recognize that this is an accounting estimate. Hindsight may be utilized for any assumptions, including both market assumptions (e.g., interest rate or equity volatility) and actuarial assumptions (e.g., lapse or mortality), however, it would be expected that market-based assumptions would generally be available. Additionally, it is expected that an insurance entity would use all information that was available at contract inception, even if not previously utilized. When deriving the attributed fee for MRB features that were not previously accounted for at fair value, insurance entities may be able to leverage attributed fee assumptions utilized for embedded derivative features that were accounted for at fair value provided the assumptions are appropriately adjusted to consider relevant differences between the features that may affect the valuation. This interpretation is consistent with the views expressed by the FASB staff on their November 2018 webcast, IN FOCUS: FASB Accounting Standards Update on Insurance.
Question IG 11-13
When an entity is adopting the MRB guidance in ASU 2018-12 at the transition date, is it required to use the current definition of fair value when determining the retrospective fair value of MRBs at the inception date? The fair value guidance in ASC 820 changed in 2008 to more explicitly require the consideration of margins and non-performance risk of liabilities.
PwC response
Yes. ASC 944-40-30-19c and ASC 944-40-65-2(f) require MRB measurement at fair value as defined in the FASB glossary, which is the current fair value definition incorporating ASC 820 (FAS 157) valuation considerations. Upon adoption of the MRB guidance under the ASU, which requires retrospective application, the attributed fee would need to be determined back to contract inception using the post FAS 157 (ASC 820) definition if margins and nonperformance risk were not considered in pre 2008 fair value measurements. Any resulting difference between fair value and the existing transition balance would be recognized as part of the cumulative effect adjustment upon transition (i.e., retained earnings, and AOCI for any non-performance risk adjustment).
Some entities may not have used the current definition of fair value when identifying the attributed fees for embedded derivatives that were issued prior to the adoption of ASC 820 that are now MRBs under the ASU (e.g., embedded derivatives, such as GMABs). Similarly, the attributed fee for these features would need to be redetermined back to contract inception using the current definition of fair value with any differences recognized as part of the cumulative effect adjustment.

Question IG 11-14 addresses the interaction of the fair value option and the new long duration insurance guidance.
Question IG 11-14
If an insurance entity had previously elected the fair value option for an insurance contract, is that election able to be reversed upon the adoption of the new guidance? Conversely, if an insurance entity had not previously elected the fair value option for an insurance contract, is the insurance contract eligible for the election of the fair value option upon the adoption of the new guidance?
PwC response
No. As required under ASC 825-10-25-2, the fair value option election is irrevocable unless a new election date occurs. ASC 825-10-25-4 provides election dates on which an entity may elect the fair value option, but the adoption of new accounting standard would not qualify as a new election date. Additionally, the new guidance did not provide any specific ability for an insurance entity to elect the fair value option upon adoption. However, an insurance entity may elect the fair value option for eligible new insurance and reinsurance contracts.

Question IG 11-15 addresses the retrospective transition impact on other accounts and balances affected by MRBs.
Question IG 11-15
Can the retrospective transition guidance for MRBs affect other accounts/balances such as the present value of future profits (PVFP) and result in a transition adjustment for those accounts/balances?
PwC response
Yes, retrospective application requires the insurance entity to consider the accounting as if the MRB had been accounted for upon contract issue/acquisition date. As a result, other accounts, such as SOP 03-1 balances and PVFP, may have transition impacts/adjustments as a result of the MRB retrospective transition requirements.
Consider a fact pattern whereby an insurance entity consummated a business combination in a period prior to the transition date of ASU 2018-12. As a result of the business combination, the insurer recognized a group of annuity contracts along with a PVFP asset relating to such contracts. In accordance with the required retrospective adoption for MRBs, the insurance entity applies the MRB guidance to the acquired contracts at the acquisition date. In applying the guidance, the insurance entity has identified certain MRBs in the acquired annuity contracts. The following are the liabilities and PVFP amounts at the acquisition date, pre and post adoption of ASU 2018-12 resulting from the retrospective adoption of the guidance for MRBs. The balances are taken from the business combination numerical examples in Example IG 12-2 and Example IG 12-3 in IG 12.3.3.
Acquisition date balances
Pre-adoption of ASU 2018-12
Post-adoption of ASU 2018-12
Fair value of entire group of contracts
$107,000
$107,000
Allocation of fair value between components in accordance with ASC 944-805-30-1:
Account balance liability, as proxy for the amount invested by the policyholder
$115,000
$115,000
SOP 03-1 liability pre-adoption
/MRB post-adoption
$3,000
$4,000
Total contract liability
$118,000
$119,000
PVFP = Total contract liability less fair value of entire contract
$11,000
$12,000
The acquisition date accounting would be retrospectively adjusted to increase both the total contract liability and PVFP by $1,000 as a result of the retrospective adoption of the MRB requirements. The insurance entity must consider PVFP amortization impacts since the date of acquisition as a result of changing the amount of PVFP. Additionally, the insurance entity must consider the potential impact of the change from SOP 03-1 accounting to MRB accounting on estimated gross profits and the potential resulting impact on the pattern of PVFP amortization from the acquisition date to the transition date. When PVFP is and will continue to be amortized using estimated gross profits after transition, the PVFP amortization pattern will be impacted to the extent that estimated gross profits are impacted by the MRB accounting. However, if the entity has decided to adopt the simplified DAC amortization approach for its PVFP from the transition date forward under the modified retrospective approach, we do not believe the previous PVFP amortization pattern from the acquisition date to the transition date is required to be adjusted to reflect the change in estimated gross profits as a result of full retrospective adoption for MRBs. However, the adjustment to the amortization amount each period from the acquisition date to the transition date to reflect the change in the beginning PVFP balance would result in an adjustment to retained earnings and the PVFP balance at the transition date.

11.3.9 Transition for premium deficiency/loss recognition balances

The accounting for the transition for premium deficiency and loss recognition balances will depend on whether the contracts are traditional life or universal life.
Traditional life contracts
As cash flow assumptions are required to be updated regularly and the net premium ratio is capped at 100% (i.e., net premiums cannot exceed gross premiums), a premium deficiency test is no longer required for nonparticipating traditional and limited-payment insurance contracts. Expected benefits and claim-related costs in excess of premiums are expensed immediately. However, unamortized PVFP from past business combinations needs to be separately tested for recoverability for traditional and limited payment contracts. A premium deficiency test is still required for contracts other than traditional and limited-payment contracts such as universal life and participating insurance contracts.
Question IG 11-16 and Question IG 11-17 address the transition date premium deficiency/loss recognition for future policy benefits for traditional insurance contracts.
Question IG 11-16
Under guidance prior to ASU 2018-12, the loss recognition cohort typically includes an aggregation of multiple issue years and occasionally a variety of products. As a result, the updated assumptions are developed for this unit of accounting and the additional loss recognition liabilities are measured in the aggregate. With the annual cohort limitation required under the new guidance, how should insurance entities determine the carry over liability basis at transition under the modified retrospective transition approach for blocks of business for which loss recognition had been recognized prior to transition?
PwC response
The new guidance does not prescribe a particular methodology for allocating the loss recognition liabilities recognized at a more aggregated level to the cohort groups. As such, a reasonable allocation methodology should be selected in order to allocate the loss recognition liability to the cohorts under the new guidance, with the objective being that the updated net premium ratio and subsequent profit emergence for each cohort should be consistent with the underlying economics of the cohorts. The allocation methodology should be disclosed in the reporting entity’s financial statements.
Question IG 11-17
Insurer A adopts the new guidance for the liability for future policy benefits on a modified retrospective basis. Prior to adoption it had recognized a “profits followed by losses” liability on a group of contracts under ASC 944-60-25-9. How should the profits followed by losses liability be treated at the transition date?
PwC response
The profits followed by losses liability would be part of the transition date carrying amounts used in the calculation of the revised net level premium ratios at the transition date, similar to any existing premium deficiency liabilities at the transition date. At the transition date, the existing profits followed by losses liabilities would need to be allocated to the issue year cohort groupings used to calculate the net premium ratio, which is expected to be a lower level than the premium deficiency grouping levels.

Universal life-type contracts
At transition, an indirect impact of the adoption of ASU 2018-12 for universal life-type contracts will be that the profits followed by losses liability will need to be recalculated using future projections of profits and losses that now exclude amortization of DAC, as DAC is no longer part of the premium deficiency test. In addition, these projections must reflect the new straight-line amortization basis for any unearned revenue liability. To the extent that this results in a change to the profits followed by losses liability, this should be recognized as a transition adjustment to retained earnings.

11.3.10 Transition to ASU 2018-12 for reinsurance contracts

The new long duration guidance will impact the accounting for reinsurance contracts for both ceded and assumed reinsurance contracts and subject these contracts to the same transition approach as direct contracts.
Question IG 11-18, Question IG 11-19, Question IG 11-20, and Question IG 11-21 discuss the transition for reinsurance contracts.
Question IG 11-18
Assume an insurance entity uses the modified retrospective approach for the liability for future policy benefits for a group of contracts that has a net premium ratio that exceeds 100%, which results in an adjustment to the opening balance of retained earnings at transition. Is an adjustment to retained earnings also required for any related proportional reinsurance recoverable at transition?
PwC response
Yes. Under the modified retrospective transition approach applied to the direct contracts, the liability for future policy benefits is increased and the opening retained earnings balance is decreased to the extent that the revised net premium ratio exceeds 100% (i.e., a loss is expected). Ceded reinsurance transactions were historically required to be recognized and measured in a manner consistent with underlying reinsured contracts, including using consistent assumptions. Assuming the agreement was proportional reinsurance, a corresponding increase to the transition carrying amount of the reinsurance recoverable and increase to opening retained earnings would be required. In situations involving non-proportional reinsurance, the amount of reinsurance offset would need to be determined considering the terms of the reinsurance agreement.
Question IG 11-19
einsurance recoverable for a ceded reinsurance contract that meets the definition of an MRB outside the scope of ASC 326 Financial Instruments – Credit Losses?
PwC response
Yes. A reinsurance contract that meets the definition of an MRB is required to be recognized at fair value with changes in fair value recognized in the income statement. Financial assets measured at fair value are outside the scope of the CECL model.
Question IG 11-20
In transition under the modified retrospective approach, is the remeasurement of ceded reinsurance recoverables due to changes from the locked-in discount rate to the transition date current rate recognized in opening AOCI or retained earnings?
PwC response
Under the modified retrospective approach, the remeasurement of the direct liability for policy benefits at transition using the current upper-medium grade fixed-income corporate instrument yield will be an adjustment to opening AOCI. Ceded reinsurance transactions are required to be accounted for using a similar model. Therefore, a corresponding change in measurement of the reinsurance recoverable to the current upper-medium grade fixed-income corporate instrument yield would also be an adjustment to opening AOCI.
Question IG 11-21
In transition under the retrospective approach, for features in ceded reinsurance contracts that meet the definition of MRBs, is the component of the remeasurement of the reinsured MRB relating to the reinsurance entity's credit risk (not the reporting entity's credit risk) recognized to opening AOCI or retained earnings?
PwC response
The adjustment would be recognized in opening retained earnings. Only fair value changes attributable to the credit risk of the reporting entity that issued the MRB are recognized in AOCI, which is not relevant to the reinsured MRB. There is no corresponding adjustment for the direct insurance entity’s instrument-specific credit risk recognized to AOCI for the ceded reinsurance.
Expand

Welcome to Viewpoint, the new platform that replaces Inform. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory.

Your session has expired

Please use the button below to sign in again.
If this problem persists please contact support.

signin option menu option suggested option contentmouse option displaycontent option contentpage option relatedlink option prevandafter option trending option searchicon option search option feedback option end slide