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Net premium ratio |
= |
Present value of benefits and related expenses |
Present value of gross premiums |
Year |
Benefits |
Gross premiums (A) |
Net premiums (A*71.1%) |
1 |
$200.0 |
$500.0 |
$355.4 |
2 |
208.8 |
474.5 |
337.2 |
3 |
216.1 |
450.3 |
320.0 |
4 |
222.2 |
427.3 |
303.6 |
5 |
227.0 |
405.4 |
288.1 |
6 |
230.7 |
384.6 |
273.3 |
7 |
233.5 |
364.8 |
259.2 |
8 |
235.3 |
346.0 |
245.9 |
9 |
236.3 |
328.1 |
233.2 |
10 |
236.5 |
311.2 |
221.1 |
11 |
236.0 |
295.1 |
209.7 |
12 |
235.0 |
279.7 |
198.8 |
13 |
233.4 |
265.2 |
188.5 |
14 |
231.3 |
251.4 |
178.6 |
15 |
228.7 |
238.3 |
169.3 |
16 |
225.8 |
225.8 |
160.5 |
17 |
222.5 |
214.0 |
152.1 |
18 |
219.0 |
202.8 |
144.1 |
19 |
215.1 |
192.1 |
136.5 |
20 |
211.1 |
182.0 |
129.3 |
Total |
$4,504.4 |
$6,338.4 |
$4,504.4 |
Present value (0%) |
$4,504.4 |
$6,338.4 |
$4,504.4 |
Net premium ratio |
||
Present value of total benefits and expenses (for Years 1-20) |
(B) |
$4,504.4 |
Present value of total gross premiums (for Years 1-20) |
(A) |
$6,338.4 |
Net premium ratio (B)/(A) |
71.1% |
Year 1 calculation |
|
Present value of future benefits and expenses (for Years 2-20) |
$4,304.4 |
Less: Present value of future net premiums (for Years 2-20) |
4,149.0 |
Liability for future policy benefits |
$155.4 |
Dr. Cash 1 |
$300.0 |
|
Dr. Benefit expense 2 |
355.4 |
|
Cr. Premium income |
$500.0 |
|
Cr. Liability for future policy benefits |
155.4 |
|
1Premiums collected of $500, less benefits paid of $200
2Benefits paid of $200, plus change in reserve of $155.4
|
Excerpt ASC 944-40-30-15
However, expense assumptions shall not include acquisition costs or any costs that are required to be charged to expense as incurred, such as those relating to investments, general administration, policy maintenance costs, product development, market research, and general overhead (see paragraph 944-720-25-2).
Excerpt from ASC 944-40-35-6A (b)(2)
Zero coupon curves |
Year 1 |
Year 2 |
Year 3 |
Spot |
1% |
2% |
3% |
Forward (derived) |
1% |
3.01% |
5.03% |
Cash flow at end of year 2 |
Cash flow at end of year 3 |
Annual interest accretion |
|
Present value at issuance |
$961.17 (1) |
$915.14 (2) |
|
End of year 1 |
980.39 |
942.59 |
$46.67 (3) |
End of year 2 |
1,000.00 |
970.87 |
47.89 |
End of year 3 |
1,000.00 |
29.13 |
|
(1)Calculated by discounting the cash flow at the end of the year 2 based on the 2-year spot rate of 2% for 2 years ($1,000/(1.02)2)
(2)Calculated by discounting the cash flow at the end of year 3 based on the 3-year spot rate of 3% for 3 years ($1,000/(1.03)3)
(3)Represents the interest accretion resulting from applying the respective spot rate to each cash flow for the period (($961.17*2%) + ($915.14*3%))
|
Cash flow at end of year 2 |
Cash flow at end of year 3 |
Annual interest accretion |
|
Present value at issuance |
$961.17 (4) |
$915.14 (5) |
|
End of year 1 |
970.78 |
924.29 |
$18.76 (6) |
End of year 2 |
1,000.00 |
952.11 |
57.04 (7) |
End of year 3 |
1,000.00 |
47.89 (8) |
|
(4)Calculated by discounting the cash flow at the end of year 2 to the end of year 1 using the 2-year forward rate of 3.01% and then discounting that total to issuance using the 1% forward rate (($1,000/1.0301)/1.01)
(5)Calculated by discounting the cash flow at the end of year 3 to the end of year 2 using the 3-year forward rate of 5.03%, and then discounting the total to the end of year 1 using the 2-year forward rate of 3.01%, and then discounting the total to issuance using the 1% forward rate ((($1,000/1.0503)/1.0301)/1.01)
(6)Represents the interest accretion resulting from applying the forward rate to each cash flow for the period (($961.17*1%) + ($915.14*1%))
(7)Represents the interest accretion resulting from applying the forward rate to each cash flow for the period. In year 2, the forward rate used for accretion would be 3.01%. Year 2 interest is ($970.78*3.01%) + ($924.29*3.01%)
(8)Represents the interest accretion resulting from applying the forward rate to each cash flow for the period. In year 3, the forward rate used for accretion would be 5.03%. Year 3 interest is ($952.11*5.03%)
|
Cash flow at end of year 2 |
Cash flow at end of year 3 |
Annual interest accretion |
|
Present value at issuance |
$ 961.17 (9) |
$ 915.14 (10) |
|
End of year 1 |
$ 48.59 (11) |
||
End of year 2 |
1,000.00 |
49.85 |
|
End of year 3 |
1,000.00 |
25.25 |
|
(9) Calculated by discounting the cash flow at the end of the year 2 based on the 2-year spot rate of 2% for 2 years ($1,000/(1.02)2)
(10)Calculated by discounting the cash flow at the end of year 3 based on the 3-year spot rate of 3% for 3 years ($1,000/(1.03)3)
(11)Represents the interest accretion resulting from discounting each cash flow for the period at the equivalent level rate based upon the spot curve. This rate was determined by calculating the internal rate of return for a bond with an inflow of $1,876.31 (the sum of the present values of each cash flow at issuance, ($961.17 + $915.14)) and an outflow of $1,000 at the end of year 2 and year 3. This rate is 2.59%. The calculation of the interest accretion for year 1 is ($961.17+$915.14)*2.59%. This is a simplified example. As noted in IG 5.2.3.2, the equivalent level rate for the liability for future policy benefits is determined by solving for the discount rate that produces the same net premium ratio as would be produced if a curve were utilized.
|
Revised net premium ratio |
= |
Present value of actual historical benefits and related claim expenses + present value of future benefits and related expenses |
Present value of actual gross premiums + present value of updated future gross premiums |
Year |
Benefits |
Gross premiums |
1 (historical) |
$200.0 |
$500.0 |
2 (historical) |
208.8 |
474.5 |
3 (historical) |
216.1 |
450.3 |
4 (historical) |
222.2 |
427.3 |
5 (historical) |
227.0 |
405.4 |
6 (historical) |
276.9 |
384.6 |
7 (historical) |
280.1 |
364.7 |
8 (historical) |
282.2 |
345.8 |
9 (historical) |
283.2 |
327.8 |
10 |
283.4 |
310.8 |
11 |
282.8 |
294.6 |
12 |
281.4 |
279.2 |
13 |
279.3 |
264.5 |
14 |
276.7 |
250.6 |
15 |
273.5 |
237.4 |
16 |
269.9 |
224.9 |
17 |
265.9 |
213.0 |
18 |
261.5 |
201.8 |
19 |
256.8 |
191.0 |
20 |
251.8 |
180.9 |
Total |
5,179.5 |
6,329.1 |
Present value (0%) |
$5,179.5 |
$6,329.1 |
Revised net premium ratio |
||
Present value of total benefits and expenses (for Years 1-20) |
(A) |
$5,179.5 |
Present value of total gross premiums (for Years 1-20) |
(B) |
6,329.1 |
Net premium ratio (A)/(B) |
(C) |
81.8% |
Updated estimate |
|||
Year |
Benefits |
Gross premiums (A) |
Net premiums (A*81.8%) |
9 |
$283.2 |
$327.8 |
$268.3 |
10 |
283.4 |
310.8 |
254.3 |
11 |
282.8 |
294.6 |
241.1 |
12 |
281.4 |
279.2 |
228.4 |
13 |
279.3 |
264.5 |
216.5 |
14 |
276.7 |
250.6 |
205.1 |
15 |
273.5 |
237.4 |
194.3 |
16 |
269.9 |
224.9 |
184.1 |
17 |
265.9 |
213.0 |
174.3 |
18 |
261.5 |
201.8 |
165.1 |
19 |
256.8 |
191.0 |
156.3 |
20 |
251.8 |
180.9 |
148.0 |
Total |
3,266.2 |
2,976.6 |
2,435.9 |
Present value (0%) |
$3,266.2 |
$2,976.6 |
$2,435.9 |
Year 9 calculations (beginning of year) |
|||
Prior estimate |
Updated estimate |
Change |
|
Present value of future benefits (for Years 9-20) |
$2,728.1 |
$3,266.2 |
$538.1 |
Less: Present value of future net premiums (for Years 9-20) |
2,185.2 |
2,435.9 |
250.7 |
Liability for future policy benefits |
$542.9 |
$830.3 |
$287.4 |
Year 9 calculation (end of year) |
|
Present value of future benefits (for Years 10-20) |
$2,983.0 |
Less: Present value of future net premiums (for Years 10-20) |
2,167.6 |
Liability for future policy benefits |
$815.4 |
Dr. Cash 1 |
$44.6 |
|
Dr. Benefit expense 2 |
268.3 |
|
Dr. Liability remeasurement loss |
287.4 |
|
Cr. Premium income |
$327.8 |
|
Cr. Liability for future policy benefits 3 |
272.5 |
|
1 Premiums collected of $327.8, less benefits paid of $283.2
2 Benefits paid of $283.2, less change in reserve of $14.9 using current net premium ratio of 81.8%
3 Liability remeasurement of $287.4, less current period change in reserve of $14.9
|
Present value of updated future benefits and related claim expenses @ 3% |
$1,200 |
Less: Present value of updated future net premiums @ 3% |
(1,050) |
Liability for future policy benefits @ 3% |
$150 (A) |
Present value of updated future benefits and related claim expenses @ 3.2% |
$1,170 |
Less: Present value of updated future net premiums @ 3.2% |
(1,030) |
Liability for future policy benefits @ 3.2% |
$140 (B) |
Difference (A) - (B) |
$10 |
Dr. Liability for future policy benefits |
$10 |
|
Cr. AOCI |
$10 |
In no event shall the liability for future policy benefits balance be less than zero at the level of aggregation at which the reserves are calculated.
Excerpt ASC 944-40-30-7
Feature |
Timing of Pricing |
Considerations |
---|---|---|
Feature elected at inception
|
At inception
|
An entity must use judgment to determine, whether in substance, the feature is part of the base contract or separate accounting unit. An entity may consider the availability and pricing of a similar, standalone contract in making this determination.
|
Feature included in original contract
|
At inception
|
Since the pricing of the feature is set at inception of the contract, election of the feature subsequent to issuance is not an internal replacement; it is the continuation of an existing contract. The inception date of the feature is the date of issuance of the original contract, even if the feature was not elected at the date of issuance of the original contract. Cash flow assumptions for the liability for future policy benefits should include assumptions about the timing and incidence of feature elections from inception of the base contract. An entity should consider the substance of the feature in its determination of cohorts.
|
Feature included in original contract
|
Upon election of the feature
|
As the pricing of the feature was not set at inception, the election of the feature is a modification that is generally a non-integrated internal replacement (considered a new contract separate from the original contract) that should be recognized and aggregated in cohorts separately from the original base contract. The issue date of the feature (used for cohorting and inception discount rate establishment) is the date of election. However, if there is no underwriting required at election, an entity should consider whether the lack of underwriting causes it to be part of the base contract (i.e., is underwriting significant to the determination of it being a new contract).
|
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