ASC 944-40
Claim Costs and Liabilities for Future Policy Benefits
944 Financial Services—Insurance
Source downloaded: .Record version 433c54b1c323. Effective date must be checked in the source.
ASC 944-40 governs how insurance entities recognize and measure claim costs and liabilities for future policy benefits, with separate subsections for short-duration contracts, long-duration contracts, reinsurance contracts, and financial guarantee insurance contracts. Its core rules are that liabilities for unpaid claims (including IBNR) and claim adjustment expenses are accrued when insured events occur, and that a liability for future policy benefits—the present value of future benefits and related expenses less the present value of future net premiums—is accrued when premium revenue is recognized. Post-ASU 2018-12, cash flow assumptions are updated at least annually with remeasurement gains/losses in net income, the discount rate is an upper-medium grade (low-credit-risk) fixed-income yield updated each reporting date through OCI, and market risk benefits are measured at fair value.
Key points (7)
- A liability for unpaid claims (including IBNR) and a liability for claim adjustment expenses shall be accrued when insured events occur, measured at the estimated ultimate cost of settling claims using past experience adjusted for current trends, less estimated recoveries such as salvage and subrogation (944-40-25-1, 944-40-30-1 through 30-3).
- For long-duration contracts, the liability for future policy benefits—the present value of future benefits and related expenses less the present value of future net premiums (net premiums never exceeding gross premiums)—is accrued when premium revenue is recognized, using assumptions for mortality, morbidity, terminations, and expenses with no provision for adverse deviation (944-40-25-8, 25-11, 944-40-30-7, 30-19).
- The liability for future policy benefits is discounted at an upper-medium grade (low-credit-risk) fixed-income instrument yield reflecting the liability's duration, and contracts may not be grouped across issue years but must be grouped into quarterly or annual cohorts (944-40-30-9, 944-40-30-7).
- Cash flow assumptions are reviewed and updated annually at the same time each year (and in interim periods if evidence suggests revision); net premiums are recalculated using actual historical plus updated expected experience, producing a liability remeasurement gain or loss in net income, while discount rate changes go directly to other comprehensive income and do not change net premiums (944-40-35-5, 35-6A, 944-40-45-4).
- A contract or feature that both protects the contract holder from other-than-nominal capital market risk and exposes the insurer to other-than-nominal capital market risk is a market risk benefit, measured at fair value with changes in net income except instrument-specific credit risk changes, which go to OCI, and presented separately on the balance sheet (944-40-25-25C, 25-25D, 944-40-30-19C, 944-40-35-8A, 944-40-45-3).
- For universal life-type contracts the liability equals the accrued account balance plus amounts assessed for future services, refundable assessments, and any premium deficiency; future assessments and surrender charges may not be anticipated, and additional liabilities for annuitization or death benefits use a benefit ratio of expected excess payments to expected assessments (944-40-30-16 through 30-18, 944-40-25-27, 25-27A, 944-40-30-20, 30-26).
- A claim liability on a financial guarantee insurance contract is recognized when expected claim loss exceeds unearned premium revenue, measured at the present value of expected net cash outflows discounted at a current risk-free rate updated each reporting period (944-40-25-42, 944-40-30-31 through 30-33, 944-40-35-26).
For students. This is the heart of insurance liability accounting and was overhauled by ASU 2018-12 (LDTI): the most common misunderstanding is thinking assumptions are "locked in" at issue—cash flow assumptions are now unlocked annually (remeasurement to net income) while discount rate changes run through OCI without touching net premiums. Also remember the subtopic's split personality: short-duration contracts accrue claims when insured events occur, while long-duration contracts accrue a future policy benefit liability when premium revenue is recognized.
liability for unpaid claimsclaim adjustment expensesincurred but not reported claimsliability for future policy benefitsmarket risk benefitaccrued account balancebenefit ratioclaims development disclosure
Machine-generated study aid for ASC 944-40. Check the source paragraphs below.
944-40-00Status
Source downloaded: .Record version a53a2b3bd8ed. Effective date must be checked in the source.
944-40-00-1
The following table identifies the changes made to this Subtopic.
944-40-05Overview and Background
Source downloaded: .Record version b84da0102704. Effective date must be checked in the source.
944-40-05-1
This Subtopic provides guidance to insurance entities on accounting for and financial reporting of claims costs and liabilities for future policy benefits. The guidance in this Subtopic is presented in the following five Subsections:
- aGeneral
- bShort-Duration Contracts
- cLong-Duration Contracts
- dReinsurance Contracts
- eFinancial Guarantee Insurance Contracts.
944-40-05-2
Claim adjustment expenses include costs incurred in the claim settlement process such as all of the following:
- aLegal fees
- bOutside adjuster fees
- cCosts to record, process, and adjust claims.
Short-Duration Contracts
944-40-05-3
The Short-Duration Contracts Subsections of this Subtopic provide insurance entities guidance on accounting for and financial reporting of short-duration contracts.
Long-Duration Contracts
944-40-05-4
The Long-Duration Contracts Subsections of this Subtopic provide guidance to insurance entities on accounting for and financial reporting of the expected cost related to long-duration insurance contracts.
Reinsurance Contracts
944-40-05-5
The Reinsurance Contracts Subsections of this Subtopic provide insurance entities guidance on accounting for and financial reporting of reinsurance contracts.
Financial Guarantee Insurance Contracts
944-40-05-6
The Financial Guarantee Insurance Contracts Subsections of this Subtopic provide guidance on accounting for and financial reporting of claim liabilities for financial guarantee insurance contracts.
Information about Insured Financial Obligations
944-40-05-7
Insurance entities often aggregate information related to the credit standing of their insured financial obligations in a watch list or surveillance list to evaluate credit deterioration in those insured financial obligations. Those lists often are separated into groupings or categories to assist management in identifying varying degrees of credit deterioration of insured financial obligations in its portfolios.
944-40-15Scope and Scope Exceptions
Source downloaded: .Record version aa87efc631a7. Effective date must be checked in the source.
Overall Guidance
944-40-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 944-10-15, with specific entity exceptions noted below.
Entities
944-40-15-2
This Subtopic does not apply to mortgage guaranty insurance entities.
Short-Duration Contracts
Overall Guidance
944-40-15-3
The Short-Duration Contracts Subsections follow the same Scope and Scope Exceptions as outlined in the General Subsection of this Section, with specific instrument qualifications noted below.
Instruments
944-40-15-4
The guidance in the Short-Duration Contracts Subsections of this Subtopic applies only to short-duration contracts. See the Short-Duration Contracts Subsection of Section 944-20-15 for a discussion of what constitutes a short-duration contract.
Long-Duration Contracts
Overall Guidance
944-40-15-5
The Long-Duration Contracts Subsections follow the same Scope and Scope Exceptions as outlined in the General Subsection of this Section, with specific instrument qualifications noted below.
Instruments
944-40-15-6
The guidance in the Long-Duration Contracts Subsections of this Subtopic applies to long-duration contracts, including investment contracts with respect to nontraditional contract benefits referenced in paragraph 944-40-25-25B. See the Long-Duration Contracts Subsection of Section 944-20-15 for a discussion of what constitutes a long-duration contract.
Reinsurance Contracts
Overall Guidance
944-40-15-7
The Reinsurance Contracts Subsections of this Subtopic follow the same Scope and Scope Exceptions as outlined in the General Subsection of this Section, with specific instrument qualifications noted below.
Instruments
944-40-15-8
The guidance in the Reinsurance Contracts Subsections of this Subtopic applies only to reinsurance contracts. For guidance on identifying a reinsurance contract, see the Reinsurance Contracts Subsection of Section 944-20-15.
Financial Guarantee Insurance Contracts
944-40-15-9
The guidance in the Financial Guarantee Insurance Contracts Subsections of this Subtopic applies only to financial guarantee insurance contracts and financial guarantee reinsurance contracts.
944-40-25Recognition
Source downloaded: .Record version 33643539047c. Effective date must be checked in the source.
Claim Costs
944-40-25-1
Both of the following shall be accrued when insured events occur:
- aA liability for unpaid claims (including estimates of costs for claims relating to insured events that have occurred but have not been reported to the insurer)
- bA liability for claim adjustment expenses; that is a liability for all costs expected to be incurred in connection with the settlement of unpaid claims.
944-40-25-2
The estimated liability for unpaid claims includes the amount of money that will be required for future payments on both of the following:
- aClaims that have been reported to the insurer
- bClaims relating to insured events that have occurred but have not been reported to the insurer as of the date the liability is estimated.
944-40-25-3
Claim adjustment expenses include any legal and adjusters' fees, and the costs of paying claims and all related expenses.
Catastrophe Losses
944-40-25-6
The conditions in paragraph 450-20-25-2 shall be considered with respect to the risk of loss assumed by an insurance entity for catastrophes that may occur during the terms of policies in force to determine whether accrual of a loss is appropriate.
Long-Duration Contracts
Overall
944-40-25-7
A liability for expected costs relating to most types of long-duration contracts shall be accrued over the current and expected renewal periods of the contracts.
944-40-25-8
The present value of estimated future policy benefits to be paid to or on behalf of policyholders less the present value of estimated future net premiums to be collected from policyholders—that is, a liability for future policy benefits—shall be accrued when premium revenue is recognized.
944-40-25-9
In addition, as discussed in paragraph 944-40-25-1 liabilities for unpaid claims and claim adjustment expenses shall be accrued when insured events occur.
944-40-25-10
A liability for future policy benefits relating to long-duration contracts other than title insurance contracts shall be accrued when premium revenue is recognized.
Traditional and Limited-Payment Long-Duration Contracts
944-40-25-11
The liability for future policy benefits represents the present value of future benefits to be paid to or on behalf of policyholders and certain related expenses less the present value of future net premiums receivable under the insurance contracts. In no event shall net premiums exceed gross premiums.
- a
- b
Universal Life-Type Contracts and Nontraditional Contract Benefits
944-40-25-12
Sales inducements provided to the contract holder, whether for universal life-type contracts (or investment contracts) shall be recognized as part of the liability for policy benefits over the period in which the contract must remain in force for the contract holder to qualify for the inducement or at the crediting date, if earlier, in accordance with paragraphs . No adjustments shall be made to reduce the liability related to the sales inducements for anticipated surrender charges, persistency, or early withdrawal contractual features.
944-40-25-13
The balance that accrues to the benefit of the contract holder for a long-duration insurance contract that is subject to paragraph 944-40-30-16 (or an investment contract that is subject to paragraphs 944-20-15-14 and ) is the accrued account balance. The liability for the contract is the combination of amounts recorded in separate account liabilities and general account policyholder liabilities.
944-40-25-14
The accrued account balance equals:
- aDeposit(s) net of withdrawals
- bPlus amounts credited pursuant to the contract
- cLess fees and charges assessed
- dPlus additional interest (for example, persistency bonus)
- eOther adjustments (for example, appreciation or depreciation recognized in accordance with paragraphs to the extent not already credited and included in [b]).
944-40-25-15
Additional interest, if any, shall be accrued through the balance sheet date at the rate that would accrue to the balance available in cash, or its equivalent, before reduction for future fees and charges, at the earlier of the date that the interest rate credited to the contract is reset (the reset date) or contractual maturity.
944-40-25-16
For purposes of the preceding paragraph, an asset or contract is the equivalent of cash if it has both of the following characteristics:
- aIt has a readily determinable fair value.
- bIt can be converted to cash without incurring significant transaction costs.
944-40-25-17
Any changes in the accrued account balance resulting from the application of the guidance in paragraphs shall be reflected in net income in the period of the changes.
944-40-25-18
Some contracts, such as variable life and annuity and certain group pension participating and other experience-rated contracts, provide for a return through periodic crediting rates, surrender adjustments, or termination adjustments based on the total return of a contractually referenced pool of assets owned by the insurance entity. Insurance entities shall first determine whether such contracts are required to be accounted for under the provisions of Subtopic 815-10 or 815-15.
944-40-25-19
To the extent a contract described in the preceding paragraph is not required to be accounted for under the provisions of Subtopic 815-10 or 815-15, the amount of other adjustments described in paragraph shall be based on the fair value of the referenced pool of assets at the balance sheet date, even if the related assets are not recognized at fair value, to the extent not already credited to the accrued account balance and included in paragraph 944-40-25-14(b).
944-40-25-20
Amounts determined for other adjustments shall not be reduced for future fees and charges.
944-40-25-21
A loss shall be recognized in the statement of operations to the extent an asset reported in the general account is designated as part of a contractually referenced pool of assets and on that designation date has an unrealized loss.
944-40-25-22
For contracts that have features that may result in more than one potential account balance, the accrued account balance shall be based on the highest contractually determinable balance that will be available in cash or its equivalent at contractual maturity or the reset date, before reduction for future fees and charges.
944-40-25-23
An example of a contract subject to the preceding paragraph is a contract that provides a return based on a contractually referenced pool of real estate assets owned by the insurance entity but also provides for minimum investment return guarantees.
944-40-25-24
For contracts in which amounts credited as interest to the contract holder are reset periodically, the accrued balance shall be based on the highest crediting rate guaranteed or declared through the reset date.
944-40-25-25
The accrued account balance shall not reflect surrender adjustments (for example, market value annuity adjustments, surrender charges, or credits). For a description of a market value annuity and market value annuity adjustments, see paragraph 944-20-05-28.
944-40-25-25B
The following guidance addresses contracts or contract features that provide for potential benefits in addition to the account balance:
- aAn insurance entity shall first determine at contract inception whether such benefits should be accounted for under the provisions of paragraph 944-40-25-25C.
- bFor benefits that are not accounted for under the provisions of paragraph 944-40-25-25C, an insurance entity shall then determine whether such benefits should be accounted for under the provisions of Subtopic 815-10 or 815-15.
- cAll other benefits shall be accounted for under the provisions of paragraphs 944-40-25-26 through 25-27A, as applicable.
944-40-25-25C
A contract or contract feature that both provides protection to the contract holder from other-than-nominal capital market risk and exposes the insurance entity to other-than-nominal capital market risk shall be recognized as a market risk benefit.
944-40-25-25D
In evaluating whether a contract or contract feature meets the conditions in paragraph 944-40-25-25C, an insurance entity shall consider that:
- aProtection refers to the transfer of a loss in, or shortfall (that is, the difference between the account balance and the benefit amount) of, the contract holder's account balance from the contract holder to the insurance entity, with such transfer exposing the insurance entity to capital market risk that would otherwise have been borne by the contract holder (or beneficiary).
- bProtection does not include the death benefit component of a life insurance contract (that is, the difference between the account balance and the death benefit amount). This condition does not apply to an investment contract or an annuity contract (including an annuity contract classified as an insurance contract).
- cA nominal risk, as explained in paragraph 944-20-15-21, is a risk of insignificant amount or a risk that has a remote probability of occurring. A market risk benefit is presumed to expose the insurance entity to other-than-nominal capital market risk if the benefit would vary more than an insignificant amount in response to capital market volatility.
944-40-25-26
This guidance addresses contract features that provide for potential benefits in addition to the account balance that are payable only upon annuitization, such as annuity purchase guarantees or guaranteed minimum income benefits that are not market risk benefits, and two-tier annuities.
944-40-25-27
If the contract feature is not required to be accounted for under paragraph 944-40-25-25C or the provisions of Topic 815 on derivatives and hedging, an additional liability for the contract feature shall be established if the present value of expected annuitization payments at the expected annuitization date exceeds the expected account balance at the expected annuitization date.
944-40-25-27A
If the contract feature is not required to be accounted for under paragraph 944-40-25-25C or the provisions of Topic 815 on derivatives and hedging and if the amounts assessed against the contract holder each period for the insurance benefit feature of an insurance contract are assessed in a manner that is expected to result in profits in earlier years and losses in subsequent years from the insurance benefit function, a liability for death or other insurance benefits shall be recognized in addition to the account balance.
Certain Participating Life Insurance Contracts
944-40-25-29
A liability for future policy benefits relating to participating life insurance contracts that meet the criteria in paragraph 944-20-15-3 shall be equal to the sum of all of the following:
- aThe net level premium reserve for death and endowment policy benefits
- bThe liability for terminal dividends
- cAny probable loss (premium deficiency) as described in paragraphs .
944-40-25-30
Terminal dividends shall be accrued in the liability for future policy benefits if both of the following conditions are met:
- aPayment of the dividend is probable.
- bThe amount can be reasonably estimated.
944-40-25-31
Death and surrender benefits incurred shall be recognized as expenses in the statement of earnings.
Title Insurance Contracts
944-40-25-32
A liability for estimated claim costs relating to title insurance contracts, including estimates of costs relating to incurred-but-not-reported claims, shall be accrued when title insurance premiums are recognized as revenue under Section 944-605-25. Estimated claim costs shall be recognized when premium revenue is recognized because the insurance provides protection against claims caused by problems with title to real estate arising out of ascertainable insured events that generally exist at that time.
Reinsurance Contracts
944-40-25-33
Reinsurance contracts do not result in immediate recognition of gains unless the reinsurance contract is a legal replacement of one insurer by another and thereby extinguishes the ceding entity's liability to the policyholder.
944-40-25-34
Reinsurance recoverables shall be recognized in a manner consistent with the liabilities (including estimated amounts for claims incurred but not reported and future policy benefits) relating to the underlying reinsured contracts. Assumptions used in estimating reinsurance recoverables shall be consistent with those used in estimating the related liabilities.
944-40-25-35
944-40-25-36
The reinsurer shall determine the classification of the reinsurance contract as an investment contract or as an insurance contract at the inception of the reinsurance contract.
944-40-25-37
For reinsurance contracts, the mortality or morbidity risk could be deemed other than nominal even if the original issuer did not determine mortality or morbidity to be other than nominal.
944-40-25-38
There is a rebuttable presumption that a contract has significant mortality risk where the additional insurance benefit would vary significantly in response to capital markets volatility.
944-40-25-39
Similarly, the issuer of a contract that provides only an insurance benefit feature that wraps a noninsurance contract, for example, a guaranteed minimum death benefit related to a mutual fund balance, shall evaluate its contract in the same manner as described in paragraphs .
944-40-25-40
A reinsurer may agree to reinsure all or a portion of certain annuitizationor death or other insurance benefits (see paragraphs 944-40-25-25B through 25-27A). Both the ceding entity and the reinsurer shall first determine whether such a reinsurance contract should be accounted for under the market risk benefitprovisions of paragraph 944-40-25-25C. For reinsurers, the reference to the account balance in paragraph 944-40-25-25D refers to the underlying contract between the direct writer and the contract holder. If the reinsurance contract is not accounted for under the market risk benefit provisions of paragraph 944-40-25-25C, both the ceding entity and the reinsurer shall then determine whether such a reinsurance contract should be accounted for under the provisions of Subtopic 815-10 or 815-15.
944-40-25-41
If the reinsurance contract is not required to be accounted for under the provisions of paragraph 944-40-25-25C or Subtopic 815-10 or 815-15, the entity shall apply the guidance in paragraphs 944-40-25-26 through 25-27A.
Financial Guarantee Insurance Contracts
944-40-25-42
An insurance entity shall recognize a claim liability on a financial guarantee insurance contract when the insurance entity expects that a claim loss will exceed the unearned premium revenue for that contract based on the present value of expected net cash outflows to be paid under the insurance contract.
944-40-30Initial Measurement
Source downloaded: .Record version ba4814551405. Effective date must be checked in the source.
Liability for Unpaid Claims
944-40-30-1
The liability for unpaid claims shall be based on the estimated ultimate cost of settling the claims (including the effects of inflation and other societal and economic factors), using past experience adjusted for current trends, and any other factors that would modify past experience.
944-40-30-2
Estimated recoveries on unsettled claims, such as salvage, subrogation, or a potential ownership interest in real estate, shall be evaluated in terms of their estimated realizable value and deducted from the liability for unpaid claims.
944-40-30-3
Estimated recoveries on settled claims other than mortgage guaranty and title insurance claims also shall be deducted from the liability for unpaid claims.
944-40-30-4
Claim adjustment expenses include costs associated directly with specific claims paid or in the process of settlement, such as legal and adjusters' fees. Claim adjustment expenses also include other costs that cannot be associated with specific claims but are related to claims paid or in the process of settlement, such as internal costs of the claims function.
944-40-30-5
The initial measurement attributes of items recognized under the General Subsection of Section 944-40-25 are the same as stated for subsequent measurement, see the General Subsection of Section 944-40-35.
Long-Duration Contracts
Overall
Traditional and Limited-Payment Long-Duration Contracts
944-40-30-7
The liability for future policy benefits accrued under paragraph 944-40-25-8 shall be the present value of future benefits to be paid to or on behalf of policyholders and related expenses less the present value of future net premiums (portion of gross premium required to provide for all benefits and expenses, excluding acquisition costs or costs that are required to be charged to expense as incurred). That liability shall be estimated using methods that include assumptions, such as discount rate, mortality, morbidity, terminations, and expenses (see paragraphs 944-40-30-9 and ). The liability also shall consider other assumptions relating to guaranteed contract benefits, such as coupons, annual endowments, and conversion privileges. The assumptions shall not include a provision for the risk of adverse deviation. In determining the level of aggregation at which reserves are calculated, an insurance entity shall not group contracts together from different issue years but shall group contracts into quarterly or annual groups.
944-40-30-7A
To the extent the present value of future benefits and expenses exceeds the present value of future gross premiums, an immediate charge shall be recognized in net income (see paragraph 944-40-45-4) such that net premiums are set equal to gross premiums. In no event shall the liability for future policy benefits balance be less than zero for the level of aggregation at which reserves are calculated. Assumptions shall be updated in subsequent accounting periods as described in paragraphs 944-40-35-5 through 35-6A and .
944-40-30-8
This guidance discusses the following assumptions:
- aDiscount rate
- bMortality
- cMorbidity
- dTermination
- eExpense.
944-40-30-9
The liability for future policy benefits shall be discounted using an upper-medium grade (low-credit-risk) fixed-income instrument yield. An insurance entity shall consider reliable information in estimating the upper-medium grade (low-credit-risk) fixed-income instrument yield that reflects the duration characteristics of the liability for future policy benefits (see paragraph 944-40-55-13E). An insurance entity shall maximize the use of relevant observable inputs and minimize the use of unobservable inputs in determining the discount rate assumption.
944-40-30-11
Mortality assumptions used in estimating the liability for future policy benefits shall be based on estimates of expected mortality.
944-40-30-12
Morbidity assumptions used in estimating the liability for future policy benefits shall be based on estimates of expected incidences of disability and claim costs.
944-40-30-13
Expected incidences of disability and claim costs for various types of insurance (for example, noncancelable and guaranteed renewable accident and health insurance contracts) and other factors, such as occupational class, waiting period, sex, age, and benefit period, shall be considered in making morbidity assumptions. The risk of antiselection or adverse selection also shall be considered in making morbidity assumptions.
944-40-30-14
Termination assumptions used in estimating the liability for future policy benefits shall be based on estimates of expected terminations and nonforfeiture benefits, using expected termination rates and contractual nonforfeiture benefits. Termination rates may vary by plan of insurance, age at issue, year of issue, frequency of premium payment, and other factors. If composite rates are used, the rates shall be representative of the entity's actual mix of business. Termination assumptions shall be made for long-duration insurance contracts without termination benefits because of the effects of terminations on expected premiums and claim costs.
944-40-30-15
Expense assumptions used in estimating the liability for future policy benefits shall be based on estimates of expected nonlevel costs, such as termination or settlement costs, and costs after the premium-paying period. Renewal expense assumptions shall consider the possible effect of inflation on those expenses. 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).
Universal Life-Type Contracts and Nontraditional Contract Benefits
944-40-30-16
The liability for policy benefits for universal life-type contracts shall be equal to the sum of the following:
- aThe balance that accrues to the benefit of policyholders at the date of the financial statements
- bAny amounts that have been assessed to compensate the insurance entity for services to be performed over future periods (see Subtopic 944-605 on insurance—revenue recognition)
- cAny amounts previously assessed against policyholders that are refundable on termination of the contract
- dAny probable loss (premium deficiency) as described in paragraphs .
944-40-30-17
Amounts that may be assessed against policyholders in future periods, including surrender charges, shall not be anticipated in determining the liability for policy benefits.
944-40-30-18
In the absence of a stated account balance or similar explicit or implicit contract value, the cash value, measured at the date of the financial statements, that could be realized by a policyholder upon surrender shall represent the element of liability described in paragraph 944-40-30-16(a).
944-40-30-19
Provisions for risk of adverse deviation shall not be made.
944-40-30-19B
The guidance in paragraphs and 944-40-30-26 through 30-29A addresses contracts or contract features that provide for potential benefits in addition to the account balance that accrues to the benefit of the policyholders.
944-40-30-19C
A market risk benefit shall be measured at fair value. Total attributed fees used to calculate the fair value of the market risk benefit shall not be negative or exceed total contract fees and assessments collectible from the contract holder.
944-40-30-19D
In determining the terms of the market risk benefit, the insurance entity shall consider guidance on determining the terms of an embedded derivative that is required to be accounted for separately under Subtopic 815-15 on embedded derivatives, including the following:
- aConsistent with paragraph 815-15-30-4, if a nonoption valuation approach is used, the terms of the market risk benefit shall be determined in a manner that results in its fair value generally being equal to zero at the inception of the contract.
- bConsistent with paragraph 815-15-30-6, if an option-based valuation approach is used, the terms of the market risk benefit shall not be adjusted to result in the market risk benefit being equal to zero at the inception of the contract.
- cConsistent with paragraph 815-15-25-7, if a contract contains multiple market risk benefits, those market risk benefits shall be bundled together as a single compound market risk benefit.
944-40-30-20
The amount of the additional liability recognized under paragraph 944-40-25-27A shall be determined based on the ratio (benefit ratio) of the following:
- aNumerator. The present value of total expected excess payments over the life of the contract, discounted at the contract rate.
- bDenominator. The present value of total expected assessments over the life of the contract, discounted at the contract rate.
944-40-30-21
The benefit ratio as determined in paragraph 944-40-30-20 may exceed 100 percent, resulting in a liability that exceeds cumulative assessments.
944-40-30-22
For contracts in which the assets are reported in the general account, the investment margin (that is, the amounts expected to be earned from the investment of policyholder balances less amounts credited to policyholder balances [see paragraph 944-40-25-14]) shall be included with any other assessments for purposes of determining total expected assessments that are referenced in paragraph 944-40-30-20.
944-40-30-22A
An increase during a period in an unearned revenue liability (that is, deferral of revenue) established in paragraphs shall be excluded from the amounts assessed against the contract holder's account balance for that period and a decrease in (that is, amortization of) an unearned revenue liability in accordance with paragraph 944-605-35-2 during a period shall be included with the assessments for that period.
944-40-30-23
The insurance entity shall calculate the present value of total expected excess payments and total assessments and investment margins, as applicable, based on expected experience.
944-40-30-24
Expected experience shall be based on a range of scenarios that considers the volatility inherent in the assumptions rather than a single set of best estimate assumptions.
944-40-30-26
The additional liability required under paragraph 944-40-25-27 shall be measured initially based on the benefit ratio determined by the following numerator and denominator:
- aNumerator. The present value of expected annuitization payments to be made and related incremental claim adjustment expenses, discounted at an upper-medium grade (low-credit-risk) fixed-income instrument yield applicable to the payout phase of the contract, minus the expected accrued account balance at the expected annuitization date (the excess payments). The excess of the present value payments to be made during the payout phase of the contract over the expected accrued account balance at the expected annuitization date shall be discounted at the contract rate.
- bDenominator. The present value of total expected assessments during the accumulation phase of the contract, discounted at the contract rate.
944-40-30-27
For contracts whose assets are reported in the general account, the investment margin (that is, the amounts expected to be earned from the investment of policyholder balances less amounts credited to policyholder balances [see paragraph 944-40-25-14]) shall be included with any other assessments for purposes of determining total expected assessments that are referenced in paragraph 944-40-30-26.
944-40-30-28
The insurance entity shall calculate the present value of total expected excess payments and total assessments and investment margins, as applicable, based on expected experience. Expected experience shall be based on a range of scenarios that considers the volatility inherent in the assumptions rather than a single set of best estimate assumptions. When determining expected excess payments, the expected annuitization rate is one of the assumptions that needs to be estimated.
944-40-30-29
In calculating the additional liability for the additional benefit feature, the contract rate used to compute present value shall be either the rate in effect at the inception of the book of contracts or the latest revised rate applied to the remaining benefit period. The approach selected to compute the present value of revised estimates shall be applied consistently in subsequent revisions to computations of the benefit ratio.
944-40-30-29A
A reinsurer or issuer of the insurance benefit features of a contract shall calculate a liability for the portion of premiums collected each period that represents compensation to the insurance entity for benefits that are assessed in a manner that is expected to result in current profits and future losses from the insurance benefit function. That liability shall be calculated using the methodology described in paragraphs and .
Certain Participating Life Insurance Contracts—Net Level Premium Reserve
944-40-30-30
The net level premium reserve shall be calculated based on the dividend fund interest rate, if determinable, and mortality rates guaranteed in calculating the cash surrender values described in the contract. If the dividend fund interest rate is not determinable, the guaranteed interest rate used in calculating cash surrender values described in the contract shall be used. If the dividend fund interest rate is not determinable and there is no guaranteed interest rate, the interest rate used in determining guaranteed nonforfeiture values shall be used. Finally, if none of the above rates exists, then the interest rate used to determine minimum cash surrender values—as set by the National Association of Insurance Commissioners' model standard nonforfeiture law—for the year of issue of the contract should be used. Regardless of the rate used, net premiums shall be calculated as a constant percentage of the gross premiums.
Financial Guarantee Insurance Contracts
944-40-30-31
An insurance entity shall measure a claim liability equal to the present value of expected net cash outflows to be paid under the insurance contract discounted using a current risk-free rate. That current risk-free rate shall be based on the remaining period (contract or expected, as applicable) of the insurance contract.
Expected Net Cash Outflows
944-40-30-32
Expected net cash outflows (cash outflows, net of potential recoveries, expected to be paid to the holder of the insured financial obligation, excluding reinsurance) are probability-weighted cash flows that reflect the likelihood of all possible outcomes. For purposes of this Subtopic, the expected net cash outflows shall be developed using the insurance entity's own assumptions about the likelihood of all possible outcomes based on all information available to the insurance entity (including relevant market information). Those assumptions shall consider all relevant facts and circumstances and, where applicable, be consistent with the information tracked and monitored through the insurance entity's risk-management activities and used to assist in making operational decisions.
944-40-30-33
At initial recognition of a claim liability, an insurance entity shall discount the expected net cash outflows under the insurance contract using the current risk-free rate at that date based on the remaining period (contract or expected, as applicable) of the insurance contract. Example 1 (see paragraph 944-40-55-30) illustrates the application of this guidance.
944-40-35Subsequent Measurement
Source downloaded: .Record version 367d0f4ba5ea. Effective date must be checked in the source.
Claim Costs
944-40-35-1
Changes in estimates of claim costs resulting from the continuous review process and differences between estimates and payments for claims shall be recognized in income of the period in which the estimates are changed or payments are made.
944-40-35-2
As discussed in paragraph 944-40-30-2, estimated recoveries on unsettled claims, such as salvage, subrogation, or a potential ownership interest in real estate, shall be evaluated in terms of their estimated realizable value and deducted from the liability for unpaid claims.
944-40-35-3
As discussed in paragraph 944-40-30-3, estimated recoveries on settled claims other than mortgage guaranty and title insurance claims also shall be deducted from the liability for unpaid claims.
944-40-35-4
Subsequent reductions in the reported amount and realized gains and losses on the sale of real estate acquired in settling claims shall be recognized as an adjustment to claim costs incurred.
Long-Duration Contracts
Traditional and Limited-Payment Long-Duration Contracts
944-40-35-5
Assumptions shall be updated in subsequent accounting periods as follows to determine changes in the liability for future policy benefits:
- aCash flow assumptions (that is, the assumptions used to derive estimated cash flows, including the mortality, morbidity, termination, and expense assumptions referenced in paragraphs ) shall be reviewed—and if there is a change, updated—on an annual basis, at the same time every year.
- 1Cash flow assumptions shall be updated in interim reporting periods if evidence suggests that cash flow assumptions should be revised.
- 2An insurance entity may make an entity-wide election not to update the expense assumption referenced in paragraph 944-40-30-15.
- 1
- bThe discount rate assumption referenced in paragraph 944-40-30-9 shall be updated for annual and interim reporting periods, as of the reporting date.
944-40-35-6
Actual experience shall be recognized in the period in which that experience arises. The liability for future policy benefits shall then be updated for actual experience at least on an annual basis as described in paragraph 944-40-35-5(a) (and for limited-payment contracts, see paragraph 944-605-35-1B for guidance on updating any corresponding deferred profit liability). An insurance entity need not update the liability for future policy benefits for actual experience more often than on an annual basis, unless cash flow assumptions are updated as described in paragraph 944-40-35-5(a)(1).
944-40-35-6A
A related charge or credit to net income (see paragraph 944-40-45-4) or other comprehensive income as a result of updating assumptions at the level of aggregation at which reserves are calculated (that is, for a group of contracts) shall be determined as follows:
- aCash flow assumptions. Net premiums shall be updated for cash flow changes. An insurance entity shall update its estimate of cash flows expected over the entire life of a group of contracts using actual historical experience and updated future cash flow assumptions. An insurance entity shall recalculate net premiums by comparing the present value of actual historical benefits and related actual (if applicable) historical expenses plus updated remaining expected benefits and related expenses, less the liability carryover basis (if applicable), with the present value of actual historical gross premiums plus the updated remaining expected gross premiums (see Examples 6 and 7 in paragraphs ). The revised ratio of net premiums to gross premiums shall not exceed 100 percent (see paragraph 944-40-35-7A).
- 1Liability remeasurement gain or loss. The revised net premiums shall be used to derive an updated liability for future policy benefits as of the beginning of the current reporting period, discounted at the original (that is, contract issuance) discount rate. The updated liability for future policy benefits as of the beginning of the current reporting period shall then be compared with the carrying amount of the liability as of that date (that is, before the updating of cash flow assumptions) to determine the current period change in liability estimate (that is, the liability remeasurement gain or loss) to be recognized in net income for the current reporting period (see paragraph 944-40-45-4 for presentation requirements).
- 2Current-period benefit expense. The revised net premiums shall be applied as of the beginning of the current reporting period to derive the benefit expense for the current reporting period (see paragraph 944-40-45-4 for presentation requirements).
- 3Subsequent periods. In subsequent periods, the revised net premiums shall be used to measure the liability for future policy benefits, subject to future revisions.
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- bDiscount rate assumptions. Net premiums shall not be updated for discount rate assumption changes.
- 1The difference between the updated carrying amount of the liability for future policy benefits (that is, the present value of future benefits and expenses less the present value of future net premiums based on updated cash flow assumptions) measured using the updated discount rate assumption and the original discount rate assumption shall be recognized directly to other comprehensive income (that is, on an immediate basis).
- 2The interest accretion rate shall remain the original discount rate used at contract issue date.
- 1
944-40-35-7A
If the updating of cash flow assumptions results in the present value of future benefits and expenses exceeding the present value of future gross premiums, an insurance entity shall:
- aSet net premiums equal to gross premiums
- bIncrease the liability for future policy benefits
- cRecognize a corresponding charge to net income for the current reporting period (see paragraph 944-40-45-4) such that net premiums are set equal to gross premiums.
944-40-35-7B
In no event shall the liability for future policy benefits balance be less than zero at the level of aggregation at which reserves are calculated.
Universal Life-Type Contracts and Nontraditional Contract Benefits
944-40-35-8A
A market risk benefit may be positive (that is, an asset) or negative (that is, a liability). Changes in fair value related to market risk benefits shall be recognized in net income, with the exception of fair value changes attributable to a change in the instrument-specific credit risk of market risk benefits in a liability position. The portion of a fair value change attributable to a change in the instrument-specific credit risk of market risk benefits in a liability position shall be recognized in other comprehensive income (see paragraph 944-40-45-3).
944-40-35-8B
Upon derecognition of a market risk benefit, an insurance entity shall derecognize any related amount included in accumulated other comprehensive income. An insurance entity only shall include in net income any gain or loss that is realized as a result of the insurance entity's nonperformance (that is, the settlement or extinguishment of an obligation for an amount less than the contractual obligation amount). On the date of annuitization (for annuitization benefits) or upon extinguishment of the account balance (for withdrawal benefits) the balance related to the market risk benefit shall be derecognized, and the amount deducted (after derecognition of any related amount included in accumulated other comprehensive income) shall be used in the calculation of the liability for future policy benefits for the payout annuity (including the establishment of a deferred profit liability to the extent that the market risk benefit amount deducted exceeds the amount of the liability for future policy benefits or the recognition of an immediate loss to the extent that the amount of the liability for future policy benefits exceeds the market risk benefit amount deducted).
944-40-35-9
An insurance entity shall regularly evaluate estimates used and adjust the additional liability balance, with a related charge or credit to benefit expense (see paragraph 944-40-45-1), if actual experience or other evidence suggests that earlier assumptions should be revised. In making such revised estimates, both the present value of total excess payments and the present value of total expected assessments and investment margins shall be calculated as of the balance sheet date using historical experience from the issue date to the balance sheet date and estimated experience thereafter.
944-40-35-10
The additional liability at the balance sheet date shall be equal to:
- aThe current benefit ratio multiplied by the cumulative assessments (cumulative assessments shall be calculated as actual cumulative assessments, including investment margins, if applicable, recorded from contract inception through the balance sheet date)
- bLess the cumulative excess payments (including amounts reflected in claims payable liabilities)
- cPlus accreted interest.
944-40-35-12
The insurance entity shall regularly evaluate estimates used and adjust the additional liability balance recognized under paragraph 944-40-25-27 with a related charge or credit to benefit expense (see paragraph 944-40-45-2), if actual experience or other evidence suggests that earlier assumptions should be revised.
944-40-35-13
In making such revised estimates, both the present value of total excess payments and the present value of total expected assessments or investment margins shall be calculated as of the balance sheet date using historical experience from the issue date to the balance sheet date and estimated experience thereafter.
944-40-35-14
The additional liability at the balance sheet date shall be equal to the sum of the following:
- aThe current benefit ratio multiplied by the cumulative assessments
- bAccreted interest (an addition)
- cAt time of annuitization, the cumulative excess payments determined at annuitization (a deduction).
944-40-35-15
The cumulative excess payments determined at annuitization in paragraph 944-40-35-14(c) is the amount that shall be deducted at the actual date of annuitization. That amount shall be calculated as the present value of expected annuity payments and related claim adjustment expenses discounted at an upper-medium grade (low-credit-risk) fixed-income instrument yield minus the accrued account balance at the actual annuitization date.
944-40-35-16
On the date of annuitization or extinguishment of the account balance, the additional liability related to the cumulative excess benefits will be derecognized and the amount deducted will be used in the calculation of the liability for the payout annuity.
944-40-35-17
A reinsurer or issuer of the insurance benefit features of a contract shall calculate a liability for the portion of premiums collected each period that represents compensation to the insurance entity for benefits that are assessed in a manner that is expected to result in current profits and future losses from the insurance benefit function.
944-40-35-18
That liability shall be calculated using the methodology described in paragraphs and .
944-40-35-19
The accrued account balance for a two-tier annuity during the accumulation phase shall be calculated using the lower-tier rate because the account balance accumulated at the lower tier is the amount that would be available in cash at maturity if the contract holder elects not to annuitize the contract.
944-40-35-20
An additional liability recognized in accordance with paragraphs or a market risk benefit, as applicable, shall be recognized during the accumulation phase for the annuitization benefit in excess of the accrued account balance.
944-40-35-21
If there is an additional liability for the annuitization benefit and a contract holder elects to annuitize, the present value of annuitization payments, including related incremental claims adjustment expenses, discounted using an upper-medium grade (low-credit-risk) fixed-income instrument yield would represent the single premium used to purchase the annuitization benefit.
Certain Participating Life Insurance Contracts
944-40-35-22
Terminal dividends accrued under paragraph 944-40-25-30 shall be recognized as an expense over the life of a book of participating life insurance contracts, at a constant rate based on the present value of the base used for the amortization of deferred acquisition costs.
944-40-35-23
The present value of the amortization base shall be computed using the expected investment yield (net of related investment expenses). Accordingly, interest shall accrue on the balance of terminal dividends.
944-40-35-25
Increases in the liability for future policy benefits shall be reported as an expense in the statement of earnings.
Financial Guarantee Insurance Contracts
944-40-35-26
An insurance entity shall update the discount rate on a claim liability recognized under 944-40-25-42 each reporting period. An insurance entity also shall revise expected net cash outflows when increases (or decreases) in the likelihood of a default (insured event) (and related amounts of net cash outflows) and potential recoveries occur. The claim liability shall not be reduced below zero. The discount amount shall be accreted on the claim liability through earnings.
944-40-35-27
Revisions to the claim liability shall be recognized as claim expense in the period of the change as a change in accounting estimate.
944-40-35-28
Paragraph 944-605-25-25 states that the unearned premium revenue represents the insurance entity's stand-ready obligation under a financial guarantee insurance contract at initial recognition. If the likelihood of a default (insured event) increases so that the present value of the expected net cash outflows expected to be paid under the insurance contract exceeds the unearned premium revenue, the insurance entity shall recognize a claim liability (in addition to the unearned premium revenue) in accordance with paragraph 944-40-25-42.
944-40-45Other Presentation Matters
Source downloaded: .Record version 36e740cff588. Effective date must be checked in the source.
Long-Duration Contracts
Universal Life-Type Contracts and Nontraditional Contract Benefits
944-40-45-1
The change in the estimate of the additional liability for death or other insurance benefits recognized under the guidance in paragraph 944-40-25-27A as of the beginning of the current period (that is, the liability remeasurement gain or loss as a result of applying the revised benefit ratio) shall be presented as a separate component of total benefit expense in the statement of operations, either parenthetically or as a separate line item. The liability remeasurement gain or loss may be reported together with the liability remeasurement gain or loss related to annuitization benefits and traditional and limited-payment contracts.
944-40-45-2
The change in the estimate of the additional liability for annuitization benefits recognized under the guidance in paragraph 944-40-25-27 as of the beginning of the current period (that is, the liability remeasurement gain or loss as a result of applying the revised benefit ratio) shall be presented as a separate component of total benefit expense in the statement of operations, either parenthetically or as a separate line item. The liability remeasurement gain or loss may be reported together with the liability remeasurement gain or loss related to death or other insurance benefits and traditional and limited-payment contracts.
944-40-45-3
The carrying amount of market risk benefits shall be presented separately in the statement of financial position. The change in fair value related to market risk benefits shall be presented separately in net income, except fair value changes attributable to a change in the instrument-specific credit risk of market risk benefits in a liability position. The portion of a fair value change attributable to a change in the instrument-specific credit risk of market risk benefits in a liability position shall be presented separately in other comprehensive income.
Traditional and Limited-Payment Contracts
944-40-45-4
The current-period change in estimate of the liability for future policy benefits (that is, the liability remeasurement gain or loss) calculated under paragraph 944-40-35-6A(a)(1) shall be presented as a separate component of total benefit expense in the statement of operations, either parenthetically or as a separate line item. For limited-payment contracts, the corresponding current-period change in estimate of the deferred profit liability (that is, the liability remeasurement gain or loss) calculated under paragraph 944-605-35-1C shall be presented separately in net income, either parenthetically or as a separate line item. The liability remeasurement gain or loss for traditional and limited-payment contracts may be reported together with the liability remeasurement gain or loss related to annuitization benefits and death or other insurance benefits.
944-40-50Disclosure
Source downloaded: .Record version 75b3f9614af7. Effective date must be checked in the source.
944-40-50-1
An insurance entity shall disclose in its financial statements the basis for estimating the liabilities for unpaid claims and claim adjustment expenses.
944-40-50-3
For annual and interim reporting periods, all of the following information about the liability for unpaid claims and claim adjustment expenses shall be presented in a tabular rollforward:
- aThe balance in the liability for unpaid claims and claim adjustment expenses at the beginning of each fiscal year presented in the statement of income, and the related amount of reinsurance recoverable on unpaid claims
- bYear-to-date incurred claims and claim adjustment expenses with separate disclosure of the provision for insured events of the current fiscal year and of increases or decreases in the provision for insured events of prior fiscal years
- cYear-to-date payments of claims and claim adjustment expenses with separate disclosure of payments of claims and claim adjustment expenses attributable to insured events of the current fiscal year and to insured events of prior fiscal years
- ccThe ending balance in the liability for unpaid claims and claim adjustment expenses and the related amount of reinsurance recoverable.
- d
944-40-50-4
For annual reporting periods, an insurance entity shall disclose management's policies and methodologies for estimating the liability for unpaid claims and claim adjustment expenses for difficult-to-estimate liabilities, such as any of the following:
- aClaims for toxic waste cleanup
- bAsbestos-related illnesses
- cOther environmental remediation exposures.
Short-Duration Contracts
Information about the Liability for Unpaid Claims and Claim Adjustment Expenses
944-40-50-4A
For health insurance claims, an insurance entity shall aggregate or disaggregate the information in paragraph 944-40-50-3 so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have significantly different characteristics (see paragraphs ).
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For health insurance claims, an insurance entity shall aggregate or disaggregate the information disclosed in interim and annual reporting periods in accordance with paragraph 944-40-50-3 so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have significantly different characteristics (see paragraphs ).944-40-50-4B
For annual reporting periods, an insurance entity shall disclose in a tabular format, as of the date of the latest statement of financial position presented, undiscounted information about claims development by accident year, including separate information about both of the following on a net basis after risk mitigation through reinsurance:
- aIncurred claims and allocated claim adjustment expenses
- bPaid claims and allocated claim adjustment expenses.
944-40-50-4C
For annual reporting periods, an insurance entity shall reconcile the disclosure about incurred and paid claims development information to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses for the most recent reporting period presented, with separate disclosure of reinsurance recoverable on unpaid claims (see paragraph 944-40-55-9E).
944-40-50-4D
For annual reporting periods, an insurance entity shall quantitatively disclose the following for each accident year presented in the disclosures about incurred claims development (see paragraph 944-40-55-9E) for the most recent reporting period presented:
- aThe total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses
- bCumulative claim frequency information, unless it is impracticable to do so. If it is impracticable to disclose claim frequency information, where the term impracticable has the same meaning as impracticability in paragraph 250-10-45-9, an insurance entity shall disclose that fact and explain why the disclosure is impracticable.
944-40-50-4E
For interim and annual reporting periods, for health insurance claims, an insurance entity shall disclose the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses.
944-40-50-4F
An insurance entity shall describe both of the following:
- aIts methodologies for:
- 1Determining the presented amounts of both incurred-but-not-reported liabilities and expected development on reported claims required by paragraphs
- 2Calculating cumulative claim frequency information required by paragraph 944-40-50-4D
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- bSignificant changes to those methodologies. When describing (2) above the insurance entity also shall include whether frequency is measured by claim event or individual claimant and how the insurance entity considers claims that do not result in a liability (see paragraph 944-40-55-9D).
944-40-50-4G
For annual reporting periods, for all claims except health insurance claims, an insurance entity shall disclose as supplementary information the historical average annual percentage payout of incurred claims by age, net of reinsurance (that is, history of claims duration by age), as of the most recent reporting period. This information shall be disclosed for the same number of accident years presented in the disclosures required by paragraph 944-40-50-4B (see paragraphs ).
944-40-50-4H
An insurance entity shall disclose the information required by paragraphs and 944-40-50-5 in a manner that allows users to understand the amount, timing, and uncertainty of cash flows arising from the liabilities. An insurance entity shall aggregate or disaggregate the disclosures in paragraphs and 944-40-50-5 so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have significantly different characteristics (see paragraphs ). An insurance entity need not provide disclosures about claims development for insignificant categories; however, balances for insignificant categories shall be included in the reconciliation required by paragraph 944-40-50-4C.
944-40-50-4I
For annual reporting periods, an insurance entity shall disclose information about significant changes in methodologies and assumptions used in calculating the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements for the most recent reporting period presented.
944-40-50-5
For liabilities for unpaid claims and claim adjustment expenses that are presented at present value in the financial statements, an insurance entity shall disclose all of the following in its annual financial statements:
- aFor each period presented in the statement of financial position, the carrying amount of liabilities for unpaid claims and claim adjustment expenses relating to short-duration contracts that are presented at present value
- bThe range of interest rates used to discount the liabilities disclosed in (a).
- cThe aggregate amount of discount related to the time value of money deducted to derive the liabilities disclosed in (a)
- dFor each period presented in the statement of income, the amount of interest accretion recognized
- eThe line item(s) in the statement of income in which the interest accretion is classified.
Long-Duration Contracts
944-40-50-5A
An insurance entity shall disclose the information required by paragraphs 944-40-50-6 through 50-7C in a manner that allows users to understand the amount, timing, and uncertainty of future cash flows arising from the liabilities. An insurance entity shall aggregate or disaggregate the disclosures in paragraphs 944-40-50-6 through 50-7C so that useful information is not obscured by the inclusion of a large amount of insignificant detail or by the aggregation of items that have significantly different characteristics (see paragraphs ). An insurance entity need not provide disclosures about liabilities for insignificant categories; however, balances for insignificant categories shall be included in the reconciliations.
Liability for Future Policy Benefits and Additional Liability for Annuitization, Death, or Other Insurance Benefits
944-40-50-6
For annual and interim reporting periods, an insurance entity shall disclose the following information about the liability for future policy benefits for traditional and limited-payment contracts described in paragraph 944-40-25-11 and the additional liability for annuitization, death, or other insurance benefits described in paragraphs 944-40-25-26 through 25-27A, as applicable to each of those liabilities:
- aA year-to-date disaggregated tabular rollforward of the beginning balance to the ending balance (see paragraph 944-40-55-13I). Amounts shall be presented gross of any related reinsurance recoverable. For the liability for future policy benefits for traditional and limited-payment contracts, the insurance entity shall present expected future net premiums separate from expected future benefits.
- bFor each disaggregated rollforward presented, either as a component of the rollforward or as accompanying information:
- 1For traditional and limited-payment contracts, the undiscounted and discounted ending balance of expected future gross premiums and expected future benefits and expenses
- 2Actual experience during the period for mortality, morbidity, and lapses, compared with what was expected for the period
- 3The amount of revenue and interest recognized in the statement of operations
- 4The amount of any related reinsurance recoverable
- 5The weighted-average duration of the liability
- 6The weighted-average interest rate, a description of the technique(s) used to determine the interest rate assumption, and information about any adjustments to observable market information.
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- cA reconciliation of the disaggregated rollforwards to the aggregate ending carrying amount of the liability for future policy benefits and the additional liability in the statement of financial position and the total revenue and interest recognized in the statement of operations.
- dFor traditional and limited-payment contracts, qualitative and quantitative information about adverse development that resulted in an immediate charge to current-period net income because of net premiums exceeding gross premiums.
944-40-50-7
For annual reporting periods, and to the extent required by Topic 270 on interim reporting, an insurance entity shall disclose information about:
- aThe significant inputs, judgments, assumptions, and methods used in measuring the liability for future policy benefits and the additional liability
- bChanges in those significant inputs, judgments, and assumptions during the period, and the effect of those changes on the measurement of the liability.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For interim and annual reporting periods, an insurance entity shall disclose information about:- aThe significant inputs, judgments, assumptions, and methods used in measuring the liability for future policy benefits and the additional liability
- bChanges in those significant inputs, judgments, and assumptions during the period, and the effect of those changes on the measurement of the liability.
Liability for Policyholders' Account Balances
944-40-50-7A
For annual and interim reporting periods, an insurance entity shall disclose the following information about the liability for policyholders' account balances described in paragraph 944-40-25-14 (excluding separate accounts described in paragraph 944-80-25-2):
- aA year-to-date disaggregated tabular rollforward of the beginning balance to the ending balance (see paragraph 944-40-55-13J).
- bFor each disaggregated rollforward:
- 1The weighted-average crediting rate
- 2The guaranteed benefit amounts in excess of the current account balances
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- 1
- cA reconciliation of the disaggregated rollforwards to the aggregate ending carrying amount of the liability for policyholders' account balances in the statement of financial position.
- dA tabular presentation of policyholders' account balances by range of guaranteed minimum crediting rates and the related range of the difference between rates being credited to policyholders and the respective guaranteed minimums.
Market Risk Benefits
944-40-50-7B
For annual and interim reporting periods, an insurance entity shall disclose the following information about market risk benefits:
- aA year-to-date disaggregated tabular rollforward of the beginning balance to the ending balance (see paragraph 944-40-55-13K)
- bFor each disaggregated rollforward, the guaranteed benefit amounts in excess of the current account balances (for example, the net amount at risk) and weighted-average attained age of contract holders
- cA reconciliation of the disaggregated rollforwards to the aggregate ending carrying amount in the statement of financial position, disaggregated between market risk benefits that are in an asset position and those that are in a liability position.
944-40-50-7C
For annual reporting periods, and to the extent required by Topic 270 on interim reporting, an insurance entity shall disclose information about:
- aThe significant inputs, judgments, assumptions, and methods used in measurement
- bChanges in those significant inputs, judgments, and assumptions during the period and the effect of those changes on the measurement of market risk benefits.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For interim and annual reporting periods, an insurance entity shall disclose information about:- aThe significant inputs, judgments, assumptions, and methods used in measurement
- bChanges in those significant inputs, judgments, and assumptions during the period and the effect of those changes on the measurement of market risk benefits.
Participating Contracts
944-40-50-8
An insurance entity shall disclose in the financial statements, with respect to long-duration participating life-insurance contracts that meet the criteria in paragraph 944-20-15-3, the methods and assumptions used in estimating the liability for future policy benefits.
Financial Guarantee Insurance Contracts
944-40-50-9
To meet the disclosure objective in paragraph 944-20-50-7, an insurance entity shall disclose all of the following information for each annual period (and in an interim period if a significant change has occurred in that interim period) unless otherwise indicated below:
- aFor the claim liability:
- 1The weighted-average risk-free rate used to discount the claim liability.
- 2The significant component(s) of the change in the claim liability for the period, including all of the following:
- iChanges in the discount rate
- iiThe accretion of the discount on the claim liability
- iiiChanges in the timing
- ivChanges in the likelihood of default.
- i
- 3The amount relating to the component(s) in item (2).
- 4The line item in the statement of income where the amount or amounts in item (2) are reported (unless separately disclosed).
- 5For each interim period, a schedule of insured financial obligations at the end of each interim period detailing, at a minimum, all of the following for each category or grouping of these financial obligations:
- iNumber of issued and outstanding financial guarantee insurance contracts
- iiRemaining weighted-average contract period
- iiiInsured contractual payments outstanding, segregating principal and interest
- ivGross claim liability
- vGross potential recoveries
- viDiscount, net (both claim liability and potential recoveries)
- viiNet claim liability
- viii
- ixUnearned premium revenue.
- i
- 1
- bA description of the insurance entity's risk-management activities used to track and monitor deteriorating insured financial obligations, including all of the following:
- 1A description of each grouping or category used to track and monitor deteriorating insured financial obligations
- 2The insurance entity's policies for placing an insured financial obligation in, and monitoring, each grouping or category
- 3The insurance entity's policies for avoiding or mitigating claim liabilities
- 4The related expense and liability reported during the period for risk mitigation activities (not including reinsurance)
- 5A description of where the risk mitigation activities expense and liability are reported in the statement of income and the statement of financial position, respectively.
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944-40-55Implementation Guidance and Illustrations
Source downloaded: .Record version ffa8533ad092. Effective date must be checked in the source.
Implementation Guidance
944-40-55-1
This implementation guidance addresses paragraph 944-40-25-6, which states that the conditions in paragraph 450-20-25-2 shall be considered with respect to the risk of loss assumed by an insurance entity for catastrophes that may occur during the terms of policies in force to determine whether accrual of a loss is appropriate.
944-40-55-2
At the time that a property and casualty insurance entity or reinsurance entity issues an insurance policy covering risk of loss from catastrophes, a contingency arises. The contingency is the risk of loss assumed by the insurance entity; that is, the risk of loss from catastrophes that may occur during the term of the policy. The insurance entity has not assumed risk of loss for catastrophes that may occur beyond the term of the policy. Clearly, therefore, no asset has been impaired or liability incurred with respect to catastrophes that may occur beyond the terms of policies in force.
944-40-55-3
To satisfy the condition in paragraph 450-20-25-2(a) that it be probable that a liability has been incurred to existing policyholders, the occurrence of catastrophes (that is, the confirming future events) would have to be reasonably predictable within the terms of policies in force. Further, to satisfy the condition in (b) in that paragraph, the amounts of losses therefrom would have to be reasonably estimable. Actuarial techniques are employed by insurance entities to predict the rate of occurrence of and amounts of losses from catastrophes over long periods of time for insurance rate-setting purposes. Predictions over relatively short periods of time, such as an individual accounting period or the terms of a large number of existing insurance policies in force, are subject to substantial deviations. Consequently, assumption of risk of loss from catastrophes by property and casualty insurance entities and reinsurance entities fails to satisfy the conditions for accrual in paragraph 450-20-25-2(a) through (b). Moreover, deferral of unearned premiums within the terms of policies in force represents the unknown liability for loss (including catastrophe losses) on unexpired policies, making an accrual inappropriate. Recognition of premium income as earned revenue within the terms of policies in force is discussed in Subtopic 944-605.
944-40-55-4
Deferral of any portion of premium income beyond the terms of policies in force is, in substance, similar to premature accrual of catastrophe losses and, therefore, also does not meet the conditions of paragraph 450-20-25-2.
944-40-55-5
The conditions for accrual in paragraph 450-20-25-2 do not prohibit a property and casualty insurance entity from accruing probable catastrophe losses that have been incurred on or before the date of its financial statements but that have not been reported by its policyholders as of that date. If the amount of loss can be reasonably estimated, that paragraph requires accrual of those incurred-but-not-reported losses.
Illustrations
944-40-55-6
This Example illustrates information an insurance entity would disclose to meet the requirements of paragraph 944-40-50-3. This Example presents amounts incurred and paid net of reinsurance. The information may also be presented before the effects of reinsurance with separate analysis of reinsurance recoveries and reinsurance recoverables related to the incurred and paid amounts.
944-40-55-7
An illustrative disclosure of a liability for unpaid claims and claim adjustment expenses follows.
- Note X. Liability for Unpaid Claims and Claim Adjustment Expenses
- Activity in the liability for unpaid claims and claim adjustment expenses is summarized as follows.
20X2 20X1 Balance at January 1 " $7,030 " " $6,687 " Less reinsurance recoverables " 1,234 " 987 Net balance at January 1 " 5,796 " " 5,700 " Incurred related to: Current year " 2,700 " " 2,600 " Prior years (171) 96 Total incurred " 2,529 " " 2,696 " Paid related to: Current year 781 800 Prior years " 2,000 " " 1,800 " Total paid " 2,781 " " 2,600 " Net balance at December 31 " 5,544 " " 5,796 " Plus reinsurance recoverables " 1,255 " " 1,234 " Balance at December 31 " $6,799 " " $7,030 "
As a result of changes in estimates of insured events in prior years, the claims and claim adjustment expenses (net of reinsurance recoveries of $X and $X in 20X2 and 20X1, respectively) decreased by $171 million in 20X2 reflecting lower-than-anticipated losses on Hurricane Howard, and increased by $96 million in 20X1 reflecting higher-than-anticipated losses and related expenses for claims for asbestos-related illnesses, toxic waste cleanup, and workers' compensation.
944-40-55-8
This Example illustrates an insurance entity disclosure designed to meet the requirements of paragraph 944-40-50-4. Additional disclosures about the liabilities for unpaid claims and claim adjustment expenses may be required under Section 450-20-50 or 275-10-50.
944-40-55-9
An illustrative disclosure of environmental-related claims follows.
- Note X. Environmental-Related Claims
- In establishing the liability for unpaid claims and claim adjustment expenses related to asbestos-related illnesses and toxic waste cleanup, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities have been established to cover additional exposures on both known and unasserted claims. Estimates of the liabilities are reviewed and updated continually. Developed case law and adequate claim history do not exist for such claims, especially because significant uncertainty exists about the outcome of coverage litigation and whether past claim experience will be representative of future claim experience.
Short-Duration Contracts
Implementation Guidance
944-40-55-9A
Paragraphs 944-40-50-4A and 944-40-50-4H require an insurance entity to aggregate or disaggregate certain disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have significantly different characteristics to allow users to understand the amount, timing, and uncertainty of cash flows arising from contracts issued by insurance entities. Consequently, the extent to which an insurance entity's information is aggregated or disaggregated for the purposes of those disclosures depends on the facts and circumstances that pertain to the characteristics of the liability for unpaid claims and claim adjustment expenses.
944-40-55-9B
When selecting the type of category to use to aggregate or disaggregate disclosures, an insurance entity should consider how information about the insurance entity's liability for unpaid claims and claim adjustment expenses has been presented for other purposes, including all of the following:
- a Disclosures presented outside the financial statements (for example, in earnings releases, annual reports, statutory filings, or investor presentations)
- b Information regularly viewed by the chief operating decision maker for evaluating financial performance
- c Other information that is similar to the types of information identified in (a) and (b) and that is used by the insurance entity or users of the insurance entity's financial statements to evaluate the insurance entity's financial performance or make resource allocation decisions.
944-40-55-9C
Examples of categories that might be appropriate include any of the following:
- a Type of coverage (for example, major product line)
- b Geography (for example, country or region)
- c Reportable segment as defined in Topic 280 on segment reporting
- d Market or type of customer (for example, personal or commercial lines of business)
- e Claim duration (for example, claims that have short settlement periods or claims that have long settlement periods).
944-40-55-9D
Claim frequency information may be tracked and analyzed by an insurance entity in a variety of ways. For example, an insurance entity may track claim frequency by claim event (such as a car accident), while another entity may track claim frequency by individual claimant (such as the number of individual claimants in a car accident). Also, certain types of insurance coverage, such as excess-of-loss insurance or supplemental insurance, can experience claim activity that does not result in a liability to the insurance entity. This Subtopic does not require a particular methodology. Therefore, to allow users to understand the context of the information presented, an insurance entity should describe qualitatively the methodologies used to determine the quantitative claim frequency information presented. In certain circumstances, such as providing reinsurance on short-duration contracts or participating in residual market pools, an insurance entity may not have access to claim frequency information, in which case it may be impracticable to disclose this information. The insurance entity should disclose that fact and explain why the disclosure is impracticable.
Illustrations
944-40-55-9E
The following Example illustrates the information that an insurance entity with one major short-duration product line (homeowners' insurance) would disclose in its 20Y6 financial statements to meet the requirements of paragraphs .
- Note X: Liability for Unpaid Claims and Claim Adjustment Expenses
- The following is information about incurred and paid claims development as of December 31, 20Y6, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts.
- The information about incurred and paid claims development for the years ended December 31, 20X7, to 20Y5, is presented as supplementary information.
-
Homeowners' Insurance in thousands "Accident Year" "Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance" "As of December 31, 20Y6" Total of Incurred-but-Not-Reported Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims "For the Years Ended December 31," 20X7 20X8 20X9 20Y0 20Y1 20Y2 20Y3 20Y4 20Y5 20Y6 20X7 " $10,000 " " $9,900 " " $9,700 " " $9,800 " " $9,750 " " $9,750 " " $9,600 " " $9,650 " " $9,575 " " $9,550 " $5 39 20X8 " 10,950 " " 11,000 " " 10,500 " " 10,750 " " 10,850 " " 10,600 " " 10,250 " " 10,150 " " 10,250 " 30 37 20X9 " 12,000 " " 11,750 " " 11,500 " " 10,900 " " 10,900 " " 10,850 " " 10,750 " " 10,500 " 90 38 20Y0 " 12,250 " " 12,500 " " 12,550 " " 12,400 " " 12,200 " " 12,150 " " 12,000 " 300 36 20Y1 " 12,300 " " 12,500 " " 12,650 " " 12,750 " " 12,800 " " 12,850 " 900 35 20Y2 " 12,800 " " 12,900 " " 12,750 " " 12,700 " " 12,700 " " 1,100 " 34 20Y3 " 13,000 " " 13,250 " " 13,100 " " 13,150 " " 1,500 " 31 20Y4 " 13,150 " " 13,250 " " 13,300 " " 2,100 " 29 20Y5 " 13,500 " " 13,250 " " 3,100 " 26 20Y6 " 13,750 " " 5,000 " 22 Total " $121,300 " -
Homeowners' Insurance in thousands "Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance" "Accident Year" "For the Years Ended December 31," 20X7 20X8 20X9 20Y0 20Y1 20Y2 20Y3 20Y4 20Y5 20Y6 20X7 " $3,000 " " $5,000 " " $5,500 " " $6,000 " " $6,800 " " $7,500 " " $8,500 " " $9,000 " " $9,050 " " $9,075 " 20X8 " 3,500 " " 5,750 " " 6,500 " " 7,500 " " 7,750 " " 8,250 " " 8,500 " " 9,000 " " 9,500 " 20X9 " 3,750 " " 6,000 " " 6,500 " " 7,500 " " 7,900 " " 8,250 " " 8,950 " " 9,700 " 20Y0 " 3,750 " " 6,250 " " 7,250 " " 7,750 " " 8,900 " " 9,700 " " 9,950 " 20Y1 " 4,250 " " 5,500 " " 6,750 " " 8,000 " " 8,950 " " 9,250 " 20Y2 " 4,125 " " 5,250 " " 7,000 " " 8,000 " " 9,000 " 20Y3 " 4,500 " " 5,750 " " 7,250 " " 7,750 " 20Y4 " 4,600 " " 6,000 " " 6,950 " 20Y5 " 4,750 " " 6,125 " 20Y6 " 4,850 " Total " $82,150 " "All outstanding liabilities before 20X7, net of reinsurance" " 1,400 " "Liabilities for claims and claim adjustment expenses, net of reinsurance" " $40,550 " - Reconciliation of the Disclosure of Incurred and Paid Claims Development to the Liability for Unpaid Claims and Claim Adjustment Expenses
- The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated statement of financial position is as follows.
-
"December 31, 20Y6" 20X4 Net outstanding liabilities Homeowners' insurance " $40,550 " Other short-duration insurance lines " 1,976 " " 1,596 " 1976 "Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance" " 42,526 " Reinsurance recoverable on unpaid claims Homeowners' insurance " 13,880 " Other insurance lines 283 Total reinsurance recoverable on unpaid claims " 14,163 " "14,163" Insurance lines other than short-duration " 3,315 " "3,315" Unallocated claims adjustment expenses " 2,420 " "2,420" Other 10 " 5,745 " "Total gross liability for unpaid claims and claim adjustment expense " " $62,434 "
944-40-55-9F
An illustrative Example of the supplementary information that an insurance entity would disclose to meet the requirements in paragraph 944-40-50-4G is as follows.
- Note X: Liability for Unpaid Claims and Claim Adjustment Expenses
- The following is supplementary information about average historical claims duration as of December 31, 20Y6.
-
"Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance" Years 1 2 3 4 5 6 7 8 9 10 Homeowners' insurance 33.8% 14.9% 8.5% 7.2% 6.6% 4.9% 5.4% 5.7% 2.7% 0.3%
944-40-55-9G
For this illustrative Example, the approach selected by the insurance entity to compute historical claims duration using the information about claims development included in paragraph 944-40-55-9F is as follows. These calculations are for illustrative purposes only and would not be included in the disclosure.
-
Percentage of Claims Paid in Year 1 Percentage of Claims Paid in Year 2 Accident Year "Claims Paid in Year 1 (A)" "Most Recently Re-estimated Incurred Claims (B)" "Percentage of Claims Paid in Year 1 (A) / (B) = (C) " Accident Year "Total Claims Paid End of Year 2 (D)" "Claims Paid in Year 2 (D) - (A) = (E)" "Percentage of Claims Paid in Year 2 (E) / (B)" 20X7 " $3,000 " " $9,550 " 31.4% 20X7 " $5,000 " " $2,000 " 20.9% 20X8 " 3,500 " " 10,250 " 34.1% 20X8 " 5,750 " " 2,250 " 22.0% 20X9 " 3,750 " " 10,500 " 35.7% 20X9 " 6,000 " " 2,250 " 21.4% 20Y0 " 3,750 " " 12,000 " 31.3% 20Y0 " 6,250 " " 2,500 " 20.8% 20Y1 " 4,250 " " 12,850 " 33.1% 20Y1 " 5,500 " " 1,250 " 9.7% 20Y2 " 4,125 " " 12,700 " 32.5% 20Y2 " 5,250 " " 1,125 " 8.9% 20Y3 " 4,500 " " 13,150 " 34.2% 20Y3 " 5,750 " " 1,250 " 9.5% 20Y4 " 4,600 " " 13,300 " 34.6% 20Y4 " 6,000 " " 1,400 " 10.5% 20Y5 " 4,750 " " 13,250 " 35.8% 20Y5 " 6,125 " " 1,375 " 10.4% 20Y6 " 4,850 " " 13,750 " 35.3% Average 33.8% Average 14.9% -
Percentage of Claims Paid in Year 3 Percentage of Claims Paid in Year 4 Accident Year "Total Claims Paid End of Year 3 (F)" "Claims Paid in Year 3 (F) - (D) = (G)" "Percentage of Claims Paid in Year 3 (G) / (B)" Accident Year "Total Claims Paid End of Year 4 (H)" "Claims Paid in Year 4 (H) - (F) = (I)" "Percentage of Claims Paid in Year 4 (I) / (B)" 20X7 " $5,500 " $500 5.2% 20X7 " $6,000 " $500 5.2% 20X8 " 6,500 " 750 7.3% 20X8 " 7,500 " " 1,000 " 9.8% 20X9 " 6,500 " 500 4.8% 20X9 " 7,500 " " 1,000 " 9.5% 20Y0 " 7,250 " " 1,000 " 8.3% 20Y0 " 7,750 " 500 4.2% 20Y1 " 6,750 " " 1,250 " 9.7% 20Y1 " 8,000 " " 1,250 " 9.7% 20Y2 " 7,000 " " 1,750 " 13.8% 20Y2 " 8,000 " " 1,000 " 7.9% 20Y3 " 7,250 " " 1,500 " 11.4% 20Y3 " 7,750 " 500 3.8% 20Y4 " 6,950 " 950 7.1% Average 8.5% Average 7.2% -
Percentage of Claims Paid in Year 5 Percentage of Claims Paid in Year 6 Accident Year "Total Claims Paid End of Year 5 (J)" "Claims Paid in Year 5 (J) - (H) = (K)" "Percentage of Claims Paid in Year 5 (K) / (B)" Accident Year "Total Claims Paid End of Year 6 (L)" "Claims Paid in Year 6 (L) - (J) = (M)" "Percentage of Claims Paid in Year 6 (M) / (B)" 20X7 " $6,800 " $800 8.4% 20X7 " $7,500 " $700 7.3% 20X8 " 7,750 " 250 2.4% 20X8 " 8,250 " 500 4.9% 20X9 " 7,900 " 400 3.8% 20X9 " 8,250 " 350 3.3% 20Y0 " 8,900 " " 1,150 " 9.6% 20Y0 " 9,700 " 800 6.7% 20Y1 " 8,950 " 950 7.4% 20Y1 " 9,250 " 300 2.3% 20Y2 " 9,000 " " 1,000 " 7.9% Average 6.6% Average 4.9% -
Percentage of Claims Paid in Year 7 Percentage of Claims Paid in Year 8 Accident Year "Total Claims Paid End of Year 7 (N)" "Claims Paid in Year 7 (N) - (L) = (O)" "Percentage of Claims Paid in Year 7 (O) / (B)" Accident Year "Total Claims Paid End of Year 8 (P)" "Claims Paid in Year 8 (P) - (N) = (Q)" "Percentage of Claims Paid in Year 8 (Q) / (B)" 20X7 " $8,500 " " $1,000 " 10.5% 20X7 " $9,000 " $500 5.2% 20X8 " 8,500 " 250 2.4% 20X8 " 9,000 " 500 4.9% 20X9 " 8,950 " 700 6.7% 20X9 " 9,700 " 750 7.1% 20Y0 " 9,950 " 250 2.1% Average 5.4% Average 5.7% -
Percentage of Claims Paid in Year 9 Percentage of Claims Paid in Year 10 Accident Year "Total Claims Paid End of Year 9 (R)" "Claims Paid in Year 9 (R) - (P) = (S)" "Percentage of Claims Paid in Year 9 (S) / (B)" Accident Year "Total Claims Paid End of Year 10 (T)" "Claims Paid in Year 10 (T) - (R) = (U)" "Percentage of Claims Paid in Year 10 (U) / (B)" 20X7 " $9,050 " $50 0.5% 20X7 " $9,075 " $25 0.3% 20X8 " 9,500 " 500 4.9% Average 2.7% Average 0.3%
Long-Duration Contracts
Implementation Guidance
944-40-55-10
This implementation guidance discusses application of paragraphs to the following types of sales inducements:
- aImmediate bonuses
- bPersistency bonuses
- cEnhanced crediting rate bonuses.
944-40-55-11
As defined in this Subtopic, in an immediate bonus, the insurance entity is obligated to credit to the contract holder's account the sales inducement as a result of signing the contract. If the criteria in paragraphs are met, an asset should be established for the same amount. Even if an entity were to impose a prepayment penalty designed to recover the sales inducement, paragraphs specify that amounts assessed against policyholders in future periods cannot be considered in determining the liability for policy benefits. The prepayment penalty for the sales inducement would be treated no differently than any other surrender charge.
944-40-55-12
As defined in this Subtopic, a persistency bonus is credited to the contract holder account balance at the end of a specified period if the contract remains in force at that date. The amount that will be credited in accordance with the terms of the contract should be accrued as a component of the contract holder account balance ratably over the vesting period. If the criteria in paragraphs are met, an asset should be established. While it may not become payable by the insurance entity until some future vesting or crediting date, the insurance entity is prohibited from anticipating surrenders and must assume the contract holder will persist to earn the bonus.
944-40-55-13
As defined in this Subtopic, in an enhanced-crediting-rate bonus, the insurance entity offers customers a crediting rate for a stated period in excess of that currently being offered by the entity for other similar contracts. The liability for an enhanced-crediting-rate bonus should be accrued ratably over the bonus crediting period. If the criteria in paragraphs are met, an asset should be established for the same amount.
944-40-55-13A
Paragraphs 944-40-35-5 through 35-6A and require an insurance entity to review—and if there is a change, update—cash flow assumptions used in estimating the liability for future policy benefits at the level of aggregation at which reserves are calculated. Example 6 (beginning in paragraph 944-40-55-29H) illustrates the calculation of the liability, including subsequent changes in the estimate of the liability.
944-40-55-13B
If the adjustment related to updating cash flow assumptions is an unfavorable adjustment because of expected net premiums exceeding expected gross premiums (that is, expected benefits and related expenses exceed expected gross premiums), the insurance entity should:
- aSet net premiums equal to gross premiums
- bIncrease the estimate of the liability for future policy benefits as of the beginning of the current reporting period
- cRecognize a corresponding adjustment to net income for the current reporting period (see paragraph 944-40-45-4)
- dDisclose qualitative and quantitative information related to adverse development (see paragraph 944-40-50-6(d))
- eAccrue the liability for future policy benefits with net premiums being set equal to gross premiums (that is, a ratio of net premiums to gross premiums equal to 100 percent) until assumptions are subsequently updated.
944-40-55-13C
If the adjustment related to updating cash flow assumptions is an unfavorable adjustment but does not result in net premiums exceeding gross premiums, then the insurance entity should:
- aIncrease the estimate of the liability for future policy benefits as of the beginning of the current reporting period
- bRecognize a corresponding change in estimate adjustment to net income for the current reporting period (see paragraph 944-40-45-4)
- cAccrue the liability for future policy benefits with the revised ratio of net premiums to gross premiums until assumptions are subsequently updated.
944-40-55-13D
If the adjustment related to updating cash flow assumptions is a favorable adjustment—including the reversal of previously recognized unfavorable adjustment described in paragraph 944-40-55-13B or 944-40-55-13C—the insurance entity should:
- aDecrease the estimate of the liability for future policy benefits as of the beginning of the current reporting period
- bRecognize a corresponding change in estimate adjustment to net income for the current reporting period (see paragraph 944-40-45-4)
- cAccrue the liability for future policy benefits with the revised ratio of net premiums to gross premiums until assumptions are subsequently updated.
944-40-55-13E
An insurance entity should maximize the use of current observable market prices of upper-medium-grade (low-credit-risk) fixed-income instruments with durations similar to the liability for future policy benefits.
- aAn insurance entity should not substitute its own estimates for observable market data unless the market data reflect transactions that are not orderly (see paragraphs for additional guidance on determining whether transactions are not orderly).
- bIn determining points on the yield curve for which there are limited or no observable market data for upper-medium-grade (low-credit-risk) fixed-income instruments, an insurance entity should use an estimate that is consistent with existing guidance on fair value measurement in Topic 820, particularly for Level 3 fair value measurement.
944-40-55-13F
To allow financial statement users to understand the amount, timing, and uncertainty of cash flows arising from contracts issued by insurance entities, paragraph 944-40-50-5A requires that an insurance entity aggregate or disaggregate certain disclosures so that useful information is not obscured by the inclusion of a large amount of insignificant detail or by the aggregation of items that have significantly different characteristics. Consequently, the extent to which an insurance entity's information is aggregated or disaggregated for the purpose of those disclosures depends on the facts and circumstances that pertain to the characteristics of the liability for future policy benefits, the additional liability, the liability for policyholders' account balances, separate account liabilities, market risk benefits, or deferred acquisition costs (and balances amortized on a basis consistent with deferred acquisition costs).
944-40-55-13G
In addition, when selecting the type of category to use to aggregate or disaggregate disclosures, an insurance entity should consider how information about the disclosed items has been presented for other purposes, including the following:
- aDisclosures presented outside the financial statements (for example, in statutory filings)
- bInformation regularly viewed by the chief operating decision maker for evaluating financial performance
- cOther information that is similar to the types of information identified in (a) and (b) and that is used by the insurance entity or users of the insurance entity's financial statements to evaluate the insurance entity's financial performance or make resource allocation decisions.
944-40-55-13H
Examples of categories that might be appropriate to consider to aggregate or disaggregate disclosures include the following:
- aType of coverage (for example, major product line)
- bGeography (for example, country or region)
- cMarket or type of customer (for example, individual or group lines of business).
944-40-55-13I
The tabular rollforward of the beginning to the ending balance related to the liability for future policy benefits or the additional liability as required in paragraph 944-40-50-6 could include the following line items:
- aIssuances
- bInterest accrual
- cNet premiums or assessments collected
- dBenefit payments
- eDerecognition (lapses or withdrawals)
- fEffect of actual variances from expected experience
- gEffect of changes in cash flow assumptions
- hEffect of changes in discount rate assumptions.
944-40-55-13J
The tabular rollforward of the beginning to the ending balance related to the liability for policyholders' account balances as required in paragraph 944-40-50-7A could include the following line items:
- aIssuances
- bPremiums received
- cPolicy charges
- dSurrenders and withdrawals
- eBenefit payments
- fTransfers from or to separate accounts
- gInterest credited.
944-40-55-13K
The tabular rollforward of the beginning to the ending balance related to market risk benefits as required in paragraph 944-40-50-7B could include the following line items:
- aIssuances
- bInterest accrual
- cAttributed fees collected
- dBenefit payments
- eEffect of changes in interest rates
- fEffect of changes in equity markets
- gEffect of changes in equity index volatility
- hActual policyholder behavior different from expected behavior
- iEffect of changes in future expected policyholder behavior
- jEffect of changes in other future expected assumptions
- kEffect of changes in the instrument-specific credit risk.
Illustrations
944-40-55-14
This Example illustrates how to calculate an additional liability for universal life-type contracts as discussed in paragraph 944-40-25-27A(for example, a variable universal life insurance contract no-lapse guarantee that would meet the condition in paragraph 944-40-25-25D(b) and not be accounted for as a market risk benefit). This Example assumes that the guidance in paragraphs has been followed, with the conclusion that the mortality and morbidity risk associated with insurance benefit features is other than nominal.
944-40-55-15
This Example assumes the following for the contracts discussed:
- aThe contracts have no front-end loads.
- bThe mortality assessments include any explicit assessments for enhanced death benefit feature.
- cThe surrender charges are calculated based on a percentage of premiums.
- dThe expense assessments are a fixed annual charge.
- eThe discount rate is 8 percent
- fThe contracts do not include market risk benefits.
944-40-55-16
Paragraphs contain the same basic assumptions as paragraph 944-40-55-20, but with the effect on the components of the additional liability of a 10 percent increase in account balances (not shown in schedules) in Year 2.
944-40-55-17
This Example illustrates computations involved in the following:
- a
- bBenefit ratio
- cAdditional liability
- d
944-40-55-19
Columns in the computations that follow do not cross-foot due to rounding.
944-40-55-20
Computation of components of the additional liability follows.
Year Expense Assessments + Mortality Assessments + "Surrender Charges" = Total Assessments (a) Excess Payments 1 $30.00 $820.50 $17.50 $868.00 $- 2 29.75 871.65 44.62 946.02 12.20 3 29.48 919.29 61.42 " 1,010.19 " 20.61 4 29.20 969.80 68.12 " 1,067.12 " 25.94 5 28.89 " 1,034.77 " 64.99 " 1,128.65 " 31.58 6 28.55 " 1,086.61 " 95.16 " 1,210.32 " 44.05 7 28.18 " 1,143.53 " 58.71 " 1,230.42 " 49.53 8 27.78 " 1,086.61 " - " 1,114.39 " 52.00 9 27.34 " 1,268.91 " - " 1,296.25 " 65.93 10 26.87 " 1,333.10 " - " 1,359.97 " 76.78 11 26.35 " 1,382.93 " - " 1,409.28 " 93.75 12 25.79 " 1,433.09 " - " 1,458.88 " 104.76 13 25.18 " 1,487.10 " - " 1,512.28 " 120.67 14 24.52 " 1,539.66 " - " 1,564.18 " 142.22 15 23.81 " 1,597.88 " - " 1,621.69 " 151.25 16 23.06 " 1,662.23 " - " 1,685.29 " 153.64 17 22.25 " 1,691.70 " - " 1,713.95 " 210.92 18 21.39 " 1,723.70 " - " 1,745.09 " 236.72 19 20.48 " 1,751.22 " - " 1,771.70 " 270.72 20 19.52 " 1,788.11 " - " 1,807.63 " 270.82 Present Value " $12,304.07 " $724.88 (a) "If the product had investment margins, they would be included in the schedule in an additional column."
944-40-55-21
Computation of the benefit ratio follows.
Present value of total expected excess payments over the life of the contract $724.88 Divided by present value of total expected assessments over the life of the contract " 12,304.07 " Equals benefit ratio 5.8914%
944-40-55-22
Computation of the Year 1 additional liability follows.
Cumulative assessments $868.00 Multiplied by benefit ratio 5.8914% Equals Year 1 additional liability ($) 51.14
944-40-55-23
The additional liability schedule follows.
Year "(A) Beginning Additional Liability" Interest "Total Assessments × Benefit Ratio" "(B) Benefit Expense Incurred" "(C) Excess Payments" "(A) + (B) - (C) Ending Additional Liability" Change in Additional Liability 1 $- $- $51.14 $51.14 $- $51.14 $51.14 2 51.14 4.09 55.73 59.82 12.20 98.76 47.62 3 98.76 7.90 59.51 67.42 20.61 145.57 46.81 4 145.57 11.65 62.87 74.51 25.94 194.15 48.57 5 194.15 15.53 66.49 82.02 31.58 244.59 50.45 6 244.59 19.57 71.30 90.87 44.05 291.41 46.82 7 291.41 23.31 72.49 95.80 49.53 337.69 46.28 8 337.69 27.02 65.65 92.67 52.00 378.35 40.66 9 378.35 30.27 76.37 106.63 65.93 419.06 40.70 10 419.06 33.52 80.12 113.65 76.78 455.92 36.86 11 455.92 36.47 83.03 119.50 93.75 481.67 25.75 12 481.67 38.53 85.95 124.48 104.76 501.39 19.72 13 501.39 40.11 89.09 129.21 120.67 509.93 8.54 14 509.93 40.79 92.15 132.95 142.22 500.65 (9.27) 15 500.65 40.05 95.54 135.59 151.25 484.99 (15.66) 16 484.99 38.80 99.29 138.09 153.64 469.44 (15.55) 17 469.44 37.56 100.98 138.53 210.92 397.05 (72.39) 18 397.05 31.76 102.81 134.57 236.72 294.91 (102.14) 19 294.91 23.59 104.38 127.97 270.72 152.16 (142.75) 20 152.16 12.17 106.49 118.67 270.82 - (152.16)
944-40-55-25
Computation of components of the additional liability with a 10 percent increase in the account balance in Year 2 follows.
Year Expense Assessments + Mortality Assessments + Surrender Charges = Total Assessments Excess Payments 1 $30.00 $820.50 $17.50 $868.00 $- 2 29.75 952.20 44.62 " 1,026.58 " - 3 29.48 " 1,004.82 " 61.42 " 1,095.72 " 14.70 4 29.20 " 1,060.59 " 68.12 " 1,157.91 " 23.32 5 28.89 " 1,131.90 " 64.99 " 1,225.78 " 30.43 6 28.55 " 1,189.01 " 95.16 " 1,312.72 " 44.65 7 28.18 " 1,251.32 " 58.71 " 1,338.21 " 51.02 8 27.78 " 1,189.01 " - " 1,216.79 " 54.23 9 27.34 " 1,389.04 " - " 1,416.38 " 68.42 10 26.87 " 1,456.89 " - " 1,483.76 " 82.24 11 26.35 " 1,511.61 " - " 1,537.96 " 101.42 12 25.79 " 1,568.05 " - " 1,593.83 " 112.70 13 25.18 " 1,626.63 " - " 1,651.81 " 131.08 14 24.52 " 1,683.48 " - " 1,708.00 " 154.93 15 23.81 " 1,747.40 " - " 1,771.22 " 163.02 16 23.06 " 1,814.73 " - " 1,837.79 " 167.79 17 22.25 " 1,845.71 " - " 1,867.96 " 232.38 18 21.39 " 1,878.58 " - " 1,899.97 " 261.62 19 20.48 " 1,909.07 " - " 1,929.54 " 296.86 20 19.52 " 1,950.07 " - " 1,969.58 " 296.31 Present value " $13,326.45 " $759.24
944-40-55-26
Computation of the benefit ratio at Year 2 follows.
Present value of total expected excess payments over the life of the contract $759.24 Divided by present value of total expected assessments over the life of the contract " 13,326.45 " Equals benefit ratio 5.6972%
944-40-55-27
Computation of the Year 2 additional liability follows.
Cumulative assessments Year 1 $868.00 Year 2 " 1,026.58 " Total " 1,894.58 " Multiplied by benefit ratio 5.6972% Equals Year 2 additional liability (a) ($) 107.94 (a) "Excludes interest, any deduction for actual claim expenses, and accrued interest related to cumulative adjustment to benefits expense (which amounts to $.13)."
944-40-55-28
The updated additional liability schedule follows.
Year "(A) Beginning Additional Liability" Interest "Total Assessments × Benefit Ratio" Cumulative Adjustments to Benefit Expense "(B) Benefit Expense Incurred" "(C) Excess Payments" "(A) + (B) - (C) Ending Additional Liability" Change in Additional Liability 1 $- $- $51.14 $- $51.14 $- $51.14 (a) $51.14 2 51.14 4.09 58.49 (1.82) (b) 60.76 - 111.89 (c) 60.76 3 111.89 8.95 62.43 - 71.38 14.70 168.57 56.68 4 168.57 13.49 65.97 - 79.45 23.32 224.71 56.13 5 224.71 17.98 69.84 - 87.81 30.43 282.09 57.38 6 282.09 22.57 74.79 - 97.36 44.65 334.79 52.71 7 334.79 26.78 76.24 - 103.02 51.02 386.80 52.00 8 386.80 30.94 69.32 - 100.27 54.23 432.83 46.04 9 432.83 34.63 80.69 - 115.32 68.42 479.73 46.90 10 479.73 38.38 84.53 - 122.91 82.24 520.40 40.67 11 520.40 41.63 87.62 - 129.25 101.42 548.24 27.83 12 548.24 43.86 90.80 - 134.66 112.70 570.20 21.96 13 570.20 45.62 94.11 - 139.72 131.08 578.84 8.64 14 578.84 46.31 97.31 - 143.62 154.93 567.53 (11.31) 15 567.53 45.40 100.91 - 146.31 163.02 550.82 (16.71) 16 550.82 44.07 104.70 - 148.77 167.79 531.80 (19.02) 17 531.80 42.54 106.42 - 148.97 232.38 448.38 (83.41) 18 448.38 35.87 108.25 - 144.12 261.62 330.88 (117.50) 19 330.88 26.47 109.93 - 136.40 296.86 170.42 (160.46) 20 170.42 13.63 112.21 - 125.84 296.31 - (170.42) (a) This represents the end-of-year liability using the original expense in Year 1. (b) The difference of 1.82 between the actual Year 1 liability (51.14) and the recomputed amount (49.32) will be the true-up adjustment included in the Year 2 benefit expense. (c) "Year 1 (51.14) plus Year 2 (58.49) plus interest (4.09), less Year 2 cumulative adjustment to benefit expense (1.82), equals an ending additional liability balance of 111.89. Rounding results in a .01 difference."
944-40-55-29A
A contract holder deposits $100,000 in a deferred annuity (either fixed or variable) that provides for a guaranteed minimum accumulation benefit that guarantees that at a specified anniversary date (for example, 5 years) the contract holder's account balance will be the greater of the following:
- aThe account value
- bDeposits less partial withdrawals accumulated at 3 percent interest compounded annually.
944-40-55-29B
The contract holder's account balance is exposed to stock market performance. At the specified anniversary date the contract holder's account balance has declined to $80,000 due to stock market declines. The guaranteed minimum value of the $100,000 deposit compounded annually at 3 percent interest is $115,930. The contract holder's account balance will be increased to the greater amount, resulting in an account balance of $115,930. In this Example, the guaranteed minimum accumulation benefit meets the criteria for a market risk benefit in accordance with paragraph 944-40-25-25C because the guaranteed minimum accumulation benefit protects the contract holder from other-than-nominal capital market risk and exposes the insurance entity to other-than-nominal capital market risk. Specifically, the insurance entity compensates the contract holder for the shortfall (due to stock market declines) between the account balance amount of $80,000 and the guaranteed amount of $115,930. The guaranteed minimum accumulation benefit should be measured at fair value in accordance with paragraph 944-40-30-19C. Similarly, if on the date of the death of the contract holder the deferred annuity provides a guaranteed minimum death benefit amount of $115,930 while the account balance is $80,000, the guaranteed minimum death benefit meets the criteria for a market risk benefit in accordance with paragraph 944-40-25-25C because the insurance entity provides compensation for the shortfall (due to stock market declines) between the account balance amount of $80,000 and the guaranteed amount of $115,930.
944-40-55-29C
A contract holder deposits $100,000 in a deferred annuity (either fixed or variable) that provides a guaranteed minimum income benefit. The contract specifies that if the contract holder elects to annuitize, the amount available to annuitize will be the higher of the then account balance or the sum of deposits less withdrawals. The contract holder's account balance is exposed to stock market performance. At the date that the contract holder chooses to annuitize, the account balance has declined to $80,000 due to stock market declines.
944-40-55-29D
In this Example, the guaranteed minimum income benefit meets the criteria for a market risk benefit in accordance with paragraph 944-40-25-25C because the guaranteed minimum income benefit protects the contract holder from other-than-nominal capital market risk and exposes the insurance entity to other-than-nominal capital market risk. Specifically, the insurance entity compensates the contract holder for the shortfall (due to stock market declines) between the account balance amount of $80,000 and the $100,000 guaranteed amount at the annuitization date. During the accumulation phase, the guaranteed minimum income benefit feature should be measured at fair value in accordance with paragraph 944-40-30-19C. Similarly, if the deferred annuity provides a guaranteed minimum withdrawal benefit or a guaranteed minimum lifetime withdrawal benefit that protects the contract holder from other-than-nominal capital market risk and exposes the insurance entity to other-than-nominal capital market risk, the guaranteed minimum withdrawal benefit or the guaranteed minimum lifetime withdrawal benefit meets the criteria for a market risk benefit.
944-40-55-29E
This Example illustrates the information that an insurance entity with two major long-duration product lines (term life and whole life) should disclose in its 20X2 financial statements to meet certain requirements of paragraph 944-40-50-6.
- Note X: Liability for Future Policy Benefits
- The balances of and changes in the liability for future policy benefits follow.
"December 31, " 20X2 20X1 Term Life Whole Life Term Life Whole Life Present Value of Expected Net Premiums "Balance, beginning of year" $VVV $VVV $XXX $XXX Beginning balance at original discount rate WWW WWW XXX XXX Effect of changes in cash flow assumptions XXX XXX XXX XXX Effect of actual variances from expected experience XXX XXX XXX XXX Adjusted beginning of year balance XXX XXX XXX XXX Issuances XXX XXX XXX XXX Interest accrual XXX XXX XXX XXX Net premiums collected (a) (XXX) (XXX) (XXX) (XXX) Derecognition (lapses) (XXX) (XXX) (XXX) (XXX) Ending balance at original discount rate YYY YYY WWW WWW Effect of changes in discount rate assumptions XXX XXX XXX XXX "Balance, end of year" $ZZZ $ZZZ $VVV $VVV Present Value of Expected Future Policy Benefits "Balance, beginning of year" $VVV $VVV $XXX $XXX Beginning balance at original discount rate WWW WWW XXX XXX Effect of changes in cash flow assumptions XXX XXX XXX XXX Effect of actual variances from expected experience XXX XXX XXX XXX Adjusted beginning of year balance XXX XXX XXX XXX Issuances XXX XXX XXX XXX Interest accrual XXX XXX XXX XXX Benefit payments (XXX) (XXX) (XXX) (XXX) Derecognition (lapses) (XXX) (XXX) (XXX) (XXX) Ending balance at original discount rate YYY YYY WWW WWW Effect of changes in discount rate assumptions XXX XXX XXX XXX "Balance, end of year" $ZZZ $ZZZ $VVV $VVV Net liability for future policy benefits $CCC $DDD $AAA $BBB Less: Reinsurance recoverable XXX XXX XXX XXX "Net liability for future policy benefits, after reinsurance recoverable " $XXX $XXX $XXX $XXX (a) Net premiums collected represent the portion of gross premiums collected from policyholders that is used to fund expected benefit payments.
- The reconciliation of the net liability for future policy benefits to the liability for future policy benefits in the consolidated statement of financial position follows.
"December 31, "20X2 20X1 Term life $CCC $AAA Whole life DDD BBB Other XXX XXX Total $XXX $XXX
- The amount of undiscounted expected gross premiums and expected future benefit payments follows.
"December 31, " 20X2 20X1 Term life Expected future benefit payments $XXX $XXX Expected future gross premiums $XXX $XXX Whole life Expected future benefit payments $XXX $XXX Expected future gross premiums $XXX $XXX
- The amount of revenue and interest recognized in the statement of operations follows.
Gross Premiums or Assessments Interest Expense " December 31, " " December 31, " 20X2 20X1 20X2 20X1 Term life $XXX $XXX $XXX $XXX Whole life XXX XXX XXX XXX Other XXX XXX XXX XXX Total $XXX $XXX $XXX $XXX
- The weighted-average interest rate follows.
"December 31, " 20X2 20X1 Term life Interest accretion rate XXX% XXX% Current discount rate XXX% XXX% Whole life Interest accretion rate XXX% XXX% Current discount rate XXX% XXX%
944-40-55-29F
This Example illustrates the information that an insurance entity with two major long-duration products with policyholders' account balances (universal life and fixed annuities) should disclose in its 20X2 financial statements to meet certain requirements of paragraph 944-40-50-7A.
- Note X: Policyholders' Account Balances
- The balance of account values by range of guaranteed minimum crediting rates and the related range of difference, in basis points, between rates being credited to policyholders and the respective guaranteed minimums follow.
"December 31, 20X2" Range of Guaranteed Minimum Crediting Rate At Guaranteed Minimum "1 Basis Point- 50 Basis Points Above " "51 Basis Points- 150 Basis Points Above " Greater Than 150 Basis Points Above Total Universal Life X.XX%-X.XX% $XXX $XXX $XXX $XXX $XXX X.XX%-X.XX% XXX XXX XXX XXX XXX Greater than X.XX% XXX XXX XXX XXX XXX Total $XXX $XXX $XXX $XXX $CCC Fixed Annuity X.XX%-X.XX% $XXX $XXX $XXX $XXX $XXX X.XX%-X.XX% XXX XXX XXX XXX XXX Greater than X.XX% XXX XXX XXX XXX XXX Total $XXX $XXX $XXX $XXX $DDD "December 31, 20X1" Range of Guaranteed Minimum Crediting Rate At Guaranteed Minimum "1 Basis Point- 50 Basis Points Above " "51 Basis Points- 150 Basis Points Above " Greater Than 150 Basis Points Above Total Universal Life X.XX%-X.XX% $XXX $XXX $XXX $XXX $XXX X.XX%-X.XX% XXX XXX XXX XXX XXX Greater than X.XX% XXX XXX XXX XXX XXX Total $XXX $XXX $XXX $XXX $AAA Fixed Annuity X.XX%-X.XX% $XXX $XXX $XXX $XXX $XXX X.XX%-X.XX% XXX XXX XXX XXX XXX Greater than X.XX% XXX XXX XXX XXX XXX Total $XXX $XXX $XXX $XXX $BBB
- The balances of and changes in policyholders' account balances follow.
"December 31," 20X2 20X1 Universal Life Fixed Annuity Universal Life Fixed Annuity "Balance, beginning of year" $AAA $BBB $XXX $XXX Issuances XXX XXX XXX XXX Premiums received XXX XXX XXX XXX Policy charges (a) (XXX) (XXX) (XXX) (XXX) Surrenders and withdrawals (XXX) (XXX) (XXX) (XXX) Benefit payments (XXX) (XXX) (XXX) (XXX) Net transfers from (to) separate account XXX XXX XXX XXX Interest credited XXX XXX XXX XXX Other XXX XXX XXX XXX "Balance, end of year" $CCC $DDD $AAA $BBB Weighted-average crediting rate X.XX% X.XX% X.XX% X.XX% Net amount at risk (b) $XXX $XXX $XXX $XXX Cash surrender value $XXX $XXX $XXX $XXX (a) Contracts included in the policyholder account balances are generally charged a premium and/or monthly assessments on the basis of the account balance. (b) "For those guarantees of benefits that are payable in the event of death, the net amount at risk is generally defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date. "
- The reconciliation of policyholders' account balances to the policyholders' account balances' liability in the consolidated statement of financial position follows.
"December 31, " 20X2 20X1 Universal life $CCC $AAA Fixed annuity DDD BBB Other XXX XXX Total $XXX $XXX
944-40-55-29G
This Example illustrates the information that an insurance entity with market risk benefits should disclose in its 20X2 financial statements to meet certain requirements of paragraph 944-40-50-7B.
- Note X: Market Risk Benefits
- The balances of and changes in guaranteed minimum withdrawal benefits associated with variable annuities and indexed annuities follow.
"December 31, 20X2" "December 31, 20X1" Variable Indexed Variable Indexed Annuities Annuities Annuities Annuities "Balance, beginning of year" $AAA $FFF $XXX $XXX "Balance, beginning of year, before effect of changes in the instrument-specific credit risk" XXX XXX XXX XXX Issuances XXX XXX XXX XXX Interest accrual XXX XXX XXX XXX Attributed fees collected XXX XXX XXX XXX Benefit payments (XXX) (XXX) (XXX) (XXX) Effect of changes in interest rates XXX XXX XXX XXX Effect of changes in equity markets XXX XXX XXX XXX Effect of changes in equity index volatility XXX XXX XXX XXX Actual policyholder behavior different from expected behavior XXX XXX XXX XXX Effect of changes in future expected policyholder behavior XXX XXX XXX XXX Effect of changes in other future expected assumptions XXX XXX XXX XXX "Balance, end of year, before effect of changes in the instrument-specific credit risk" XXX XXX XXX XXX Effect of changes in the instrument-specific credit risk XXX XXX XXX XXX "Balance, end of year" $GGG $LLL $AAA $FFF "Reinsurance recoverable, end of year" $XXX $XXX $XXX $XXX "Balance, end of year, net of reinsurance" $XXX $XXX $XXX $XXX
- The reconciliation of market risk benefits by amounts in an asset position and in a liability position to the market risk benefits amount in the consolidated statement of financial position follows.
"December 31, " 20X2 20X1 Asset Liability Net Asset Liability Net Variable annuities $XXX $XXX $GGG $XXX $XXX $AAA Indexed annuities XXX XXX LLL XXX XXX FFF $XXX $XXX $NNN $XXX $XXX $MMM
944-40-55-29H
This Example illustrates an approach to updating assumptions used to measure the liability for future policy benefits related to traditional life insurance contracts.
944-40-55-29I
This Example assumes the following for the contracts discussed:
- aAt contract inception:
- 1The insurance entity issues 1,000 guaranteed-renewable 20-year term life insurance contracts that are grouped into a single cohort for purposes of measuring the liability for future policy benefits.
- 2Face amount per contract: $200,000.
- 3Annual premium per contract: $500.
- 4Discount rate: 0 percent.
- 5Lapse rate: 5 percent for all years.
- 6Mortality rate: 0.1 percent in Year 1, increasing linearly to 0.29 percent in Year 20.
- 7For ease of illustration, no expenses are assumed, benefit payments and premium receipts occur at the end of the year, and annual periods are presented.
- 1
- bDuring Year 6: The insurance entity experiences unfavorable mortality that is 20 percent higher than expected. The insurance entity determines that it does not need to change its future mortality or lapse assumptions.
- cDuring Year 9: After experiencing continued unfavorable mortality (20 percent higher than expected in Years 7 through 9), the insurance entity increases its mortality assumption by 20 percent for Years 10 through 20.
- dDuring Year 10: The current upper-medium grade (low-credit-risk) fixed-income instrument yield increases from 0 percent to 2 percent. The insurance entity does not change its future mortality or lapse assumptions.
944-40-55-29J
This Example illustrates computations involved in the following:
- aNet premiums
- bLiability remeasurement adjustments.
944-40-55-29K
The computation of the original net premium ratio at the issue date of the portfolio of contracts follows.
Original Cash Flow Estimate Year Benefits Gross Premiums 1 $200.0 $500.0 2 208.8 474.5 3 216.1 450.3 4 222.2 427.3 5 227.0 405.4 6 230.7 384.6 7 233.5 364.8 8 235.3 346.0 9 236.3 328.1 10 236.5 311.2 11 236.0 295.1 12 235.0 279.7 13 233.4 265.2 14 231.3 251.4 15 228.7 238.3 16 225.8 225.8 17 222.5 214.0 18 219.0 202.8 19 215.1 192.1 20 211.1 182.0 Total " $4,504.4 " " $6,338.4 " Present value (a) " $4,504.4 " " $6,338.4 " Net premium ratio (b) 71.1% (a) 0% discount rate. (b) Present value of benefits/present value of gross premiums (for Years 1-20).
944-40-55-29L
The computation of the liability for future policy benefits at the end of Year 1 follows.
Liability for Future Policy Benefits (End of Year 1) Year Benefits Gross Premiums Net Premiums (a) 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 " $4,304.4 " " $5,838.4 " " $4,149.0 " Present value (b) " $4,304.4 " " $5,838.4 " " $4,149.0 " (a) Gross premiums × 71.1% net premium ratio. (b) 0% discount rate. Present value of future benefits (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
Accounting Entries (Year 1) Cash (a) $300.0 Benefits expense (b) 355.4 Premium income $500.0 Liability for future policy benefits 155.4 (a) "Premiums collected of $500.0, less benefits paid of $200.0." (b) "Benefits paid of $200.0, plus change in reserve of $155.4."
944-40-55-29M
- At the end of Year 6, the Entity updates its mortality assumption to reflect the unfavorable experience in that year (that is, the true-up from expected experience to actual experience) and its effect on estimated cash flows. However, as specified in paragraph 944-40-35-5(a), the Entity reviewed its future cash flow assumptions and determined that its future mortality and lapse assumptions did not need to be adjusted.
- The following table provides information about the estimated cash flow effects of updating cash flow assumptions and the corresponding adjustment to the liability for future policy benefits and current-period benefit expense.
Original Cash Flow Estimate Updated Cash Flow Estimate (a) Change Year Benefits Gross Premiums Benefits Gross Premiums Benefits Gross Premiums 1 $200.0 $500.0 $200.0 $500.0 $- $- 2 208.8 474.5 208.8 474.5 - - 3 216.1 450.3 216.1 450.3 - - 4 222.2 427.3 222.2 427.3 - - 5 227.0 405.4 227.0 405.4 - - 6 230.7 384.6 276.9 384.6 46.1 - 7 233.5 364.8 233.4 364.7 (0.1) (0.1) 8 235.3 346.0 235.2 345.9 (0.1) (0.1) 9 236.3 328.1 236.2 328.0 (0.1) (0.1) 10 236.5 311.2 236.4 311.1 (0.1) (0.1) 11 236.0 295.1 236.0 295.0 (0.1) (0.1) 12 235.0 279.7 234.9 279.7 (0.1) (0.1) 13 233.4 265.2 233.3 265.1 (0.1) (0.1) 14 231.3 251.4 231.2 251.3 (0.1) (0.1) 15 228.7 238.3 228.7 238.2 (0.1) (0.1) 16 225.8 225.8 225.7 225.7 (0.1) (0.1) 17 222.5 214.0 222.5 213.9 (0.1) (0.1) 18 219.0 202.8 218.9 202.7 (0.1) (0.1) 19 215.1 192.1 215.1 192.0 (0.1) (0.1) 20 211.1 182.0 211.0 181.9 (0.1) (0.1) Total " $4,504.4 " " $6,338.4 " " $4,549.6 " " $6,337.3 " $45.2 $(1.1) Present value (b) " $4,504.4 " " $6,338.4 " " $4,549.6 " " $6,337.3 " $45.2 $(1.1) Net premium ratio (c) 71.1% 71.8% (a) Benefits and gross premiums for Years 1-6 represent actual (historical) cash flows. Years 7-20 represent expected (future) cash flows. (b) 0% discount rate. (c) Present value of benefits/present value of gross premiums (for Years 1-20).
Remeasurement of Liability for Future Policy Benefits (Beginning of Year 6) Original Estimate Updated Estimate Year Benefits Gross Premiums Net Premiums (a) Benefits Gross Premiums Net Premiums (b) 6 $230.7 $384.6 $273.3 $276.9 $384.6 $276.1 7 233.5 364.8 259.2 233.4 364.7 261.8 8 235.3 346.0 245.9 235.2 345.9 248.3 9 236.3 328.1 233.2 236.2 328.0 235.5 10 236.5 311.2 221.1 236.4 311.1 223.3 11 236.0 295.1 209.7 236.0 295.0 211.8 12 235.0 279.7 198.8 234.9 279.7 200.8 13 233.4 265.2 188.5 233.3 265.1 190.3 14 231.3 251.4 178.6 231.2 251.3 180.4 15 228.7 238.3 169.3 228.7 238.2 171.0 16 225.8 225.8 160.5 225.7 225.7 162.1 17 222.5 214.0 152.1 222.5 213.9 153.6 18 219.0 202.8 144.1 218.9 202.7 145.5 19 215.1 192.1 136.5 215.1 192.0 137.9 20 211.1 182.0 129.3 211.0 181.9 130.6 Total " $3,430.2 " " $4,081.0 " " $2,900.1 " " $3,475.4 " " $4,079.8 " " $2,928.9 " Present value (c) " $3,430.2 " " $4,081.0 " " $2,900.1 " " $3,475.4 " " $4,079.8 " " $2,928.9 " (a) Gross premiums × 71.1% net premium ratio. (b) Gross premiums × 71.8% net premium ratio. (c) 0% discount rate. Original Estimate Updated Estimate Change Present value of future benefits (for Years 6-20) " $3,430.2 " " $3,475.4 " $45.2 Less: Present value of future net premiums (for Years 6-20) " 2,900.1 " " 2,928.9 " 28.8 Liability for future policy benefits $530.1 $546.5 $16.4
Liability for Future Policy Benefits (End of Year 6) Year Benefits Gross Premiums Net Premiums (a) 7 $233.4 $364.7 $261.8 8 235.2 345.9 248.3 9 236.2 328.0 235.5 10 236.4 311.1 223.3 11 236.0 295.0 211.8 12 234.9 279.7 200.8 13 233.3 265.1 190.3 14 231.2 251.3 180.4 15 228.7 238.2 171.0 16 225.7 225.7 162.1 17 222.5 213.9 153.6 18 218.9 202.7 145.5 19 215.1 192.0 137.9 20 211.0 181.9 130.6 Total " $3,198.5 " " $3,695.3 " " $2,652.8 " Present value (b) " $3,198.5 " " $3,695.3 " " $2,652.8 " (a) Gross premiums × 71.8% net premium ratio. (b) 0% discount rate. Present value of future benefits (for Years 7-20) " $3,198.5 " Less: Present value of future net premiums (for Years 7-20) " 2,652.8 " Liability for future policy benefits $545.7
Accounting Entries (Year 6) Cash (a) $107.7 Benefits expense (b) 276.1 Liability remeasurement loss (c) 16.4 Premium income $384.6 Liability for future policy benefits (d) 15.6 (a) "Premiums collected of $384.6, less benefits paid of $276.9." (b) "Benefits paid of $276.9, less change in reserve of $0.8 using current net premium ratio of 71.8%." (c) Separately presented in the statement of operations. (d) "Liability remeasurement of $16.4, less current period change in reserve of $0.8."
944-40-55-29N
- At the end of Year 9, the Entity reviews and updates its mortality assumption to reflect the unfavorable experience in that year and an increase in expected mortality in Years 10 through 20.
- The following tables provide information about the estimated cash flow effects of updating the mortality assumption and the corresponding adjustment to the liability for future policy benefits and current-period benefit expense.
Prior Cash Flow Estimate Updated Cash Flow Estimate (a) Change Year Benefits Gross Premiums Benefits Gross Premiums Benefits Gross Premiums 1 $200.0 $500.0 $200.0 $500.0 $- $- 2 208.8 474.5 208.8 474.5 - - 3 216.1 450.3 216.1 450.3 - - 4 222.2 427.3 222.2 427.3 - - 5 227.0 405.4 227.0 405.4 - - 6 276.9 384.6 276.9 384.6 - - 7 280.1 364.7 280.1 364.7 - - 8 282.2 345.8 282.2 345.8 - - 9 236.0 327.8 283.2 327.8 47.2 - 10 236.3 310.9 283.4 310.8 47.2 (0.1) 11 235.8 294.8 282.8 294.6 47.0 (0.2) 12 234.8 279.5 281.4 279.2 46.6 (0.3) 13 233.1 264.9 279.3 264.5 46.2 (0.4) 14 231.1 251.1 276.7 250.6 45.7 (0.5) 15 228.5 238.0 273.5 237.4 45.0 (0.6) 16 225.6 225.6 269.9 224.9 44.3 (0.7) 17 222.3 213.8 265.9 213.0 43.5 (0.7) 18 218.8 202.6 261.5 201.8 42.7 (0.8) 19 214.9 191.9 256.8 191.0 41.8 (0.9) 20 210.9 181.8 251.8 180.9 40.9 (0.9) Total " $4,641.4 " " $6,335.3 " " $5,179.5 " " $6,329.1 " $538.1 $(6.1) Present value (b) " $4,641.4 " " $6,335.3 " " $5,179.5 " " $6,329.1 " $538.1 $(6.1) Net premium ratio (c) 73.3% 81.8% (a) Benefits and gross premiums for Years 1-9 represent actual (historical) cash flows. Years 10-20 represent expected (future) cash flows. (b) 0% discount rate. (c) Present value of benefits/present value of gross premiums (for Years 1-20).
Remeasurement of Liability for Future Policy Benefits (Beginning of Year 9) Prior Estimate Updated Estimate Year Benefits Gross Premiums Net Premiums (a) Benefits Gross Premiums Net Premiums (b) 9 $236.0 $327.8 $240.2 $283.2 $327.8 $268.3 10 236.3 310.9 227.8 283.4 310.8 254.3 11 235.8 294.8 216.0 282.8 294.6 241.1 12 234.8 279.5 204.7 281.4 279.2 228.4 13 233.1 264.9 194.1 279.3 264.5 216.5 14 231.1 251.1 184.0 276.7 250.6 205.1 15 228.5 238.0 174.4 273.5 237.4 194.3 16 225.6 225.6 165.3 269.9 224.9 184.1 17 222.3 213.8 156.6 265.9 213.0 174.3 18 218.8 202.6 148.4 261.5 201.8 165.1 19 214.9 191.9 140.6 256.8 191.0 156.3 20 210.9 181.8 133.2 251.8 180.9 148.0 Total " $2,728.1 " " $2,982.7 " " $2,185.2 " " $3,266.2 " " $2,976.6 " " $2,435.9 " Present value (c) " $2,728.1 " " $2,982.7 " " $2,185.2 " " $3,266.2 " " $2,976.6 " " $2,435.9 " (a) Gross premiums × 73.3% net premium ratio. (b) Gross premiums × 81.8% net premium ratio. (c) 0% discount rate. 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
Liability for Future Policy Benefits (End of Year 9) Year Benefits Gross Premiums Net Premiums (a) 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 " $2,983.0 " " $2,648.7 " " $2,167.6 " Present value (b) " $2,983.0 " " $2,648.7 " " $2,167.6 " (a) Gross premiums × 81.8% net premium ratio. (b) 0% discount rate. 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
Accounting Entries (Year 9) Cash (a) $44.6 Benefits expense (b) 268.3 Liability remeasurement loss (c) 287.4 Premium income $327.8 Liability for future policy benefits (d) 272.5 (a) "Premiums collected of $327.8, less benefits paid of $283.2." (b) "Benefits paid of $283.2, less change in reserve of $14.9 using current net premium ratio of 81.8%." (c) Separately presented in the statement of operations. (d) "Liability remeasurement of $287.4, less current period change in reserve of $14.9."
944-40-55-29O
- At the end of Year 10, the Entity updates its discount rate assumption from 0 percent to 2 percent.
- The following table provides information about the effect of updating the discount rate assumption and the adjustment to the liability for future policy benefits and other comprehensive income.
Liability for Future Policy Benefits (End of Year 10) Original Discount Rate 0% Current Discount Rate 2% Change Present value of future benefits (for Years 11-20) " $2,699.6 " " $2,430.0 " $(269.6) Less: Present value of future net premiums (for Years 11-20) " 1,913.3 " " 1,733.8 " (179.5) Liability for future policy benefits $786.3 $696.2 $(90.1) Decrease to Liability for Future Policy Benefits (End of Year 10) Liability for future policy benefits $90.1 Other comprehensive income $90.1
944-40-55-29P
This Example illustrates an approach to updating assumptions used to measure the liability for future policy benefits with a carryover basis.
944-40-55-29Q
This Example assumes the following for the contracts discussed:
- aThe beginning of Year 4 carryover basis is $387.6, which will be used in subsequent recalculations of the net premium ratio.
- bAt the beginning of Year 4, the Entity updates cash flow assumptions and recalculates net premiums.
- cA discount rate of 0 percent is used to compute the net premiums and the liability for future policy benefits.
- dFor ease of illustration, no expenses are assumed, benefit payments and premium receipts are made at the end of the year, and annual periods are presented.
944-40-55-29R
This Example illustrates computations that involve the following:
- aNet premiums
- bUpdates of the net premium ratio.
944-40-55-29S
At the beginning of Year 4, the Entity recalculates the net premiums as follows.
Net Premium Ratio Year Benefits Gross Premiums 4 $222.2 $427.3 5 227.0 405.4 6 276.9 384.6 7 233.4 364.7 8 235.2 345.9 9 236.2 328.0 10 236.4 311.1 11 236.0 295.0 12 234.9 279.7 13 233.3 265.1 14 231.2 251.3 15 228.7 238.2 16 225.7 225.7 17 222.5 213.9 18 218.9 202.7 19 215.1 192.0 20 211.0 181.9 Total " $3,924.6 " " $4,912.5 " Present value (a) " $3,924.6 " " $4,912.5 " (a) 0% discount rate. Present value of benefits (for Years 4-20) (A) " $3,924.6 " Carrying value of the liability for future policy benefits (end of Year 3) (B) 387.6 Expected remaining benefits (A) - (B) = (C) " 3,537.0 " Present value of gross premiums (for Years 4-20) (D) " $4,912.5 " Updated net premium ratio = (C)/(D) 72.0%
944-40-55-29T
The computation of the liability for future policy benefits at the end of Year 4 using the revised net premiums follows.
Liability for Future Policy Benefits (End of Year 4) Year Benefits Gross Premiums Net Premiums (a) 5 $227.0 $405.4 $291.9 6 276.9 384.6 276.9 7 233.4 364.7 262.6 8 235.2 345.9 249.0 9 236.2 328.0 236.2 10 236.4 311.1 224.0 11 236.0 295.0 212.4 12 234.9 279.7 201.4 13 233.3 265.1 190.9 14 231.2 251.3 180.9 15 228.7 238.2 171.5 16 225.7 225.7 162.5 17 222.5 213.9 154.0 18 218.9 202.7 145.9 19 215.1 192.0 138.3 20 211.0 181.9 131.0 Total " $3,702.4 " " $4,485.2 " " $3,229.4 " Present value (b) " $3,702.4 " " $4,485.2 " " $3,229.4 " (a) Gross premiums × 72.0% net premium ratio. (b) 0% discount rate. Present value of future benefits (for Years 5-20) " $3,702.4 " Less: Present value of future net premiums (for Years 5-20) " 3,229.4 " Liability for future policy benefits $473.0
944-40-55-29U
At the end of Year 6, the Entity reviews and updates its mortality assumption as specified in paragraph 944-40-35-5(a), which results in an adjustment to benefit expenses and the liability for future policy benefits.
Net Premium Ratio Year (a) Benefits Gross Premiums 4 $222.2 $427.3 5 227.0 405.4 6 276.9 384.6 7 280.1 364.7 8 282.2 345.8 9 283.2 327.8 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 " $4,554.6 " " $4,904.3 " Present value (b) " $4,554.6 " " $4,904.3 " (a) Benefits and gross premiums for Years 4-6 represent actual (historical) cash flows. Years 7-20 represent expected (future) cash flows. (b) 0% discount rate. Present value of benefits (for Years 4-20) (A) " $4,554.6 " Carrying value of the liability for future policy benefits (end of Year 3) (B) 387.6 Expected remaining benefits (A) - (B) = (C) " 4,167.0 " Present value of gross premiums (for Years 4-20) (D) " $4,904.3 " Updated net premium ratio = (C)/(D) 85.0%
Remeasurement of Liability for Future Policy Benefits (Beginning of Year 6) Original Estimate Updated Estimate Year Benefits Gross Premiums Net Premiums (a) Benefits Gross Premiums Net Premiums (b) 6 $276.9 $384.6 $276.9 $276.9 $384.6 $326.8 7 233.4 364.7 262.6 280.1 364.7 309.9 8 235.2 345.9 249.0 282.2 345.8 293.8 9 236.2 328.0 236.2 283.2 327.8 278.5 10 236.4 311.1 224.0 283.4 310.8 264.0 11 236.0 295.0 212.4 282.8 294.6 250.3 12 234.9 279.7 201.4 281.4 279.2 237.2 13 233.3 265.1 190.9 279.3 264.5 224.8 14 231.2 251.3 180.9 276.7 250.6 213.0 15 228.7 238.2 171.5 273.5 237.4 201.8 16 225.7 225.7 162.5 269.9 224.9 191.1 17 222.5 213.9 154.0 265.9 213.0 181.0 18 218.9 202.7 145.9 261.5 201.8 171.4 19 215.1 192.0 138.3 256.8 191.0 162.3 20 211.0 181.9 131.0 251.8 180.9 153.7 Total " $3,475.4 " " $4,079.8 " " $2,937.5 " " $4,105.4 " " $4,071.6 " " $3,459.5 " Present value (c) " $3,475.4 " " $4,079.8 " " $2,937.5 " " $4,105.4 " " $4,071.6 " " $3,459.5 " (a) Gross premiums × 72.0% net premium ratio. (b) Gross premiums × 85.0% net premium ratio. (c) 0% discount rate. Original Estimate Updated Estimate Change Present value of future benefits (for Years 6-20) " $3,475.4 " " $4,105.4 " $630.0 Less: Present value of future net premiums (for Years 6-20) " 2,937.5 " " 3,459.5 " 522.0 Liability for future policy benefits $537.9 $645.9 $108.0
Liability for Future Policy Benefits (End of Year 6) Year Benefits Gross Premiums Net Premiums (a) 7 $280.1 $364.7 $309.9 8 282.2 345.8 293.8 9 283.2 327.8 278.5 10 283.4 310.8 264.0 11 282.8 294.6 250.3 12 281.4 279.2 237.2 13 279.3 264.5 224.8 14 276.7 250.6 213.0 15 273.5 237.4 201.8 16 269.9 224.9 191.1 17 265.9 213.0 181.0 18 261.5 201.8 171.4 19 256.8 191.0 162.3 20 251.8 180.9 153.7 Total " $3,828.5 " " $3,687.1 " " $3,132.7 " Present value (b) " $3,828.5 " " $3,687.1 " " $3,132.7 " (a) Gross premiums × 85.0% net premium ratio. (b) 0% discount rate. Present value of future benefits (for Years 7-20) " $3,828.5 " Less: Present value of future net premiums (for Years 7-20) " 3,132.7 " Liability for future policy benefits $695.8
Accounting Entries (Year 6) Cash (a) $107.7 Benefits expense (b) 326.8 Liability remeasurement loss (c) 108.0 Premium income $384.6 Liability for future policy benefits (d) 157.9 (a) "Premiums collected of $384.6, less benefits paid of $276.9." (b) "Benefits paid of $276.9, plus change in reserve of $49.9 using current net premium ratio of 85.0%." (c) Separately presented in the statement of operations. (d) "Liability remeasurement of $108.0, plus current period change in reserve of $49.9."
Financial Guarantee Insurance Contracts
944-40-55-30
This Example illustrates the measurement of the claim liability for a financial guarantee insurance contract as described in paragraph 944-40-30-33. An insurance entity determines that there is an expectation that a claim loss on an insured financial obligation (a bond) will exceed the unearned premium revenue for that contract. The present value of expected net cash outflows used to measure the claim liability considers the amount, timing, and probability of possible net cash outflows, that is, cash outflows, net of potential recoveries, to be paid to the holder of the insured financial obligation, excluding reinsurance. The present value of expected net cash outflows is developed using the insurance entity's own assumptions about the likelihood of all possible outcomes based on all information available to the insurance entity (including relevant market information). A calculation of the present value of expected net cash outflows follows.
"Discounted Possible Net Cash Outflows (a)" Probability "Probability- Weighted Net Cash Outflows" " $70,000,000 " 5% " $3,500,000 " " 50,000,000 " 15% " 7,500,000 " " 40,000,000 " 20% " 8,000,000 " " 20,000,000 " 45% " 9,000,000 " " 10,000,000 " 10% " 1,000,000 " - 5% - Present value of expected net cash outflows " $29,000,000 " (a) Discounted Possible Net Cash Outflows includes different probabilities of realization related to potential recoveries. The discount factor is the current risk-free rate.
944-40-55-31
At the date the expected net cash outflows are calculated, the remaining unearned premium revenue is $1.2 million. Accordingly, a claim liability of $27.8 million is recognized in the statement of financial position ($29.0 million less $1.2 million).
944-40-55-32
This Example illustrates the disclosure of a schedule of insured financial obligations required in paragraph 944-40-50-9(a)(5) and 944-40-50-9(b)(1) through (5). This Example assumes the insurance entity uses a surveillance list with four surveillance categories to track and monitor its insured financial obligations. The surveillance list and four surveillance categories are used for illustrative purposes only. The surveillance categories in paragraph 944-40-55-33 describe the claim liability before the mitigating effects of potential recoveries.
944-40-55-33
The following are brief descriptions of each surveillance category to provide context to this Example:
- a Category A. This category includes insured financial obligations that are still currently performing (that is, insured contractual payments are made on time but the likelihood of an event of default has increased since the financial guarantee insurance contract was first issued), but if economic conditions persist for an extended period of time, they may not be performing in the future. The issuer of the insured financial obligation may have experienced credit deterioration as a result of a general economic downturn. As a result, the present value of expected net cash outflows may exceed the unearned premium revenue of the financial guarantee insurance contract some time in the future.
- b Category B. This category includes insured financial obligations that are currently characterized as potentially nonperforming and may require action by the insurance entity to avoid or mitigate an event of default.
- c Category C. This category includes insured financial obligations that are characterized as nonperforming and for which actions to date by the insurance entity have not been successful in avoiding or mitigating an event of default. The insurance entity continues its efforts to cure the claim, but an event of default is imminent.
- d Category D. This category includes insured financial obligations in which an event of default has occurred.
944-40-55-34
For the insured financial obligations discussed in the preceding paragraph, the financial information might be presented as follows.
-
Surveillance Categories A B C D Total Number of policies 37 16 5 4 62 Remaining weighted-average contract period (in years) 16 14 11 12 Insured contractual payments outstanding: Principal " $656,000,000 " " $409,000,000 " " $196,000,000 " " $111,000,000 " " $1,372,000,000 " Interest " 478,000,000 " " 298,000,000 " " 150,000,000 " " 73,000,000 " " 999,000,000 " Total " $1,134,000,000 " " $707,000,000 " " $346,000,000 " " $184,000,000 " " $2,371,000,000 " Gross claim liability " $1,045,000,000 " " $690,000,000 " " $330,000,000 " " $184,000,000 " " $2,249,000,000 " Less: Gross potential recoveries " 752,000,000 " " 381,000,000 " " 29,000,000 " " 7,000,000 " " 1,169,000,000 " "Discount, net" " 159,000,000 " " 153,000,000 " " 125,000,000 " " 78,000,000 " " 515,000,000 " Net claim liability " $134,000,000 " " $156,000,000 " " $176,000,000 " " $99,000,000 " " $565,000,000 " Unearned premium revenue " $7,000,000 " " $4,000,000 " " $2,000,000 " $- (b) " $13,000,000 " Claim liability reported in the balance sheet (a) " $120,000,000 " " $148,000,000 " " $170,000,000 " " $99,000,000 " " $537,000,000 " Reinsurance recoverables " $10,000,000 " " $19,000,000 " " $25,000,000 " " $27,000,000 " " $81,000,000 " (a) "The claim liability is determined on a contract-by-contract basis. As such, instances may arise where the unearned premium revenue exceeds the present value of the expected net cash outflows (and therefore, the net claim liability less the unearned premium revenue may not equal the claim liability reported in the balance sheet)." (b) "In this instance, it is assumed that once an insured financial obligation is in Category D, the only remaining obligation of the insurance enterprise is making claim payments. As such, all related balances of the insured financial obligation are written off, including the unearned premium revenue."
944-40-65Transition and Open Effective Date Information
Source downloaded: .Record version ba2976605873. Effective date must be checked in the source.
944-40-65-1
Paragraph superseded on 06/20/2018 after the end of the transition period stated in Accounting Standards Update No. 2015-09, Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts.
944-40-65-2
Paragraph superseded on 07/02/2026 after the end of the transition period stated in Accounting Standards Updates No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, No. 2019-09, Financial Services—Insurance (Topic 944): Effective Date, No. 2020-11, Financial Services—Insurance (Topic 944): Effective Date and Early Application, and No. 2022-05, Financial Services—Insurance (Topic 944): Transition for Sold Contracts.
944-40-S00StatusSEC
Source downloaded: .Record version 0ab404229cb5. Effective date must be checked in the source.
944-40-S00-1
The following table identifies the changes made to this Subtopic.
| Paragraph | Action | Accounting Standards Update | Date |
| 944-40-S99-1 | Amended | Accounting Standards Update No. 2012-03 | 08/27/2012 |
944-40-S30Initial MeasurementSEC
Source downloaded: .Record version e07fd25ce580. Effective date must be checked in the source.
Discounting Claims Liabilities Related to Short-Duration Contracts
944-40-S30-1
See paragraph 944-20-S99-1, SAB Topic 5.N, for SEC Staff views on discounting claims liabilities related to short-duration contracts.
944-40-S50DisclosureSEC
Source downloaded: .Record version 6c94a1fe9940. Effective date must be checked in the source.
Property-Casualty Insurance Reserves for Unpaid Claim Costs
944-40-S50-1
See paragraph 944-40-S99-1, SAB Topic 5.W, for SEC Staff views on disclosures of property casualty insurance reserves for unpaid claim costs.
944-40-S99SEC MaterialsSEC
Source downloaded: .Record version 72f576d767e1. Effective date must be checked in the source.
SEC Staff Guidance
944-40-S99-1
The following is the text of SAB Topic 5.W, Contingency Disclosures Regarding Property-Casualty Insurance Reserves for Unpaid Claim Costs.
- Facts: A property-casualty insurance company (the "Company") has established reserves, in accordance with FASB ASC Topic 944, Financial Services—Insurance, for unpaid claim costs, including estimates of costs relating to claims incurred but not reported ("IBNR"). FN44 The reserve estimate for IBNR claims was based on past loss experience and current trends except that the estimate has been adjusted for recent significant unfavorable claims experience that the Company considers to be nonrecurring and abnormal. The Company attributes the abnormal claims experience to a recent acquisition and accelerated claims processing; however, actuarial studies have been inconclusive and subject to varying interpretations. Although the reserve is deemed adequate to cover all probable claims, there is a reasonable possibility that the abnormal claims experience could continue, resulting in a material understatement of claim reserves.
- FN44 FASB ASC paragraph 944-40-30-1 prescribes that "[t]he liability for unpaid claims shall be based on the estimated ultimate cost of settling the claims (including the effects of inflation and other societal and economic factors), using past experience adjusted for current trends, and any other factors that would modify past experience." [Footnote reference omitted]
- FASB ASC Topic 450, Contingencies, requires, among other things, disclosure of loss contingencies. FN45 However, FASB ASC paragraph 450-10-05-6 notes that "[n]ot all uncertainties inherent in the accounting process give rise to contingencies."
- FN45 FASB ASC paragraphs provide guidance that "[i]f no accrual is made for a loss contingency because one or both of the conditions in FASB ASC paragraph 450-20-25-2 are not met, or if an exposure to loss exists in excess of the amount accrued pursuant to the provisions of FASB ASC paragraph 450-20-25-2, disclosure of the contingency shall be made when there is at least a reasonable possibility that a loss or an additional loss may have been incurred. The disclosure shall indicate the nature of the contingency and shall give an estimate of the possible loss or range of loss or state that such an estimate cannot be made." [Footnote reference omitted and emphasis added.]
- FASB ASC Topic 275, Risks and Uncertainties, FN46 also provides disclosure guidance regarding certain significant estimates.
- FN46 FASB ASC Topic 275 provides that disclosures regarding certain significant estimates should be made when certain criteria are met. The guidance provides that the disclosure shall indicate the nature of the uncertainty and include an indication that it is at least reasonably possible that a change in the estimate will occur in the near term. If the estimate involves a loss contingency covered by FASB ASC Topic 450, the disclosure also should include an estimate of the possible loss or range of loss, or state that such an estimate cannot be made. Disclosure of the factors that cause the estimate to be sensitive to change is encouraged but not required.
- FASB ASC Topic 275 requires disclosures regarding current vulnerability due to certain concentrations which may be applicable as well.
- Interpretive Response: Yes. The staff believes that specific uncertainties (conditions, situations and/or sets of circumstances) not considered to be normal and recurring because of their significance and/or nature can result in loss contingencies FN47 for purposes of applying FASB ASC Topics 450 and 275 disclosure requirements. General uncertainties, such as the amount and timing of claims, that are normal, recurring, and inherent to estimations of property-casualty insurance reserves are not considered subject to the disclosure requirements of FASB ASC Topic 450. Some specific uncertainties that may result in loss contingencies pursuant to FASB ASC Topic 450, depending on significance and/or nature, include insufficiently understood trends in claims activity; judgmental adjustments to historical experience for purposes of estimating future claim costs (other than for normal recurring general uncertainties); significant risks to an individual claim or group of related claims; or catastrophe losses. The requirements of FASB ASC Topic 275 apply when "[i]t is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements will change in the near term due to one or more future confirming events... [and] the effect of the change would be material to the financial statements."
- FN47 The loss contingency referred to in this document is the potential for a material understatement of reserves for unpaid claims.
- Interpretive Response: Yes. The staff believes the judgmental adjustments to historical experience for insufficiently understood claims activity noted above results in a loss contingency within the scope of FASB ASC Topics 450 and 275. Based on the facts presented above, at a minimum the Company's financial statements should disclose that for purposes of estimating IBNR claim reserves, past experience was adjusted for what management believes to be abnormal claims experience related to the recent acquisition of Company A and accelerated claims processing. It should also be disclosed that there is a reasonable possibility that the claims experience could be the indication of an unfavorable trend which would require additional IBNR claim reserves in the approximate range of $XX-$XX million (alternatively, if Company management is unable to estimate the possible loss or range of loss, a statement to that effect should be disclosed).
- Additionally, the staff also expects companies to disclose the nature of the loss contingency and the potential impact on trends in their loss reserve development discussions provided pursuant to Property-Casualty Industry Guides 4 and 6. Consideration should also be given to the need to provide disclosure in MD&A.
- Question 3: Does the staff have an example in which specific uncertainties involving an individual claim or group of related claims result in a loss contingency the staff believes requires disclosure?
- Interpretive Response: Yes. A property-casualty insurance company (the "Company") underwrites product liability insurance for an insured manufacturer which has produced and sold millions of units of a particular product which has been used effectively and without problems for many years. Users of the product have recently begun to report serious health problems that they attribute to long term use of the product and have asserted claims under the insurance policy underwritten and retained by the Company. To date, the number of users reporting such problems is relatively small, and there is presently no conclusive evidence that demonstrates a causal link between long term use of the product and the health problems experienced by the claimants. However, the evidence generated to date indicates that there is at least a reasonable possibility that the product is responsible for the problems and the assertion of additional claims is considered probable, and therefore the potential exposure of the Company is material. While an accrual may not be warranted since the loss exposure may not be both probable and estimable, in view of the reasonable possibility of material future claim payments, the staff believes that disclosures made in accordance with FASB ASC Topics 450 and 275 would be required under these circumstances.
- The disclosure concepts expressed in this example would also apply to an individual claim or group of claims that are related to a single catastrophic event or multiple events having a similar effect.
Related subtopics
- 605-944 Financial Services—InsuranceRevenue Recognition
- 310-944 Financial Services—InsuranceReceivables
- 944-20 Insurance ActivitiesFinancial Services—Insurance
- 405-30 Insurance-Related AssessmentsLiabilities
- 340-30 Insurance Contracts That Do Not Transfer Insurance RiskOther Assets and Deferred Costs
- 944-30 Acquisition CostsFinancial Services—Insurance