2018年-普华永道全球_Targeted_Improvements_to_the_Accounting_for_Long_13页_707kb

Summary of ASU 2018-12 Implications for Insurance Accounting

Introduction

The FASB's ASU 2018-12 introduces significant changes to the accounting for long-duration contracts, particularly affecting traditional nonparticipating life products, universal life products, variable annuities, and fixed indexed annuities. The changes include:

• A new amortization model for deferred acquisition costs (DAC)
• A fair value model for guaranteed minimum benefits (GMxB) with other-than-nominal capital market risk
• A revised approach to profit recognition and equity volatility

These changes will not affect the total profits over the lifetime of a product cohort but will impact opening GAAP equity and the timing of profit emergence.

Core Content

Traditional Nonparticipating Life Products

• Opening Equity:
  • Under the modified retrospective approach, opening equity is likely unchanged due to the pivot from existing DAC and liability balances.
  • Entities with prior loss recognition events may see additional decreases in equity due to the finer aggregation level required by ASU.
  • Entities with shadow loss recognition balances may see an increase in equity due to the release of those balances.
• Profit Emergence:
  • Accelerated for both new and in-force business.
• Earnings Volatility:
  • Increased due to the removal of the locked-in concept and annual review of assumptions.
  • Near-term volatility may decrease if experience variances are not significant.
• OCI/Equity Volatility:
  • Overall decreased volatility if assets and liabilities are well matched.
  • OCI adjustments for AFS assets may offset some of the changes.

Life Contingent Payout Annuity Products

• Opening Equity:
  • No significant impact for most, but some may see increases in liabilities.
  • Decreased equity due to the lower current single A discount rate.
• Profit Emergence:
  • May be accelerated or slowed depending on the assumptions and DAC/DPL model.
• Earnings Volatility:
  • Increased due to the ASU's lower aggregation level and required assumption updates.
• OCI/Equity Volatility:
  • Increased due to the periodic updating of discount rates and lack of offset from AFS assets.

Long Term Care (LTC)

• Opening Equity:
  • Expected to increase liabilities, decreasing equity.
• Profit Emergence:
  • Accelerated for both inforce and new business.
• Earnings Volatility:
  • Increased over the product lifetime due to assumption updates.
  • Some future years may see less volatility due to no DAC impairment testing.
• OCI/Equity Volatility:
  • Increased due to assumption updates and lower discount rates.

Participating Whole Life

• Opening Equity:
  • Likely to increase due to removal of shadow DAC and net unrealized gains on AFS assets.
• Profit Emergence:
  • DAC amortization will be on a constant level basis, potentially accelerating profit emergence.
• Earnings Volatility:
  • Slight reduction due to less volatile DAC amortization.
• OCI/Equity Volatility:
  • Decreased due to less volatile DAC amortization and elimination of shadow DAC.

Universal Life (UL) Products

• Opening Equity:
  • Expected to increase due to removal of shadow DAC and URL adjustments.
• Profit Emergence:
  • May be slower for new business due to the constant level basis of DAC amortization.
  • For older blocks, profit emergence may be faster due to higher liabilities at transition.
• Earnings Volatility:
  • Increased due to the lack of DAC offset to gross profits and SOP 03-1 reserves.
• OCI/Equity Volatility:
  • May decrease due to elimination of shadow adjustments, but equity volatility is likely to increase due to earnings volatility.

Fixed Deferred Annuities and Fixed Indexed Annuities without GMxB

• Opening Equity:
  • Expected to increase due to removal of shadow DAC adjustments.
• Profit Emergence:
  • Decelerated for existing blocks due to DAC amortization starting after incurrence.
• Earnings Volatility:
  • Slightly decreased due to no retrospective unlocking and assumption updates.
• OCI/Equity Volatility:
  • Increased due to lack of offset from AFS assets.

Deferred Annuities with GMxB

• Opening Equity:
  • Expected to decrease due to the fair value model for GMxBs.
• Profit Emergence:
  • Slower for new business due to earlier liability recognition.
  • For older blocks, profit emergence may be faster due to higher liabilities at transition.
• Earnings Volatility:
  • Increased due to fair value liabilities being more volatile than SOP 03-1 liabilities.
  • Hedging may not fully offset this volatility, especially during market fluctuations.
• OCI/Equity Volatility:
  • Increased due to the fair value model and changes in own credit risk affecting OCI.

Main Impacts and Considerations

• Transition Approach:
  • Full vs. modified retrospective approaches may result in different impacts on opening equity.
  • Most firms are expected to use the modified retrospective approach due to data and system constraints.
• DAC Amortization:
  • DAC is no longer subject to interest accrual, leading to faster amortization.
  • However, DAC may amortize slower if future impairment is expected.
• Profit Emergence Timing:
  • Accelerated for newly issued policies and in-force business.
• Earnings and Equity Volatility:
  • Volatility is expected to increase for most product groups, but may decrease in the short term.
  • Equity volatility is likely to be reduced if assets and liabilities are well matched.
• OCI Impact:
  • OCI adjustments for discount rate changes will be more frequent and significant.
  • For products with GMxB, OCI will reflect changes in fair value liabilities.

Key Takeaways

• The ASU will significantly alter the accounting for long-duration contracts, especially for DAC and GMxBs.
• Opening equity at transition will vary based on the transition approach and product characteristics.
• Profit emergence will be affected by the new amortization models and assumption updates.
• Earnings and equity volatility are expected to increase, but may be mitigated by asset-liability matching and hedging strategies.

Contacts

• David Honour
  PwC Actuarial Services Partner
  +1 646 471 1696
  david.honour@pwc.com

• Michael Lockerman
  PwC Actuarial Services Partner
  +1 646 471 2179
  mic