FAIR VALUE ACCOUNTING FOR GMXB RIDERS SHAIO-TIEN PAN - EQUITY-BASED INSURANCE GUARANTEES CONFERENCE - SOA
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Equity-Based Insurance Guarantees Conference
Nov. 5-6, 2018
Chicago, IL
Fair Value Accounting for GMxB Riders
Shaio-Tien Pan
SOA Antitrust Compliance Guidelines
SOA Presentation Disclaimer
Sponsored byFair Value Accounting for GMxB Riders SHAIO-TIEN PAN Actuarial Director, PwC 2018 EBIG Conference (Session 3B) 5 November 2018 (1530 – 1700 hours)
GAAP LTDI – History & background
• The existing U.S. GAAP multi-model accounting
approach for insurance contracts evolved over the
decades, often in response to new product features. GAAP LTDI objectives
• FASB began proactively working with the IASB in 2008 1. Improve the timeliness of the
liability for future policy benefits
on an exposure draft of fundamental changes to the with assumptions updates
accounting for insurance contracts.
2.Simplify and improve the
• In the summer of 2013, FASB released its proposed accounting for GMxB in
comprehensive new standards for insurance. variable contracts
• In February of 2014, the FASB voted to change its course 3.Simplify DAC amortization
toward making ‘targeted improvements’ for long-duration 4.Improve the effectiveness
contracts. GAAP LDTI begins. of the required disclosures
• In April of 2014, the target areas are chosen: unit of
account, liability calculations, DAC amortization, loss
recognition, and revenue recognition.
• The LDTI exposure draft was issued in 2016. It was
redeliberated in 2017-18, with significant changes made;
the effective date has been announced to be 2021 for
public companies. The final version was released August
15, 2018
2FASB Long-Duration Targeted Improvements (LDTI) – History and
adoption timeline
Who does it affect?
All public and private companies
August 2018 that report on a US GAAP basis.
Issuance of Further secondary impacts to any
February 1sthalf 2016 final standard
2014
firms that have adopted a modified
Re-deliberations June 2018
FASB decided to completed in March
US GAAP basis.
Final
drop its comprehensive 2016; FASB votes to deliberations
insurance project and draft a revised
focus on targeted document March 2017
improvements for exposure Public roundtable When does it take effect?
Adoption dates are the following for
calendar year-end companies:
• Public companies –
2014 2015 2016 2016 2017 2018 2019 2020 2021 2022 Beyond
Jan 1, 2021
• Private companies -
Jan 1, 2022
August 2014 September 2016 August, October, 2021 2022 Early adoption is acceptable
FASB begins FASB exposure and November 2017 Public companies Private companies
re-deliberations draft issued with Board Meetings to Effective Effective January 1, 2022
on long duration comment period discuss tentative January 1, 2021
targeted improvements ending 12/15/16 decisions What will be required?
based on scope Three years comparative income
agreed upon in
April 2014
statements at date of first reporting
after adoption (e.g. for public
companies comparative will be
required from 2019).
3FASB Long-Duration Targeted Improvements (LDTI) – overview of changes
What is changing?
• Assumptions updates for
01 02
• For contract features that have other-
for non-participating than-nominal capital market risks
traditional and limited- • Fair value measurement through
payment insurance contracts. income
• Discount rate will be based • Change in instrument-specific credit
on upper medium grade (low risk recognized in OCI
credit risk) fixed-income
Targeted
instruments. Improvements for
• Eliminate PAD and loss Long-Duration
recognition testing.
Contracts
04
03 • New disclosure requirements including
• DAC will be amortized on a
liability roll forwards and information
constant basis over the life of
about significant inputs, judgements
the contract, independent of
and assumptions.
profitability
• No interest accretion
• No impairment test.
4GAAP LTDI - Impact on Annuity GMxB’s
GMxB Current GAAP New GAAP
VA GMDB SOP03-1 Market Risk Benefit (MRB)
• Payment is a result of an identifiable insurable
event To be measured at Fair Value
Changes in fair value flow through
VA GMAB FAS 157 P/L, except changes in instrument-
VA GMIB • Typically SOP 03-1 specific credit risk recognized in
• FAS 157 if benefit is net settled Other Comprehensive Income
• Typical for reinsurance If a contract contains multiple MRB,
• Some consider automatic annuitization those MRBs shall be bundled
feature net settlement together as a single compound
market risk benefit
VA GMWB/GLWB • Typically FAS 157 for non-lifetime GMWBs
• Diversity in practice exists for lifetime GMWBs
• Full-FAS 157
• Hybrid FAS 157/SOP03-1
Note: FIA’s index crediting feature is not considered
FIA GMxB Typically SOP 03-1 MRB, and will continue to be accounted for as
embedded derivatives under ASC 815
5Transition
○ Transition Date: 1/1/2019
○ Adoption in 2021 would require adjustment to the 2020 and 2019
comparative periods
○ Full retrospective method must be used for MRB
○ Benefit of hindsight may be used for the full retrospective method to the extent
that assumptions in prior periods are unobservable or otherwise unavailable and
cannot be independently substantiated.
6GMxB Financial Impact Assessment
Opening Equity at Profit Emergence Earnings Volatility Total Equity Volatility
Transition (New business)
Variable Annuity Adverse Adverse Adverse Adverse
FIA with GMxB Adverse Adverse Adverse Adverse
• The expected adverse impact primarily due to Guarantees currently accounted for under SOP 03-1
(GMDBs, GMIBs, etc) will now be measured at fair value under the new definition of Market Risk Benefits
(MRBs)
• Further analysis based on company specific circumstances is recommended to assess the potential
financial impacts of the new guidance
• Potential levers to manage these metrics: Hedging strategy
7FASB LDTI – Implications for insurers
LDTI will impact all aspects of an insurer’s operations - going beyond just the finance
and actuarial functions including product design and distribution, capital management
and hedging, strategic planning, commercial decisions and market communications
Strategic Implications Technical Challenges
• Earnings volatility and risk • DAC calculation
sensitivity • Transition
• Increased disclosures • Fair value market
• Budgeting and strategic planning risk benefits
• Product decisions • Disclosure
• Hedging
• Annual incentive plans
Top
LDTI
items Business Operation Challenges
Implementation & • Capturing new and additional data
Transition Challenges points; historical data points
• Finance, actuarial and IT resources needed for transition
• PMO and interactions to inflight projects • Actuarial valuation & reporting
• Parallel reporting during 2020 infrastructure
• Board and Executive Team training • New financial reporting controls
• Management of external communications
8Implications on GMxB Hedging
Hedge Objective
Pre-2021: What to hedge toward between the Transition Date (2019) and the Effective Date (2021)?
Post-2021: Economics vs New GAAP vs Stat(also new)
Cost of Hedging
Higher notional required
Potential rise in implied volatility due to increased demand for option hedges
Hedge Strategy
Rho & Vega coverage
Gamma coverage
Dynamic vs Static
Rebalance threshold
Other factors
Wall Street analysts & investors expectations
Rating Agencies’ viewpoints
Company’s risk appetite
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