Insurers Ready For AICPA Guideline On Guarantees In Variable Products
Insurers have started announcing anticipated charges to reflect a new accounting guideline that will largely affect variable annuities and variable life products.
By and large, insurers contacted by National Underwriter say the charges will not be significant. However, they add that, in general, it really depends on the type of contracts a particular company writes.
Statement of Position 03-1 will become effective Dec. 15, 2003. The SOP was developed by the American Institute of Certified Public Accountants, New York, and cleared by the Financial Accounting Standards Board, Norwalk, Conn. The new guideline will be applied at the beginning of the entitys fiscal year starting after the effective date.
The SOP addresses whether certain separate account insurance contracts assets and liabilities should be reflected in insurers general accounts and whether related revenues and expenses should appear in their income statements.
It states that a separate account should be reported as a general account liability if it does not meet certain conditions:
1. It must be legally recognized;
2. The account assets supporting the contract liabilities are legally insulated from the general account liabilities;
3. The insurer must invest the contract holders funds within the separate account as directed by the contract holder to designated investment alternatives; and,
4. All investment performance, net of fees, must pass to the contract holder.
The SOP also offers reasons why under certain conditions, a particular VA must be included in the general account.
For example, the SOP states that because an insurer provides a fixed return for a specified period, a market value adjusted annuity written through a separate account does not meet criterion No. 4 and consequently must be treated as a general account contract.
The SOP also offers guidance on guaranteed minimum income benefits. It says that if a GMIB is not accounted for under FAS 133, which addresses derivatives, an additional liability should be established if the present value of the expected annuitization payments at the annuitization date exceeds the expected account balance at the expected annuitization date.