Insurers Ready For AICPA Guideline On Guarantees In Variable Products

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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.

Other types of products addressed in the SOP are two-tier annuities and VAs with guaranteed minimum accumulation benefits. Additionally, the SOP could affect accounting for VAs and variable life insurance.

In mid-November, American International Group, New York, said the SOP will require it to recognize a liability for guaranteed minimum death benefits and other living benefits related to its VA and VL contracts, and modify certain disclosures and financial statement presentations for these products. AIG expects a one-time cumulative accounting charge upon adoption to approximate $200 million after income taxes, to be recorded in the first quarter of 2004. The company says it will not be material to its financial condition or liquidity.

In general, the SOP will impact the way the industry recognizes liabilities for VA guarantees, says Mark Thresher, senior vice president and CFO, with Nationwide Financial, Columbus, Ohio.

But, he continues, Nationwide maintains GAAP reserves for GMDBs and GMIBs. At the end of third-quarter 2003, the company had $22 million in reserves net of reinsurance.

Approximately 95% of those reserves are for GMDBs rather than GMIBs, Thresher says. Nationwide did not sell many GMIBs, he adds.

Prior to 2002, the guarantee risk in variable products was almost completely reinsured but in 2002 reinsurance for these guarantees dried up, Thresher says. Currently, 60% of these guarantees are reinsured, he adds.

Thresher says the reserves Nationwide established are consistent with the requirements in the new SOP.

At Hartford Life Insurance Company, Simsbury, Conn., a $30 million-40 million reserve will be established for products with guarantees, says Tom Campbell, vice president and corporate actuary.

For example, Hartford offers a modified guaranteed annuity that it considers a separate account but because of guidelines in the new SOP it may have to be put in the general account, he says. And, he adds, Hartford sells VAs in Japan, but if those contracts do not meet the definition of VAs in the SOP, they also may have to be put in the general account, Campbell continues.

In general, the SOP will affect companies differently, depending on the types of contracts offered and provisions in those contracts, he says.

Companies may ultimately redesign products, but the reason for such changes may be due as much to the availability of reinsurance as to accounting changes, Campbell adds.

Reserves also were established by AXA Group, New York. In January 2002, the company changed its method of accounting for liabilities associated with VA GMDBs and GMIBs, and established $33.1 million in reserves. Prior to that action, these benefits were expensed as incurred.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.