Fair Value Accounting for GMxB Riders. Shaio-Tien Pan

Transcription

1 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 by

2 Fair Value Accounting for GMxB Riders SHAIO-TIEN PAN Actuarial Director, PwC 2018 EBIG Conference (Session 3B) 5 November 2018 ( hours)

3 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. FASB began proactively working with the IASB in 2008 on an exposure draft of fundamental changes to the accounting for insurance contracts. In the summer of 2013, FASB released its proposed comprehensive new standards for insurance. In February of 2014, the FASB voted to change its course toward making targeted improvements for long-duration contracts. GAAP LDTI begins. 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 It was redeliberated in , with significant changes made; the effective date has been announced to be 2021 for public companies. The final version was released August 15, 2018 GAAP LTDI objectives 1.Improve the timeliness of the liability for future policy benefits with assumptions updates 2.Simplify and improve the accounting for GMxB in variable contracts 3.Simplify DAC amortization 4.Improve the effectiveness of the required disclosures 2

4 FASB Long-Duration Targeted Improvements (LDTI) History and adoption timeline February 2014 FASB decided to drop its comprehensive insurance project and focus on targeted improvements Beyond August 2014 FASB begins re-deliberations on long duration targeted improvements based on scope agreed upon in April st half 2016 Re-deliberations completed in March 2016; FASB votes to draft a revised document for exposure September 2016 FASB exposure draft issued with comment period ending 12/15/16 August 2018 Issuance of final standard June 2018 Final deliberations March 2017 Public roundtable August, October, and November 2017 Board Meetings to discuss tentative decisions 2021 Public companies Effective January 1, Private companies Effective January 1, 2022 Who does it affect? All public and private companies that report on a US GAAP basis. Further secondary impacts to any firms that have adopted a modified US GAAP basis. When does it take effect? Adoption dates are the following for calendar year-end companies: Public companies Jan 1, 2021 Private companies - Jan 1, 2022 Early adoption is acceptable What will be required? Three years comparative income statements at date of first reporting after adoption (e.g. for public companies comparative will be required from 2019). 3

5 FASB Long-Duration Targeted Improvements (LDTI) overview of changes What is changing? 01 Assumptions updates for for non-participating traditional and limitedpayment insurance contracts. Discount rate will be based on upper medium grade (low credit risk) fixed-income instruments. Eliminate PAD and loss recognition testing. 03 DAC will be amortized on a constant basis over the life of the contract, independent of profitability No interest accretion No impairment test. Targeted Improvements for Long-Duration Contracts 02 For contract features that have otherthan-nominal capital market risks Fair value measurement through income Change in instrument-specific credit risk recognized in OCI 04 New disclosure requirements including liability roll forwards and information about significant inputs, judgements and assumptions. 4

6 GAAP LTDI - Impact on Annuity GMxB s GMxB Current GAAP New GAAP VA GMDB VA GMAB FAS 157 SOP03-1 Payment is a result of an identifiable insurable event VA GMIB Typically SOP 03-1 FAS 157 if benefit is net settled Typical for reinsurance Some consider automatic annuitization feature net settlement 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 FIA GMxB Typically SOP 03-1 Market Risk Benefit (MRB) To be measured at Fair Value Changes in fair value flow through P/L, except changes in instrumentspecific credit risk recognized in Other Comprehensive Income If a contract contains multiple MRB, those MRBs shall be bundled together as a single compound market risk benefit Note: FIA s index crediting feature is not considered MRB, and will continue to be accounted for as embedded derivatives under ASC 815 5

7 Transition 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. 6

8 GMxB Financial Impact Assessment Opening Equity at Transition Profit Emergence (New business) Earnings Volatility Total Equity Volatility 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 7

9 FASB 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 Earnings volatility and risk sensitivity Increased disclosures Budgeting and strategic planning Product decisions Hedging Annual incentive plans Implementation & Transition Challenges Finance, actuarial and IT resources PMO and interactions to inflight projects Parallel reporting during 2020 Board and Executive Team training Management of external communications Top LDTI items Technical Challenges DAC calculation Transition Fair value market risk benefits Disclosure Business Operation Challenges Capturing new and additional data points; historical data points needed for transition Actuarial valuation & reporting infrastructure New financial reporting controls 8

10 Implications 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 9

11