Search within this section
Select a section below and enter your search term, or to search all click Insurance Contracts
Favorited Content
Year 
Benefits 
Gross premiums (A) 
Net premiums (A*71.1%) 
1 
$200.0 
$500.0 
$355.4 
2 
208.8 
474.5 
337.2 
3 
216.1 
450.3 
320.0 
4 
222.2 
427.3 
303.6 
5 
227.0 
405.4 
288.1 
6 
230.7 
384.6 
273.3 
7 
233.5 
364.8 
259.2 
8 
235.3 
346.0 
245.9 
9 
236.3 
328.1 
233.2 
10 
236.5 
311.2 
221.1 
11 
236.0 
295.1 
209.7 
12 
235.0 
279.7 
198.8 
13 
233.4 
265.2 
188.5 
14 
231.3 
251.4 
178.6 
15 
228.7 
238.3 
169.3 
16 
225.8 
225.8 
160.5 
17 
222.5 
214.0 
152.1 
18 
219.0 
202.8 
144.1 
19 
215.1 
192.1 
136.5 
20 
211.1 
182.0 
129.3 
Total 
$4,504.4 
$6,338.4 
$4,504.4 
Present value (0%) 
$4,504.4 
$6,338.4 
$4,504.4 
Net premium ratio 

Present value of total benefits and expenses (for Years 120) 
(A) 
$4,504.4 

Present value of total gross premiums (for Years 120) 
(B) 
$6,338.4 

Net premium ratio (A)/(B) 
(C) 
71.1% 
Year 1 calculation 

Present value of future benefits (for Years 220) 
$4,304.4 

Less: Present value of future net premiums (for Years 220) 
4,149.0 

Liability for future policy benefits 
$155.4 
Dr. Cash^{1} 
$300.0 

Dr. Benefit expense^{2} 
355.4 

Cr. Premium income 
$500.0 

Cr. Liability for future policy benefits 
155.4 

^{1}Premiums collected of $500, less benefits paid of $200
^{2}Benefits paid of $200, plus change in reserve of $155.4

Excerpt ASC 944403015
However, expense assumptions shall not include acquisition costs or any costs that are required to be charged to expense as incurred, such as those relating to investments, general administration, policy maintenance costs, product development, market research, and general overhead (see paragraph 944 720252).
Excerpt from ASC 94440356A (b)(2)
Zero coupon curves 
Year 1 
Year 2 
Year 3 
Spot 
1% 
2% 
3% 
Forward (derived) 
1% 
3.01% 
5.03% 
Cash flow at end of year 2 
Cash flow at end of year 3 
Annual interest accretion 

Present value at issuance 
$961.17 ^{(1)} 
$915.14 ^{(2)} 

End of year 1 
980.39 
942.59 
$46.67 ^{(3)} 
End of year 2 
1,000.00 
970.87 
47.89 
End of year 3 
1,000.00 
29.13 

^{(1)}Calculated by discounting the cash flow at the end of the year 2 based on the 2year spot rate of 2% for 2 years ($1,000/(1.02)^{2})
^{(2)}Calculated by discounting the cash flow at the end of year 3 based on the 3year spot rate of 3% for 3 years ($1,000/(1.03)^{3})
^{(3)}Represents the interest accretion resulting from applying the respective spot rate to each cash flow for the period (($961.17*2%) + ($915.14*3%))

Cash flow at end of year 2 
Cash flow at end of year 3 
Annual interest accretion 

Present value at issuance 
$961.17 ^{(4)} 
$915.14 ^{(5)} 

End of year 1 
970.78 
924.29 
$18.76 ^{(6)} 
End of year 2 
1,000.00 
952.11 
57.04 ^{(7)} 
End of year 3 
1,000.00 
47.89 ^{(8)} 

^{(4)}Calculated by discounting the cash flow at the end of year 2 to the end of year 1 using the 2year forward rate of 3.01% and then discounting that total to issuance using the 1% forward rate (($1,000/1.0301)/1.01)
^{(5)}Calculated by discounting the cash flow at the end of year 3 to the end of year 2 using the 3year forward rate of 5.03%, and then discounting the total to the end of year 1 using the 2year forward rate of 3.01%, and then discounting the total to issuance using the 1% forward rate ((($1,000/1.0503)/1.0301)/1.01)
^{(6)}Represents the interest accretion resulting from applying the forward rate to each cash flow for the period (($961.17*1%) + ($915.14*1%))
^{(7)}Represents the interest accretion resulting from applying the forward rate to each cash flow for the period. In year 2, the forward rate used for accretion would be 3.01%. Year 2 interest is ($970.78*3.01%) + ($924.29*3.01%)
^{(8)}Represents the interest accretion resulting from applying the forward rate to each cash flow for the period. In year 3, the forward rate used for accretion would be 5.03%. Year 3 interest is ($952.11*5.03%)

Cash flow at end of year 2 
Cash flow at end of year 3 
Annual interest accretion 

Present value at issuance 
$ 961.17 ^{(9)} 
$ 915.14 ^{(10)} 

End of year 1 
$ 48.59 ^{(11)} 

End of year 2 
1,000.00 
49.85 

End of year 3 
1,000.00 
25.25 

^{(9)} Calculated by discounting the cash flow at the end of the year 2 based on the 2year spot rate of 2% for 2 years ($1,000/(1.02)2)
^{(10)}Calculated by discounting the cash flow at the end of year 3 based on the 3year spot rate of 3% for 3 years ($1,000/(1.03)3)
^{(11)}Represents the interest accretion resulting from discounting each cash flow for the period at the equivalent level rate based upon the spot curve. This rate was determined by calculating the internal rate of return for a bond with an inflow of $1,876.31 (the sum of the present values of each cash flow at issuance, ($961.17 + $915.14)) and an outflow of $1,000 at the end of year 2 and year 3. This rate is 2.59%. The calculation of the interest accretion for year 1 is ($961.17+$915.14)* 2.59%. This is a simplified example. As noted in IG 5.2.3.2, the equivalent level rate for the liability for future policy benefits is determined by solving for the discount rate that produces the same net premium ratio as would be produced if a curve were utilized.

Year 
Benefits 
Gross premiums 
1 (historical) 
$200.0 
$500.0 
2 (historical) 
208.8 
474.5 
3 (historical) 
216.1 
450.3 
4 (historical) 
222.2 
427.3 
5 (historical) 
227.0 
405.4 
6 (historical) 
276.9 
384.6 
7 (historical) 
280.1 
364.7 
8 (historical) 
282.2 
345.8 
9 (historical) 
283.2 
327.8 
10 
283.4 
310.8 
11 
282.8 
294.6 
12 
281.4 
279.2 
13 
279.3 
264.5 
14 
276.7 
250.6 
15 
273.5 
237.4 
16 
269.9 
224.9 
17 
265.9 
213.0 
18 
261.5 
201.8 
19 
256.8 
191.0 
20 
251.8 
180.9 
Total 
5,179.5 
6,329.1 
Present value (0%) 
$5,179.5 
$6,329.1 
Revised net premium ratio 

Present value of total benefits and expenses (for Years 120) 
(A) 
$5,179.5 
Present value of total gross premiums (for Years 120) 
(B) 
6,329.1 
Net premium ratio (A)/(B) 
(C) 
81.8% 
Updated estimate 

Year 
Benefits 
Gross premiums (A) 
Net premiums (A*81.8%) 
9 
$283.2 
$327.8 
$268.3 
10 
283.4 
310.8 
254.3 
11 
282.8 
294.6 
241.1 
12 
281.4 
279.2 
228.4 
13 
279.3 
264.5 
216.5 
14 
276.7 
250.6 
205.1 
15 
273.5 
237.4 
194.3 
16 
269.9 
224.9 
184.1 
17 
265.9 
213.0 
174.3 
18 
261.5 
201.8 
165.1 
19 
256.8 
191.0 
156.3 
20 
251.8 
180.9 
148.0 
Total 
3,266.2 
2,976.6 
2,435.9 
Present value (0%) 
$3,266.2 
$2,976.6 
$2,435.9 
Year 9 calculations (beginning of year) 

Prior estimate 
Updated estimate 
Change 

Present value of future benefits (for Years 920) 
$2,728.1 
$3,266.2 
$538.1 
Less: Present value of future net premiums (for Years 920) 
2,185.2 
2,435.9 
250.7 
Liability for future policy benefits 
$542.9 
$830.3 
$287.4 
Year 9 calculation (end of year) 

Present value of future benefits (for Years 1020) 
$2,983.0 
Less: Present value of future net premiums (for Years 1020) 
2,167.6 
Liability for future policy benefits 
$815.4 
Dr. Cash^{1} 
$44.6 

Dr. Benefit expense^{2} 
268.3 

Dr. Liability remeasurement loss 
287.4 

Cr. Premium income 
$327.8 

Cr. Liability for future policy benefits^{3} 
272.5 

^{1} Premiums collected of $327.8, less benefits paid of $283.2
^{2} Benefits paid of $283.2, less change in reserve of $14.9 using current net premium ratio of 81.8%
^{3} Liability remeasurement of $287.4, less current period change in reserve of $14.9

Present value of updated future benefits and related claim expenses @ 3% 
$1,200 
Less: Present value of updated future net premiums @ 3% 
(1,050) 
Liability for future policy benefits @ 3% 
$150 (A) 
Present value of updated future benefits and related claim expenses @ 3.2% 
$1,170 
Less: Present value of updated future net premiums @ 3.2% 
(1,030) 
Liability for future policy benefits @ 3.2% 
$140 (B) 
Difference (A)  (B) 
$10 
Dr. Liability for future policy benefits 
$10 

Cr. AOCI 
$10 
In no event shall the liability for future policy benefits balance be less than zero at the level of aggregation at which the reserves are calculated.
Excerpt ASC 94440307
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Select a section below and enter your search term, or to search all click Insurance Contracts