GAAP Unlocking and the effect on reporting

[Bballry1234]

When you do GAAP unlocking (both retro or prosp) in year 3, for example, you don't change what you report for years 1 and 2. However, you need to recalculate the DAC from issue for all years to determine the DAC for years 3+.

So, if you were to use the reported year 2 DAC with the new k, you'd arrive at the wrong year 3 DAC.

So, you need to use your recalculated year 2 DAC from issue (even though it has no effect on reporting) to get the accurate year 3 DAC.

The effect of the unlocking = accurate year 3 DAC - year 3 DAC determined from new k and EGP and year 2 reported DAC.

Does this sound right?

NOTE: using page 223 and 174

[ACEManual]

What you are decribing is a retrospective DAC roll forward.

Another way to think about this is a prospective method. You unlock assumptions and true up, then recalculate DAC. The year value will reflect the change of assumptions. Prior year DAC values will not change since the company will not state past financial statements.

One thing to keep in mind is that K is always PV to time zero.

[Bballry1234]

Originally Posted by ACEManual

What you are decribing is a retrospective DAC roll forward.

Another way to think about this is a prospective method. You unlock assumptions and true up, then recalculate DAC. The year value will reflect the change of assumptions. Prior year DAC values will not change since the company will not state past financial statements.

One thing to keep in mind is that K is always PV to time zero.

Ah, I see this in the Table 7-3 spreadsheet. They apply 'k' to PV(future EGP) and get the same DAC as the retro method I described above. I prefer the prospective method, much easier haha. Thanks for clarifying on that. Just to make sure, prospective and retrospective always get you the same answer right?

As a follow up, on Table 7-4, they change the credited rate to 0.0525 in all future years (years 4+) and this carries forward to the EGP calculations. However, it doesn't seem to affect the credited rate (i.e. the discount rate) on DAC and PV(EGP) calcs (they use 6.5% for all years). Is this the norm? If you grab table 7-4 from the link below, this is easier to see:

http://www.soa.org/news-and-publicat...ce-detail.aspx

I thought that the .0525 would flow through on future DAC amortization, but the authors don't seem to handle it that way.

[ACEManual]

Retro and prospective will return the same answer, if you are doing it right.

For the DAC valuation rate you can use the intial credited rate or an updated credited rate.

[samiam1985]

Originally Posted by Bballry1234

As a follow up, on Table 7-4, they change the credited rate to 0.0525 in all future years (years 4+) and this carries forward to the EGP calculations. However, it doesn't seem to affect the credited rate (i.e. the discount rate) on DAC and PV(EGP) calcs (they use 6.5% for all years). Is this the norm? If you grab table 7-4 from the link below, this is easier to see:

http://www.soa.org/news-and-publicat...ce-detail.aspx

I thought that the .0525 would flow through on future DAC amortization, but the authors don't seem to handle it that way.

I haven't started studying for CSP yet (just had a kid so I did modules this sitting), but I've done a ton of work with DAC/URL/SOP intangibles so I guess I can maybe answer this. In general, the discount method chosen at "inception" of a k-cohort should be used until the asset/liability is run off. I've worked with groups of business that discount in all possible ways, but they will always keep the same method.

In the case that you're probably looking at (again, I don't have a book so I'm guessing as to the scenario) the valuation rate was set to the initial/current crediting rate and it was then determined to be a static valuation rate. This rate then becomes independent of fluctuations in the actual crediting. Another method would be to initially determine that the valuation rate will always match the crediting rate in each period. Either method is fine so long as you stick to it.

One thing worth noting on a variable type of block is that you probably want to utilize a constant rate instead of adjusting each quarter. The reason for this is you may run into a scenario in which you have a very large intangible balance and a current quarter crediting rate that moves +/- 20% every 3 months. That's variability you'd probably not want to explain to shareholders.