The release of Financial Accounting Standards Board (FASB) Accounting Standards Update 2018-12, Targeted Improvements for Long-Duration Contracts (ASU 2018-12, also referred to as LDTI) has created a flurry of activity in the life insurance industry, as actuaries and other professionals try to interpret and apply the new accounting standard.
Among other major changes, the standard creates a new category of liabilities for “Market Risk Benefits” (MRBs), which must be held at fair value, as defined under existing GAAP standards. The definition of an MRB encompasses, among other possibilities, all kinds of guaranteed living benefits and guaranteed death benefits (GMxBs) on deferred annuity contracts, including both variable annuities (VAs) and fixed indexed annuities (FIAs). Under current, pre-LDTI GAAP, many kinds of GMxBs are valued under an insurance benefit model, with reserves calculated under a Statement of Position (SOP) 03-1 methodology and typically not using market-consistent assumptions. Thus, the new fair value MRB model represents a significant change for some products, with both financial and operational implications.
This paper by Milliman actuaries offers perspective that can help insurers as they shape their new valuation methodologies for MRBs on FIA contracts. The paper focuses on the cash flow modeling aspects of MRBs on FIA contracts, especially the methodology for projecting indexed account growth.