What is a shadow account for life insurance? The shadow account is a value that is calculated similar to a UL cash value. However, the shadow account has its own set of charges. As long as the net shadow account value is positive, the policy will stay in force regardless of whether the cash value is sufficient to cover the insurance charges.
What is shadow account ul insurance?
Shadow account UL was seen as the equivalent of a term life insurance product buried in a UL chassis. The shadow account UL product only required that the shadow account stay above zero in order for the policy to stay inforce.
What is a shadow account and how is it used?
Shadow accounts are, in fact, never used to determine cash surrender values–their only purpose is to determine whether secondary death benefit guarantees are in effect. Shadow accounts may use unique credited rates, cost of insurance factors and loads within this calculation.
What is shadow accounting under IFRS?
Because it allowed by the extension of local GAAP by IFRS 4 related to CFS (consolidated financial statements) for insurance companies, shadow accounting is a practice of accounting which is applied to account for insurance liabilities for insurance contracts with discretionary participation features.
What are the regulatory requirements for shadow accounts?
As the only regulatory requirement on shadow accounts involved the statutory reserving process under AG38, companies continued to get creative with shadow account designs, specifically the charges and interest credits for the shadow accounts.
How is deferred profit sharing determined?
What is shadow accounting?
What is shadow account?
Shadow account designs have prospered over the last decade as they provide a solution for those who want death benefit protection but may be too old to purchase term insurance or may not have the means to afford other types of coverage, such as minimum premium no lapse UL. Shadow account UL products are meant to be cost effective and allow the insured to determine the time frame over which they want the policy to stay inforce.
What does "lapse supported" mean in shadow account?
Furthermore, shadow account UL designs were seen as "lapse supported" which generally means that lower lapse rates decrease profitability. One would expect to see low lapse rates in a shadow account product, especially if the shadow account reaches a levelwhere premiums no longer have to be paid.
What is a minimum no lapse premium?
The minimum no lapse premium approach was seen as a way to help keep premium levels up in UL policies so that policies could persist through the early policy years. Most UL plans allow policy holders a flexible approach in paying premiums. Original UL policies (no
What is secondary guarantee universal life?
Secondary guarantee Universal Life (UL) product sales have been on the upswing for several years. Sales of these products have benefitted from lower cost structures and secondary guarantees that allow the product to stay inforce for longer periods than ever before.
Why are large companies better at shadow accounts?
Not only that, large companies can develop complex shadow account designs as they have the means to afford the cost of enhancing the various software systems used to market and administer shadow account UL policies.
What is the regulatory requirement for shadow accounts?
As the only regulatory requirement on shadow accounts involved the statutory reserving process under AG38, companies continued to get creative with shadow account designs, specifically the charges and interest credits for the shadow accounts. Regulators once again took notice as it appeared that some companies were trying to circumvent AG38 (and thus hold lower reserves) by manipulating the policy's design.
What is STOLL insurance?
Regulators have also been concerned about stranger owned life insurance (STOLl) which has made use of shadow account UL plans of late in a life settlement capacity. Life settlements, in theory, involves the sale of a life insurance product that is no longer needed by the insured for a price that is greater than the cash surrender value of the policy. The price that the insured received is mainly based on their perceived life expectancy, with lower life expectancy cases yielding higher prices. These policies are sold to investor groups.
Why do companies use stochastic analysis?
Increasingly, companies are conducting stochastic analysis to complement deterministic pricing of universal life and formulaic GAAP and statutory reserving standards. This analysis typically focuses on the interest rate risk inherent with the primary guarantees in the plan, but may include other key variables.
What is VUL life insurance?
The most recent life insurance product line in which guarantees have emerged is variable universal life insurance (VUL). These feature less competitive death benefit guarantees than under UL, but the gap appears to be narrowing. Reserving requirements for these guarantees were spelled out in Actuarial Guideline 37, which generally reflects an attained age level reserve methodology, along with a one-year term reserve. There is a unique provision in this guideline that allows companies to provide documentation in the state of domicile as to why the AG37 standard may be redundant.
What are the guarantees of universal life?
Basic guarantees provided in universal life (UL) plans include credited interest rate floors, cost of insurance charge maximums, static surrender charge schedules and expense charge maximums. Much in-force UL business was written in a higher interest rate environment than today's, with 4 percent or higher guarantees, and was not viewed as a corporate exposure when interest rates were in the high single digits or low double digits. One offset to the interest rate exposure was that multiple parameters could be adjusted by the life company, if necessary, to achieve target profitability. Asset hedging offers opportunities to reduce risks associated with a low interest rate environment, but few companies have pursued such programs because of the costs involved. In some situations, this has resulted in GAAP reserve adequacy problems for certain blocks of business as interest rates have dropped in recent years.
What is Regulation XXX?
Regulation XXX was implemented for various types of life business issued beginning January 1, 2000. This addressed flaws in unitary reserving methods as applied to some products. It imposed a humpback reserve requirement in basic reserve calculations over the guaranteed level premium period. It continued to require standardized mortality assumptions, based on the 1980 CSO Mortality Table, to be used with this methodology that had (in some cases) huge margins relative to expected mortality for certain classes of insureds. However, it allowed for individual company determination of "X factors" that were used to set mortality assumptions that were part of deficiency reserve calculations, providing some relief to companies.
What are the key variables in stochastic modeling?
Key variables include interest rates, funding patterns, mortality and lapses. There are a series of critical assumptions in performing such analysis, including mean reversion interest rate assumptions. Companies are spending much more time building models to understand exposures in this area, and as covered below, discussions are occurring as to whether a principles-based valuation approach should supplant the current formulaic standards.
What is corporate risk management?
Corporate risk management, which requires a sound understanding of the range of potential results relative to certain exposures, is increasingly critical. The ability to affect external capital solutions typically demands considerable sensitivity analyses at a minimum, and usually stochastic analysis. Key variables normally examined include interest rates, mortality assumptions, lapses and other factors that depend on the coverage under consideration.
When was the CSO table adopted?
Some further relief has been provided as the 2001 CSO table was adopted by the NAIC in December of 2002. However, even this updated table fails to recognize the benefits of modern underwriting techniques and distinctions in underwriting classifications beyond simple smoker versus non-smoker mortality differentials.
How is deferred profit sharing determined?
The deferred profit sharing is determined in two stages: 1. By allocating unrealized gains and losses on the assets to insurance contracts with participation features on the basis of a three-year historic average; 2.
What is shadow accounting?
Shadow Accounting may be defined as – An accounting adjustment to allow for the impact of recognizing unrealized gains or losses on related insurance assets and liabilities, in a consistent manner to the recognition of the unrealized gains or losses on financial assets that have a direct effect on the measurement of the related insurance assets and liabilities. For example, in the income statement or in the statement of changes in equity.
Shadow Accounts
- As long as the shadow account is greater than zero, the policy will stay inforce. This allowed companies to offer their clients a lower cost product and degree of flexibility not available in a minimum no lapse secondary guarantee UL. The shadow account approach made it easier to target (dial in) a desired no lapse period. Premiums could be structu...
Product Design
- The earlier designs of shadow account products in the new millennium saw higher charges imposed in the early durations of the policy as well as higher expense charges on premiums in excess of target. ART premium designs and multiple interest rate buckets were also popular. While minimizing the AG38 reserve is important, making sure that less profitable policy funding …
Future of Shadow Accounts
- For companies looking to get into the competitive shadow account UL market, there are many other considerations. Reinsurance coverage is critical as most companies have retention limits that would not allow them to issue higher face amount policies without reinsurance coverage. Early on, it was not uncommon to offshore the reserve strain and use a letter of credit (LOC) for t…
Summary
- The regulatory focus on shadow account UL products has been on the statutory reserve and making sure that it is of sufficient magnitude to eventually pay off the liability when the insured passes away. AG38 evolved from the original Guidelines XXX & AXXX which also sought to keep reserve levels sufficient to eventually pay off the liability. Nonetheless, the actual design elemen…