Unit Linked Insurance

[musema]

I am trying really hard to get my head around how unit linked insurance is accounted for and its presentation in the FS. The issue is around the fair value of the unit linked reserves in the P&L.

1) The premiums go to the PL as revenue net of reinsurance premium ceded
2) Claims, Underwriting and other operating expenses as expense
3) Policy fees received on pure investment plans as income + reinsurance commission + fund management fees
4) now we have these FSLI - fair value gain/loss, Change in reserves for unit linked liabilities.

The fair value gain/loss is the opening actuarial unit linked asset + premiums in - claims paid - policy fees +/- (market movements) = closing actuarial closing unit linked reserve.

And the change in reserves for unit linked liabilities is opening actuarial unit linked liability - closing actuarial unit linked liability. So the difference between these two figures is the increase/decrease in liability.

Is this approach correct.? These create huge losses to be adjusted thru the PL distorting the bottom line.

Let me know if you require more details.

Regards

 

[bklynboy]

Which country's accounting basis are you referring to? Also, are these separate account policies (meaning investment experience is directed by the policyholder) ?

I am familiar with the accounting for unit-link under US GAAP, which is different than how you are explaining it. Under US GAAP, unit-linked policies are accounted for under FAS 97 which records all amounts as a component of the policyholder account balance. This means, premiums increase the liability, claims reduce the liability and any investment experience (including MTM) increases the liability. It is all balance sheet and there is no P&L impact outside of the fees and insurance charges deducted from the account value.

If you provide more detail I will try and help with your question.

 

[musema]

Sorry couldn't reply on this earlier. I am in the UAE and we report on IFRS. IFRS stipulates distinction to be made between insurance and investment contracts. In case of investment contract it should accounted using IAS 39, while for insurance it should be IFRS 4. Although ifrs 4 isn't very clear we refer to uk gaap for that, but only for balance sheet classification. How should the p&l be treated? ?

 

[bklynboy]

IFRS is not my strong area as I am a US based company. I do have a few international subsidiaries that follow IFRS and my understanding is as follows (I assume you are only discussing unit-links sold and not where your company has purchased units).

A unit-linked contact is one where some or all of the benefits are determined by the price of units in an internal or external investment fund. Therefore, unless a risk component or another guarantee qualify them as insurance contracts (including a guaranteed minimum death benefit for instance), such unit linked contracts are classified as pure investment contracts, and IAS 39 must be applied. This is what we do at my international subs and only classify as investment products.

Unit-linked assets and liabilities are presented as separate line items in the balance sheet (generally at FV) and not co-mingled with the insurer’s other assets and liabilities. On the P&L the only item that you would have is fee income as premiums, reserves and claims are adjustments to the liability balance as recorded under deposit accounting.

Note that IFRS is not my strong area so I suggest you look at the internet and research the specifics. Wish I could be more help.

 

[musema]

Okay i got my head around US GAAP and we are going top follow FAS 97 for accounting unit linked contracts. The question now is how to account for something known as actuarial under funding?

 

[bklynboy]

Can you be more specific what you mean be actuarial underfunding?

 

[Leandro C. Fua]

IFRS is not my strong area as I am a US based company. I do have a few international subsidiaries that follow IFRS and my understanding is as follows (I assume you are only discussing unit-links sold and not where your company has purchased units).

A unit-linked contact is one where some or all of the benefits are determined by the price of units in an internal or external investment fund. Therefore, unless a risk component or another guarantee qualify them as insurance contracts (including a guaranteed minimum death benefit for instance), such unit linked contracts are classified as pure investment contracts, and IAS 39 must be applied. This is what we do at my international subs and only classify as investment products.

Unit-linked assets and liabilities are presented as separate line items in the balance sheet (generally at FV) and not co-mingled with the insurer’s other assets and liabilities. On the P&L the only item that you would have is fee income as premiums, reserves and claims are adjustments to the liability balance as recorded under deposit accounting.

Note that IFRS is not my strong area so I suggest you look at the internet and research the specifics. Wish I could be more help.

Hi! I am working for a corporation and our company purchased unit linked insurance for some of our VIP's. I am not sure whether to book this as an expense or as an investment, can you help me with find the correct IFRS to support my entries.

I also want to know if I can use cost of the ULP Insurance as tax deduction?

Thanks

 

[bklynboy]

I am more of a GAAP expert and for GAAP you record an asset for the cash surrender value. Any difference is then reflected as an expense. Idea is that to teh extent the policy has cash value you have an asset on teh balance sheet.

Not familiar with tax consequences.