APPLICATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES TO ANNUITIES

Since the AICPA published its Audit Guide for Life Insurance Companies, a number of changes have taken place in the life insurance marketplace. Some of the nontraditional products now being offered by life insurance companies have called into question the definition of revenues as being related solely to premium income. Other items that could be used to allocate revenues (and profits) properly include sales loads, investment income, assets, or some combination of these items, either with or without premium income. This paper explores a reserving technique in which profits are recognized as a percentage of assets. This technique is applied to two hypothetical flexible premium annuity products. Examples are provided that show the emergence of profit when experience assumptions are met, and the effect on profit patterns when actual experience deviates from that assumed in setting the reserves.