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Old 02-15-2019, 01:38 AM
genuinev genuinev is offline
Join Date: Feb 2014
College: Warwick University
Posts: 3
Default Waiver of Premium - US GAAP Reserve for Disabled Life


I have a technical question regarding how WoP should be treated under US GAAP. Hope someone could help me clarify.

Please assume the following:
- 3-year premium paying, 3-year TL policy that has waiver of premium feature.
- The 'expected' cost of waiver of premium is $10 per year, and this expected cost is modelled as reduction of gross premium. The gross premium charged to policyholder is $110, so the Premium Income will be $100.

Below is the 'expected' CF as at inception.
Year 1: Premium Income 100, Death Benefit 20
Year 2: Premium Income 100, Death Benefit 40
Year 3: Premium Income 100, Death Benefit 60

Benefit K, ignoring discount and BOY/EOY, will be (20+40+60)/(300) = 120/300

For this policy, benefit reserve at Y2 will be PV(Ben) - PV(Prem) * Ben K = 100 - 200 * (120/300) = 20 -> This benefit reserve takes into account 'expected' cost of waiver of premium as a deduction of premium (both reflected in Ben K by reducing Premium Income)..

Now, imagine this policy is 'in reality' waived of premium as at Y2.
Then, my benefit reserve at Y2 under US GAAP will still be 20, because it is all locked-in under USGAAP.

My question is, if this policy is waived in reality, should I hold a disabled life reserve for this policy?
It seems like holding benefit reserve of 20 only seem to be too small (because I know that I will not have future premium of 200), but also it could be argued that cost of waiver is already reflected in the premium, so it should be ok not to set up DLR when we look at the benefit reserve at a portfolio level.

Also, I would be grateful if you could share any website that discusses this topic if you know.

Thank you.
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dlr, us gaap, waiver of premium

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