As well as the standard libraries available as part of the Prophet system, there are also several additional modules available which contain extra functionality. The modules currently available are:
Introduction
A separate module is available for Prophet to produce the liability driven components of US GAAP reporting and projected revenue accounts and balance sheets. This has been designed in accordance with the US regulations for reporting by insurance companies on long duration policies.
The objective of GAAP is to produce adjusted accounts with a revised result ("GAAP net income") from the Profit & Loss account or "Income Statement". This GAAP net income should relate the incidence of profit to the provision by the insurer of policy benefits and services, by deferring some of the expenses and, if necessary, some of the premiums.
There are a number of reasons why results may need to be produced in accordance with the US GAAP regulations. These include:
- A desire to raise capital in the US
- A company has a US parent
- Attempted take-over bids with US involvement
- A wish to list a company's shares in the US
There are differences in the way the regulations have been implemented by companies based in the US and by companies based outside the US. In the US, the method normally used is to perform the calculations on a model cell basis rather than on an individual policy basis, with the model cells fixed when the business is sold and not updated from year to year. The approach outside the US is more typically to use an individual policy basis. In Prophet, both approaches are possible.
The US GAAP module can be used with the Conventional, French, German, International and Unit Linked libraries. It has been designed to integrate easily with existing tailored libraries. The functionality is included automatically in the North American library.
Features
Types of calculations available:
- FAS 60
- FAS 97 for limited payment contracts
- FAS 97 for universal life-type contracts
- FAS 120
- Purchase GAAP
Provisions for adverse deviation:
- Separate variables to enter the PADs for deaths, expenses, expense inflation, investment returns and lapses
- Applied by scaling up the underlying assumption by the specified amount
Choice (where appropriate) of the following amortisation bases for deferred acquisition costs and other items to be amortised:
- In proportion to premiums
- In proportion to estimated gross profit
- In proportion to estimated gross margins
Other features
- Loss recognition - standard variables use calculation looping to calculate the liability on a current realistic basis as well as the locked-in basis to determine whether a premium deficiency exists. Any premium deficiency will first reduce the DAC asset and then increase the liabilities
- Business cohorts - calculations at a cohort level can be carried out by using accumulations and performing the calculations in a Summary product
- Backwards projection of what a current portfolio of policies originally looked like, to calculate amortisation schedules over the whole life of the portfolio
- Shadow DAC - calculation of the balance sheet position on an alternative basis
Balance sheet items calculated:
- Benefit reserve (FAS 60, FAS 120)
- Value of units without funding (FAS 97 UL)
- DAC asset (FAS 60, FAS 97 UL, FAS 120)
- Deferred Profit Liability (FAS 97 LP)
- Terminal Dividend Liability (FAS 97 UL, FAS 120)
- Unearned Revenue Reserve (FAS 97 UL)
- Loyalty Benefit Reserve (FAS 97 UL)
- Debt item (unit deductions owed by policyholder) (FAS 97 UL)
- DAC / additional reserve loss recognition adjustment (all FAS)
- Purchase GAAP Value of Business Acquired (all FAS)
- All positions under Shadow assumptions (FAS 97 UL, FAS 120)
Methodology
General methodology:
- Indicators to specify that US GAAP calculations are required and to determine which type
- Calculations performed on an individual policy or grouped model point basis
- All future cashflows recalculated each time a run is carried out
Meeting auditing requirements:
- Index variable to specify the particular basis to be used, to meet locking-in requirements
- Definitions in the standard module set up to follow approaches which have already been proved acceptable to auditors
- Alternative definitions set up or switches created to allow easy use of the most common alternative approaches
- Supports a factor-based approach
Use of a factor-based approach
- Alternative formulas set up to allow tables of existing factors to be used if these are already available
- If tables of pre-calculated factors do not yet exist, Prophet can be used to produce the required factors
- Microsoft Excel template supplied which reads the necessary results and outputs the factors for use in subsequent runs
Projections of results:
- Revenue account and balance sheet items projected on the current best estimate GAAP basis without provision for adverse deviation
- Standard Microsoft Excel templates supplied to report on results
Summary library:
- The Summary library module can be used to report on and adjust the results from the underlying liability products
- This module is supplied automatically and free of charge when any other US GAAP library module is licensed
Documentation:
- Comprehensive on-line manual describing the main features and setting out the most important variables
- Extensive comments in the formulas describing how the various elements fit together
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What is Analysis of Movements?
Analysis of Movements is a separate module of Prophet. It consists of additional variables for the actuarial libraries which extend the calculations that can be made. The extensions to the calculations analyse the effect of policy movements over the period immediately prior to a valuation or model office projection.
Comparison of successive values over time often forms an important part of a reporting exercise. Such reconciliations are often produced under considerable time pressure. This module enables you to automate this process, significantly reducing the risks involved. However, once this has been implemented, the module can be used to drill down into the results to identify the areas of the company that are performing better or worse than expected.
What does Analysis of Movements produce?
Analysis of Movements enables you to verify your financial year results by analysing:
- The differences between actual and expected values arising from policy movements
- The movement in value over the inter-valuation period
- The effect of policy movements on projected cash flows and values
The analyses are produced in the same process and using the same calculations rules as you use for your valuations and projections.
Analyses can be produced as part of your end-of-year processes to analyse the effect of movements across the whole of the prior year. They can also be produced mid-year to analyse the effect of movements since the previous valuation. In this case, they seamlessly produce revised forecasts for the year as a whole and, if required, for the following years.
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Given the growing popularity of variable annuity-style products in markets around the world, we have been working on modules to allow these to be modelled using the iWorks Prophet libraries used outside of North America. We are pleased to announce that the release version of the variable annuity module for the Unit Linked and International libraries is now available. For both of these libraries this module includes the following features:
- Multi-fund functionality – each model point can invest in as many different funds as required, each with their own assumptions regarding growth, charges and deductions and with transfers between funds.
- Guaranteed Minimum Death Benefit (GMDB) – 6 options including return of premiums, rollup and ratchet.
- Guaranteed Minimum Withdrawal Benefit (GMWB) – choice of reducing fund or lifetime option, with optional bonus credits and ratchet.
- Guaranteed Minimum Accumulation Benefit (GMAB) – guaranteed percentage of premiums paid less withdrawals at flexible dates, with balance either paid to policyholder or added to fund.
- Guaranteed Minimum Income Benefit (GMIB) - based on a guaranteed growth in the underlying fund and guaranteed annuity rates at retirement.
- Annuity conversion - option for the fund to convert to an annuity or for the benefit to be taken in the form of a lump sum.
- Reserving - unit reserves, sterling reserves (U library only), value of the annuity element and reserve for the guarantees (percentage of fund or discounted costs less charges).
- Pricing - value at point of sale of the guarantee costs and charges, either using a fixed discount rate or a market-consistent approach.
This release version also includes online documentation for all the new features.
We have also started work on a module to model variable annuities within the ALS library and plan to release this module later this year.
Please note these modules are only intended for customers outside of the US as variable annuities have always been a standard product in the US library.
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Other products: Prophet - Life | Prophet - ALS | Prophet - General / P&C | Glean
