FAS 60

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FAS 60 , official Statement of Financial Accounting Standards No. 60 , denotes an accounting standard issued by the Financial Accounting Standards Board that deals with the accounting of insurance contracts. This US GAAP standard is also of interest to non-US insurance companies, provided their shares are listed on a US stock exchange or they apply US GAAP in the context of an IFRS financial statement in accordance with IFRS 4 . In addition to FAS 60, there are essentially two other insurance standards, FAS 97 and FAS 120 .

background

With FAS 60, a separate standard for the accounting of insurance contracts was issued for the first time in June 1982. This standard is therefore more general, while the standards FAS 97 and FAS 120, which were added later, address more specific topics or types of contracts. For this reason, the more recent standards occasionally refer to FAS 60 and individual procedures that are not explicitly mentioned there are generally followed in accordance with the older standard.

Calculation bases

According to FAS 60, the actuarial interest rate, biometric calculation basis, cancellation probabilities and the costs incurred are taken into account as the calculation basis. These are actuarially estimated from past experience as a best estimate and given safety allowances or discounts.

Discount rate

The discount rate used is estimated when the contract is concluded as the net return on the insurance company's investments minus safety margins, taking into account trends, asset mix and spread and remaining terms.

biometrics

Current mortality and disability probabilities are to be used for the biometric calculation basis, whereby selection effects and differentiating features such as gender or age are to be taken into account. If possible, company data should be used, but industry tables are permitted.

cancellation

According to FAS 60, cancellation must be explicitly included in the calculation. Company-specific experiences should also be included here, but industry data can also be used.

costs

When considering the costs in the calculation, all recognizable developments over the course of the costs should be included. According to FAS 60, the costs incurred are recorded as expenses. There is only the option of activation for the acquisition costs. The capitalized acquisition costs can be found as DAC in the balance sheet and are repaid over the term of the contract. When calculating the item, the calculation bases for the actuarial reserve must be used.

Lock-in principle

The selected calculation bases are fixed and are generally to be applied for the entire term ( lock-in principle ). However, it must be checked regularly whether the gross contribution has been sufficiently determined to be able to meet future benefits ( loss recognition test ). The present value of the future gross contributions and the actuarial reserve reduced by the DAC are deducted from the present value of the future benefits including the regulatory and other costs. If the difference is negative, there is no need for action, otherwise the calculation bases must be adjusted, which affects both the DAC and the actuarial reserve. In practice, when making the adjustment, the DAC is usually written off first before there is an increase in the actuarial reserve that affects expenses.

Bonuses and benefits

According to FAS 60, the gross premium ( gross premium ) can be broken down into individual parts. A distinction is made between four parts:

  • Net premium - portion to cover the services including regulatory costs
  • Repayment premium - portion of the repayment of the unpaid acquisition costs (DAC)
  • Cost premium - portion to cover the other costs (mainly administrative costs, ongoing closing costs, taxes, etc.)
  • Profit surcharge

There is also the reserve premium, which indicates the proportion with which the actuarial reserve is calculated. It is the sum of the net and cost premium. The calculation bases of the actuarial reserve are used for the calculation.

The premiums are recognized in profit or loss when they are due. In practice, in the USA, profit shares to increase insurance benefits that result from profit sharing and annuity accumulation credits are also added.

Actuarial reserve

To determine the actuarial reserve, the reserve premium must first be determined. This results from the gross premium multiplied by the ratio of the present value of the future benefits plus the present value of the other future costs and the present value of the future gross premium. In addition to the reserve premium, the repayment premium and the gross profit are also proportional to the premium.

The actuarial reserve can then be calculated prospectively as the difference between the present value of future benefits and the present value of future reserve premiums, although a retrospective calculation is also possible. In contrast to German practice, the actuarial reserve is undeveloped .

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