3.5 Long Duration Contracts

A long-duration contract or long-duration targeted improvement (LDTI) is one that is generally not subject to unilateral changes in its provisions and requires the performance of various functions and services, including insurance protection, for an extended period. Examples include contracts that are non-cancellable or guaranteed renewable by the insurer, such as most term and whole life insurance and payout annuity contracts.

According to the revised guidance, the non-participating traditional insurance contracts and limited-payment contracts that are measured using the net-level premium measurement approach are covered. Annual or more frequent updating of insurance assumptions is required, with the impact on the liability recognized on a retrospective catch-up basis as a separate component of benefit expense. There is no provision for adverse deviation. The net premium ratio is capped at 100%, which replaces the premium deficiency test. Contracts from different issue years will no longer be permitted to be grouped, effectively resulting in a lower level of aggregation for determining contracts in a loss position.

The discount rate is standardized to an upper-medium grade (low credit risk) fixed-income corporate instrument yield (single A) that reflects the duration characteristics of the liability rather than expected investment yields. The discount rate is required to be updated at each reporting date, with the effect of discount rate changes on the liability recorded in other comprehensive income (OCI). The contract inception date discount rate is locked in for benefit expense purposes.

For the LDTI transition, the application computes the Net Premium Ratio and Benefit Ratio in the following way:

• Net Premium Ratio: If the transition method is Full Retrospective, then the net premium as on inception is computed. If the transition method is Modified Retrospective, then the net premium as on the transition date is computed by using the net premium ratio formula that is configured against the Transition Date.
• Benefit Ratio: If the transition method is FullRetrospective, then the Benefit Ratio as on inception is computed. If the transition method chosen is modified retrospective then the Benefit Ratio as on the transition date is computed by using the Benefit Ratio formula that is configured against the Transition Date.