The Financial Accounting Standards Board (FASB) has completed new accounting rules that could give the public a better idea about what’s really going on inside life insurance companies, and, possibly, knock more insurance and annuity products off of financial professionals’ shelves.
FASB has published those new standards in Accounting Standards Update (ASU) 2018-12 — Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.
The standards, which are based on a draft released in September 2016, will affect any life insurer financial reports prepared using U.S. Generally Accepted Accounting Principles (GAAP).
The ASU 2018-12 drafters say they want to give investors timely information about what’s really happening to the projected value of the long-term benefits and guarantees insurers have sold.
Life insurance company representatives have argued that the new financial reports could scare investors away from the life insurance sector, and that complying with the rules will be difficult.
FASB is a Norwalk, Connecticut-based organization that manages the GAAP accounting standards.
U.S. GAAP rules have the most direct effect on U.S. companies that have sold stock to “public investors,” or ordinary investors. Publicly traded companies use GAAP rules when reporting on their performance to public investors.
The FASB changes will not have a direct effect on state insurance regulators’ own Statutory Accounting Principles.
But life insurers that are not public companies, such as policyholder-owned mutual life insurers, may prepare GAAP financial statements when they are communicating with lenders, or with potential buyers, or for other purposes.
That means the new FASB rules will have the most dramatic effect on the kinds of life insurers with shares that trade on the New York Stock Exchange, but that the rules could also have some effect on other life insurers.
What Products Are Affected?
The new GAAP standards will apply to U.S. insurers that offer universal life policies, participating life policies, whole life policies and term life policies, and to several related types of products: long-term care benefits, earnings protection benefits, and universal disability contracts, according to the ASU 2018-12 text.
The new GAAP standards will also apply to a variety of annuity product features, such as variable annuity minimum guaranteed death benefits, guaranteed minimum accumulation benefits, and guaranteed minimum income benefits.
What Does ASU 2018-12 Require?
The new ASU 2018-12 rules require an affected insurer to:
- Update the projected value of insurance benefits and guarantee liabilities at least once per year, by updating the assumptions used to create the projections.
- Use a standardized discount rate, or interest-rate-like figure, rather than its own, homegrown yield estimate, to create the liability value projections.
- Include the change in the value of benefits and guarantee liabilities in net income.
- Adopt a new reporting category for “market risk benefits,” or contract provisions, such as index annuity guarantees or variable life guarantees, through which an insurer protects the consumer from capital market risk by assuming the capital market risk itself, and apply “fair value” rules for measuring the value of those benefits.
- Give more information about the methods it uses to measure liabilities, and to make and change assumptions.
The rules won’t change how life insurers’ blocks of business are really doing.
But, if life insurers sold some of the business, such as universal life insurance, back when insurers’ investment yields were much higher than they are today, and the life insurers have not updated the interest rate assumptions used to value those liabilities, the new rules could lead to big increases in the reported value of the liabilities related to those blocks of business.
Pros and Cons
FASB Chairman Russell Golden said in a statement that the new update will provide investors and other financial statement users with better and more timely and transparent information about long-term contracts issued by insurers.
“Featuring targeted improvements to the current reporting model for these contracts, it reflects the input we received from diverse insurance industry stakeholders over more than 10 years of extensive outreach,” Golden said.
FASB says it has spent 10 years developing the standards, and that it held more than 150 meetings with financial statement users; 250 meetings with preparers, auditors, industry groups and others; and 13 group meetings with 60 users.
FASB said it also participated in 14 conferences with more than 150 users, and 13 public round table discussions, and that it reviewed about 450 comment letters.