U.S. life insurance distributors are starting to wonder what the new Financial Accounting Standards Board rules for long-duration insurance contracts will mean for the life and annuity products on their shelves.
Larry Rybka, president of ValMark Financial Group, is one of executives watching the new FASB rules closely to see how the rules affect the supply of long-tailed products.
“The ‘surprises’ that have come in some life companies’ income statements, or the writedowns that occur when blocks of this long-tailed business are sold, provide something like this is needed,’ Rybka wrote in a comment on the new FASB rules.
But, at the same, the new accounting rules, and the underlying weaknesses the rules might reveal, could make finding products that offer any kind of long-term guarantee more difficult, Rybka said.
“The new accounting standards, and the hits the companies will take on reserving, are the reason for carriers jettisoning business lines,” Rybka said.
“This is a very difficult and technical topic, and off the radar of almost all producers,” Rybka said. “I think this change may be the biggest unreported story of 2018 for the life industry.”
“Historical Cost Accounting” v. “Mark-to-Market Accounting”
When the value of an asset, or a liability, changes, a company can take two different approaches: It can assume that the value of an asset is still the same as it was when the asset was purchased, and that the value of the life insurance benefits or annuity income promised is the same now as it was when the promises were made.
U.S. life insurers can usually use historical cost accounting for their liabilities, and they can use historical cost accounting for some bonds they plan to hold until the bonds mature.
European Union regulators have pushed insurers there to take a “mark to market” approach to reporting on both assets and liabilities, even when the results may be depressing.
Some European financial services companies have backed away from offering annuities, or even life insurance, in part because of worries about tough new European financial performance reporting rules.
Earlier this month, the U.S. Financial Accounting Standards Boards posted new accounting standards that will require publicly traded U.S. insurers to take a mark-to-market approach to valuing annuity guarantees, life insurance guarantees, and other benefits and guarantees promised by long-duration contracts. The new standards could affect products such as long-term care insurance, long-term disability insurance, annuities with any kind of guarantees, and permanent life products.
Rybka see he thinks the lack of insurer obligation value transparency has been making understanding the financial strength of life insurers difficult.
“Ratings having been tricky as a sole measure,” Rybka said. “‘Accounting surprises’ seem to happen with increasing regularity.”
The generally weak performance of life insurers’ stocks since the end of the Great Recession has been another cause for concern, Rybka said. He suspects stock performance may correlate with how much the new accounting rules will affect a company.
Even when a consumer buys coverage from an insurer in a group of strong companies, the group may sell or spin off the insurer from which the consumer bought the coverage, Rybka said.
Separate Accounts v. General Accounts
The apparent lack of transparency “reinforces our view of the importance of protecting policyholders with separate account products,” Rybka said. “If companies are under pressure and can change non-guaranteed elements of the contract, I would rather than trust equity markets than company intentions.
“Also in terms of protecting policyholders from an absolute downside, having cash values in a separate account provides protection. Guarantees are nice to have, but fewer carriers will offer them, and, as we have learned over and over again, a guarantee is only is as good as the guarantor.”
— Read Fitch Wants Insurers to Post More LTCI Performance Data, on ThinkAdvisor.