How a Financial Services Distributor Sees the New Life Accounting Rules

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.

(Related: New Accounting Rules to Put Life Insurers on GAAP Reporting Rollercoaster)

“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.