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Accounting Group May Put Off Life Insurers' Benefits Value Rollercoaster Rides

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The Financial Accounting Standards Board (FASB) today said it wants to give U.S. insurers more time before they have to get on a new financial reporting rollercoaster.

FASB has proposed postponing the dates when insurers will have to begin complying with a new set of FASB rules that affect accounting for “long-duration insurance contracts,” such as contracts for life insurance, long-term disability insurance, annuities and long-term care insurance.

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

  • For the biggest publicly traded insurers, the effective date could move back to January 2022, from January 2021, FASB says.
  • For smaller publicly traded companies, the effective date could move to January 2024, from January 2021.
  • For any other entities subject to the rules, the effective date could move to January 2024, from January 2022.

FASB Chairman Russell Golden said in a statement that the accounting standards group came up with the delay proposal after watching insurers trying to meet the original deadlines.

“We believe it will result in a higher-quality implementation for all,” Golden said in the statement.

Comments on the proposed rule effective date delays are due Sept. 20.

The Long-Duration Contract Accounting Rules

FASB published the rules that would be affected by the delay in 2018, in Accounting Standards Update 2018-12.

Under the ASU 2018-12 rules, an insurer is supposed to update the projected value of its insurance benefits obligations and product guarantee obligations once a year.

The insurer is also supposed to use a standardized “discount rate,” or interest-rate-related figure, to come up with the liability value projections, to avoid the temptation to use a homegrown rate that will make its projections look better than competitors’ projections.

An insurer is also supposed to take a “mark to market” approach to valuing product benefits that may vary along with investment markets, such as annuity guaranteed minimum income benefits, or a variable universal life no-lapse guarantee.

An insurer is supposed to include the change in projected benefits value in its net income.

The rules affect only the U.S. Generally Accepted Accounting Principles (GAAP) financial statements that publicly traded companies and some other companies put out in the United States. The new FASB rules do not have a direct effect on insurance company financial statements prepared using state insurance regulators’ Statutory Accounting Principles (SAP). Insurance regulators rely mainly on SAP accounting statements to assess insurers’ finances.

Why the Rules Are a Big Deal

U.S. life insurers, fraternals, and accident and health insurance issuers generated $38 billion in 2017 on total of about $848 billion in direct written premiums and annuity deposits and considerations, according to data from the National Association of Insurance Commissioners (NAIC).

The companies are responsible for trillions of dollars in insurance and annuity obligations.

Insurers tend to back long-duration obligations with investments in high-quality bonds. Yields on 10-year Treasury bonds fell to 2% on June 30, from about 2.7% Dec. 31, 2019. That means the amount of income an insurer can earn a $1 billion pile of 10-year Treasury bonds has fallen 25%.

The discount rates insurers use to value their insurance and annuity obligations tend to vary with interest rates.

If publicly traded life insurers have to apply even small discount rate assumption changes to small portions of their obligations every year, that could lead to billions of dollars of extra additions to, and deductions from, from life insurers’ total reported net income very year.

Why FASB Adopted the Long-Duration Contract Rules

Securities analysts, and analysts at rating agencies, have argued for years that murky accounting has hurt their ability to understand what’s happening to life insurer’ obligations for products such as long-term care insurance.

FASB says in a discussion of its effective-date-postponement proposal that it has heard the complaints.

“Investors and other financial statement users have consistently provided feedback throughout the duration of the board’s insurance project, which began in 2008, that the existing accounting model for long-duration contracts does not provide sufficient decision-useful information in a timely or transparent manner,” FASB says.

ASU 2018-12 is also part of a long-running FASB effort to have companies update the asset and liability figures in their financial statements regularly, rather than leaving the figures as is for years.

Some companies have already tried to update key benefits value assumptions on a regular basis. In the long-term care insurance market, for example, companies such as Genworth Financial Inc. and Unum Group regularly conduct LTCI benefits valuation assumption reviews, beef up reserves in response to the results of the reviews, and brief investors on the benefits value changes and reserve additions.

FASB says applying the ASU 2018-12 will lead to more consistency in benefits value measurements.

Why FASB Says It’s Delaying the Rules’ Effective Date

FASB officials say in the discussion of their delay proposal that they believe putting off implementation will help big, publicly traded life insurers put the changes in multiyear systems modernization efforts.

If the big insurers had to implement the new rules by January 2021, that would “result in short-term fixes that can be manual in nature and present an increased level of control risk,” FASB says. “Those short-term fixes would require additional implementation efforts beyond the effective date for companies to realize many of the benefits from the accounting changes.”

The smaller companies need more time because system design consultants and software vendors are too busy helping the big life insurers update their systems to do much for the smaller companies and nonpublic companies, FASB says.


Links to more information about the FASB accounting standards delay proposal is available here.

— Read GE Responds to Markopolos LTCI Reinsurance Reserving Criticisms, on ThinkAdvisor.

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