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.
- 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%.