The Financial Accounting Standards Board (FASB) says it wants to postpone the compliance deadlines for a major new batch of accounting rules.
The move could affect financial reports for life insurance policies, annuities, long-term disability insurance policies, long-term care insurance policies, and many other “long-duration insurance contracts.”
The announcement of the shift, which came out Wednesday, may have led many financial professionals to squint at their screens, briefly, and then click on the link to the weekend weather report.
But, over the next few years, what happens to FASB Accounting Standards Update 2018-12 could have effects on life insurance agents and brokers that will last a lot longer than the effects of this weekend’s weather.
Here are five things for financial professionals to know about the proposed ASU 2018-12 delay.
1. This is mainly about how much Wall Street investors smile at, or yell at, publicly traded life insurers.
All U.S. life insurers prepare financial statements according to state insurance regulators’ Statutory Accounting Principles.
Life Insurers that sell stock or bonds to the public — in other words, use, or have used, money from ordinary investors to finance their activities — also prepare financial statements according to FASB’s U.S. Generally Accepted Accounting Principles (GAAP) rules.
Today, under GAAP rules, life insurers record how much they think the benefits they have sold will be worth when they sell policies. They normally can leave those estimates in place until the policy lapses, or they pay the benefits.
Under the ASU 2018-12 rules, life insurers would have to give investors annual updates on how think the value of the benefits they have promised has changed. A life insurer would put the changes on its “bottom line” — in the net income figure.
Because the value of the total promised future benefits is usually bigger than a life insurer’s annual revenue, and much bigger than the life insurer’s annual net income, even a 1% cut in the estimated value of the future benefits could lead to big cut, or a big increase, in net income.
The new FASB proposal announced Wednesday could put off the ASU 2018-12 compliance deadline for the biggest publicly traded life insurers to January 2022, from January 2021.
For other affected life insurers, the compliance deadline could move to January 2024, from January 2021, or to January 2024, from January 2022.
2. The proposed deadline change is just a proposal.
FASB is asking for public comments on the proposal. Comments are due Sept. 20.
FASB plans to post the comment letters online. The link to the comment letter folder will likely appear here, with a title that includes the term “long-duration contracts.”
3. The delay could affect your ability to know how well life insurers are prepared to make good on promises to you and your clients.
State guaranty associations offer limited protection for policyholders against the effects of life and health insurer failures. The guaranty associations do not protect agent and broker compensation.
Rating agency analysts and securities analysts have complained for years that each life insurer handles reporting on its insurance and annuity obligations differently, and that knowing what’s really going on inside insurers is difficult because of the lack of clear information about the value of benefits obligations.
4. Implementing the regulations could give you, clients and investors a distorted picture of how life insurers are doing.
Publicly traded life insurers have had frozen, non-mark-to-market valuations of promised benefits in their financial statements for more than 100 years. Many of them have been in business, in more or less the same form, using similar-looking financial statements, since before Teddy Roosevelt was president.
New ups and downs from benefits value updates could make life insurer net income go up and down more without making the companies any more volatile than they were before the new rules took effect.
In some cases, the new rules could make life insurers’ net income figures look like a car alarm that goes off so often that everyone ignores it.
Other accounting rule changes, for example, now require life insurers to mark derivatives holdings and other holdings to market in a new way. In the first quarter, of this year, marking derivatives to market led to Brighthouse reporting a $1.3 billion derivatives loss for the first quarter, and contributed to a $735 million net loss, on $691 million in revenue.
Securities analysts did not bother to ask Brighthouse executives about the derivatives loss during the company’s quarterly earnings call. Investors were so uninterested in the net loss that it had little apparent effect on the company’s share price.
5. Implementing the regulations could reduce publicly traded life insurers’ interest in offering products with long-term guarantees.
When executives at publicly traded life insurance companies hold quarterly earnings calls, they often talk to security analysts about how well they have managed to limit sales of annuities that come with living benefits guarantees.
Some talk about how successful efforts to use benefits buyback offers and other strategies to shed the long-term guarantee risk associated with universal life guarantees.
Implementing ASU 2018-12 could further increase pressure on life insurers to move toward selling products such as investment-only variable annuities, dental insurance, vision insurance, and short-term health insurance that involve few or no long-term benefits guarantees.
— Read New Accounting Rules to Put Life Insurers on GAAP Reporting Rollercoaster, on ThinkAdvisor.