Accounting Group Postpones Major Life Insurer Rule Shift

One FASB delay affects long-duration contract obligations. Another affects what happens when investments go bad.

(Credit: Allison Bell/ALM)

The Financial Accounting Standards Board (FASB) has formally agreed to give life insurers more time to cope with new rules that could lead to insurers adding hundreds of millions of dollars in gains and losses to their net results just about every quarter.

FASB announced Friday that it has pushed back the effective dates for new rules for reporting on the value of long-duration insurance contract obligations, such as annuities, long-term care insurance benefits and long-term disability insurance benefits.

(Related: Accounting Group May Put Off Life Insurers’ Benefits Value Rollercoaster Rides)

Here’s how the Norwalk, Connecticut-based group has changed the effective dates for three groups of insurers:

FASB approved the long-duration contract rules in 2018, in Accounting Standards Update 2018-12.

ASU 2018-12 requires an affected insurer to update estimates of the value of the long-duration contract benefits it has promised whenever the insurer releases financial reports.

Because the value of benefits obligations is often much higher than an insurer’s annual premium revenue, even small changes in the projected value of the benefits obligations can be as big as, or bigger than, the insurer’s operating income.

Insurers told FASB that implementing ASU 2018-12 by January 2021 would be difficult.

FASB announced a rule delay proposal in August.

FASB members approved the proposal Oct. 16.

FASB Basics

In the United States, a ”public company” is a company with shares of stock that are held by more than 500 shareholders.

FASB oversees the U.S. Generally Accepted Accounting Principles (GAAP). U.S. public companies and some other U.S. companies use financial statements prepared according to U.S. GAAP rules to report on their performance to investors and lenders.

State insurance regulators have worked with the National Association of Insurance Commissioners (NAIC) to develop a separate system of accounting rules — the Statutory Accounting Principles (SAP) accounting standards.

ASU 2018-12 affects only the GAAP rules and GAAP financial statements. It has no direct effect on the SAP financial reports that insurers with state insurance regulators.

The Current Expected Credit Losses (CECL) Standards

FASB has also been implementing a major set of standards that will affect all companies but could have an especially big effect on life insurers: the Current Expected Credit Losses (CECL) standards.

The CECL standard will affect how companies handle the risk of the credit arrangements they have provided for other individuals or entities going bad.

Life insurers earn interest by making many ordinary loans to individuals and businesses. They also provide credit through investments in instruments such as notes, bonds and mortgage-backed securities.

The CECL standard will require life insurers and other companies to predict the odds that they will experience credit losses when they provide the credit. Companies will have to establish the reserves for the expected credit losses when the credit is in place.

FASB adopted the CECL standard in 2016, in Accounting Standards Codification 326, or ASC 326.

FASB announced a CECL standard delay proposal around the same time it announced the ASU 2018-12 delay proposal.

FASB has decided to continue to require big public companies, including big, public life insurers, to start complying with the CECL standard in January.

For smaller public life insurers, and for private life insurers, the effective date will move to January 2023, from January 2021.

Resources

Links to information about the FASB standards delay decisions are available here.

— Read Life Insurers Face Another Big, Hairy Accounting Shift, on ThinkAdvisor.

— Connect with ThinkAdvisor Life/Health on Facebook, LinkedIn and Twitter.

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