FASB Proposes New Rules on Long-Term Insurance Contracts

By:
Chris Gaetano
Published Date:
Sep 30, 2016
Contract

The Financial Accounting Standards Board (FASB) released a proposal intended to improve financial reporting of long-duration insurance contracts such as life insurance, disability income, long-term care, and annuities.

Under the new rules insurance entities would update their assumptions used to measure future cash flows at least once a year, and the discount rate assumption at each reporting date. The effects of these updated assumptions would be calculated and recorded using a retrospective approach when updating cash flow assumptions and an immediate approach when updating discount rate assumptions. Insurance entities, further, would discount expected future cash flows at a high-quality fixed-income instrument yield maximizing the use of market observable inputs. They would no longer test for risk of adverse deviation and premium deficiency. Whether or not to establish a liability in addition to an account balance for insurance benefits would he performed annually, rather than at contract inception. 

They would also measure all market risk benefits at fair value; the portion of any changes in fair value attributable to changes in the instrument-specific credit risk would be recognized in other comprehensive income. 

In addition, deferred acquisition costs that, today, are amortized in proportion to premiums, gross profits or gross margins would instead, in the interests of simplicity, be amortized in proportion to the amount of insurance in force or, if this amount cannot be reasonable estimated, on a straight line basis. Further, deferred acquisition costs would not be subject to impairment testing. 

Finally, there would be more disclosures. Insurance entities would need to provide disaggregated rollforwards of the beginning to ending balances of the liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities and deferred acquisition costs. They would also have to disclose quantitative and qualitative information about significant inputs, judgments and assumptions used in measurement, as well as all changes in them that took place and the effect of those changes on the measurement. 

“During outreach on our project to consider potential improvements to the insurance accounting model, stakeholders identified specific areas of financial reporting related to long-duration contracts that could be improved,” stated FASB Chairman Russell G. Golden. “Based on that feedback, the Board developed the proposed ASU, which sets forth recommended, targeted improvements to enhance the quality of information provided to investors about these contracts.”

Comments are being accepted until Dec. 15. 

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