The Financial Accounting Standards Board (FASB) issued changes to Accounting Standards Update (ASU) No. 2018-12, Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, which affects all insurers that issue long-duration contracts (e.g., life insurance, long-term disability, etc.). The changes to the ASU are intended to result in improvements to accounting records in the following ways:
1. A more current measure of insurance liability
In the new model, assumptions utilized in determining the liability for future policy holder benefits are required to be updated at the same time each year on at least an annual basis. This varies from the current model which only requires the insurer to update the assumptions if a triggering event occurs. These changes to the reporting updates will be applied retrospectively through current year earnings.
Furthermore, the new ASU will also standardize the discount rate used in determining the liability for future policy holder benefits with the effect of discount rate changes recorded immediately through other comprehensive income.
2. A more consistent measurement of market risk benefits
The ASU defines market risk benefits (MRBs) as “a benefit offered by an insurer that protects a contract holder from capital market risk” (e.g., investment losses due to market downturns). MRBs will be required to be accounted for at fair value, which must be recorded through other comprehensive income.
3. Simplified amortization of deferred acquisition costs
Deferred acquisition costs (DACs) will be required to be amortized on a straight line basis over the expected life of the contract. Additionally, amortization rates should be updated prospectively with DACs being reduced when actual terminations and lapses are greater than expected. By conducting this change, the interest accretion and impairment assessment will be eliminated.
4. Enhanced disclosures
The ASU requires significant additional disclosures for all insurance liabilities and DACs. The disclosures will include disaggregated rollforwards, qualitative and quantitative information about assumptions and estimates, and reconciliation to the carry amount of certain income statement activity.
For public business entities, these changes are effective for the Jan. 1, 2021, calendar year. For non-public business entities, the changes are effective for Jan.1, 2022, calendar year. Early adoption is also permitted.
If your insurance organization writes long-duration insurance contracts, you should begin evaluation of the impact of the changes on your internal processes, any internal controls over those processes and financial statement disclosures during the 2019 and 2020 calendar years to ensure you are prepared for implementation. We recommend consulting your Baker Tilly advisor on the impacts to your organization.
For more information on this topic, or to learn how Baker Tilly’s insurance industry specialists can help, contact our team.