Insurance — targeted improvements to the accounting for long-duration contracts

In August 2014, the FASB began its discussions of targeted improvements to the accounting for long-duration insurance contracts and tentatively decided that insurance entities should:

Update all assumptions they used to calculate (1) the liability for future policy benefits for traditional long-duration contracts, limited-payment contracts, and participating life insurance contracts and (2) the additional liability for universal life-type contracts.

Update those assumptions annually in the fourth quarter.

Recognize the impact of changes in assumptions in net income.

Not include a provision for adverse deviation in their calculation of the liability.

Not be required to perform a premium-deficiency test.

The Board also tentatively decided to require the following disclosures, presented on a disaggregated basis:

The liability balance and weighted-average discount rates used (presented in time bands) to measure that balance, along with any other significant information that affected the discount rates.

Quantitative and qualitative information about liability measurement methods and inputs, including separate disclosure of assumptions such as discount rate, mortality, morbidity, lapse, and expenses.

Rollforward reconciliation of the liability balances, separately indicating those amounts associated with new contracts, benefit payments, assumption changes, and contract derecognitions.

At its November 2014 meeting, the Board debated what discount rate an insurer should use when measuring a contract that, under existing U.S. GAAP, the insurer would discount by applying an expected investment yield. The Board tentatively decided that the discount rate used should be “based on a portfolio of high-quality fixed-income investments.”

In February 2015, the FASB discussed three alternatives for amortizing deferred acquisitions costs (DACs) for long-duration insurance contracts (including retention of current U.S. GAAP) and tentatively decided that DACs would be “amortized over the expected life of a book of contracts in proportion to the amount of insurance in force. When the amount of insurance in force is variable and cannot be reliably predicted or is otherwise not readily determinable, however, a straight-line method in proportion to the number of contracts outstanding would be used.”

At its May and July 2015 meetings, the FASB discussed how insurers should calculate and record the effects of annually updating the assumptions they use to measure the liability for future policy benefits under traditional long-duration insurance contracts.

After debating the merits of several alternatives, the Board tentatively agreed on a retrospective approach under which an insurer would use an unlocked net premium ratio (computed as the present value of future policy benefits divided by the present value of future net premiums). The insurer would (1) immediately recognize in earnings the effects of changes in cash flow assumptions and (2) initially record in other comprehensive income the effects of changes in the discount rate. Refer to the July 24, 2015, Deloitte Accounting Journal entry for additional details of the FASB’s tentative decision.

Next steps

On August 15, 2018, the FASB issued ASU 2018-12 Targeted Improvements to the Accounting for Long-Duration Contracts. For public business entities, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application is permitted.