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Journal entry — Insurance project — FASB tentatively decides on method for calculating and recording the effects of updated assumptions related to long-duration insurance contracts

Published on: Jul 24, 2015

In previous deliberations, the FASB tentatively decided that insurers should annually update the assumptions they use to measure the liability for future policy benefits under traditional long-duration insurance contracts. At its meeting today, the FASB discussed how insurers should calculate and record the effects of their updated assumptions.

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.

Specifically, when the insurer updates its assumptions, it would calculate a revised net premium ratio by using its actual historic experience and its updated cash flow projections based on the revised assumptions, excluding the impact of changes in the discount rate. It would then (1) recognize a cumulative catch-up adjustment in earnings for the current period to adjust its liability for future policy benefits to the amount that would have been recorded had the revised net premium ratio been applied since contract inception and (2) accrue the liability for future policy benefits in future periods on the basis of the revised net premium ratio. The changes in the liability attributable to changes in the discount rate would be (1) recognized immediately in other comprehensive income and (2) reclassified to earnings over the life of the liability.

The Board will continue to deliberate its project on long-duration insurance contracts at future meetings.

Insurance project — FASB tentatively decides on method for calculating and recording the effects of updated assumptions related to long-duration insurance contracts Image

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