At its meeting today, the FASB began discussing targeted improvements to guidance on 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 for future policy benefits for traditional long-duration contracts, limited-payment contracts, and participating life insurance contracts.
• Not be required to perform a premium-deficiency test.

In addition, the Board debated whether insurance entities should use an asset-based or liability-based discount rate to reflect the time value of money for the liability for future policy benefits. Some Board members believe that using a liability-based discount rate has more conceptual merit than using an asset-based rate (as is current practice under U.S. GAAP); however, they are concerned about the costs and complexity of deriving such a rate. The Board made no decisions and directed its staff to perform additional research to explore cost-effective, practical alternatives for deriving a liability-based discount rate.

Next Steps                                         

At a future meeting, the FASB will (1) resume deliberations related to discount rates, including whether a single rate or a yield curve should be used for discounting, and (2) decide what information insurance entities should disclose about their liability measurement (e.g., discount rate and assumptions used).