Financial reporting for insurance companies that issue long-duration contracts will change under an accounting standard issued by FASB.
The targeted changes to the current reporting model affect accounting for companies that sell long-duration products such as life insurance, disability income insurance, long-term-care insurance, and annuities.
FASB issued the changes in Accounting Standards Update No. 2018-12, Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The new standard:
- Requires updated assumptions for liability measurement. Assumptions used to measure the liability for traditional insurance contracts, which typically are determined at contract inception, will now be reviewed. If there is a change, the liability will be updated at least annually, with the effect recorded in net income.
- Standardizes the liability discount rate. The liability discount rate will be a standardized, market-observable discount rate (upper-medium grade fixed-income instrument yield), with the effect of rate changes recorded in other comprehensive income.
- Provides more consistency in measurement of market risk benefits. FASB has cut the number of measurement models from two to one (fair value). This will create uniformity across similar market-based benefits and will better align with the fair value measurement of derivatives used to hedge capital market risk.
- Simplifies amortization of deferred acquisition costs. A more level amortization basis replaces the previous earnings-based amortization methods.
- Requires enhanced disclosures. These include rollforwards and information about significant assumptions and the effects of changes in those assumptions.
The standard will take effect in 2021 for public business entities for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2020. For all other entities, the standard will take effect for fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022.
Early adoption will be permitted.
FASB's work to improve accounting for insurance contracts began 10 years ago as a comprehensive convergence project with the International Accounting Standards Board (IASB). FASB later split with the IASB on the project and initially proposed a comprehensive new standard that would have introduced new accounting models.
After outreach to constituents, FASB decided that a more targeted approach was needed for insurance contract accounting.