Tuesday, August 28, 2018

No. 284: The Financial Accounting Standards Board Announces New Accounting Guidance for Life Insurance Companies

On August 15, 2018, the Financial Accounting Standards Board (FASB) issued a press release entitled "FASB Improves Accounting Standards for Insurance Companies that Issue Long-Duration Contracts." The new Accounting Standards Update (ASU) has five major components: (1) it requires assumptions for liability management to be updated at least annually, with the effect recorded in net income; (2) it standardizes the liability discount rate; (3) it provides greater consistency in measurement of market risk benefits; (4) it simplifies the amortization of deferred acquisition costs; and (5) it requires enhanced disclosures. The press release is in the package offered at the end of this post.

The Effective Date
The ASU is so detailed that implementation clearly will require extensive work by the affected companies. Here is what the ASU says about the effective date:
For public business entities, the amendments in this Update are 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 of the amendments is permitted.
The ACLI Response
I sought the views of the American Council of Life Insurers (ACLI), the most prominent of the life insurance company trade groups. A spokesperson sent me an ACLI General Bulletin dated August 16, 2018, and ACLI's most recent comment letter to FASB. The letter, dated June 20, 2018, was over the signature of Mike Monahan, ACLI's senior director of accounting policy. The letter dealt for the most part with the effective date of the ASU. Here is the second paragraph of the letter:
We are writing to express our significant concern with the effective date decision made at the June 6, 2018, meeting, which gives public companies just over 2 years to implement. We do not believe this date is realistic and strongly urge the Board to reconsider their decision prior to the issuance of a final standard by extending the effective date for at least one additional year. We do not believe it is advisable for the Board to "wait" and see if preparers will be able to implement by this date and "later" consider potentially extending the effective date.
I have not seen the effective date decision made in June 2018. However, I believe that FASB denied the ACLI's request to extend the effective date for at least one additional year. I asked the ACLI whether my belief is correct. The spokesperson confirmed my belief. The August 2018 ACLI general bulletin and the June 2018 ACLI comment letter are in the package offered at the end of this post.

The NAIC Response
I also sought the views of the National Association of Insurance Commissioners (NAIC). In response, a spokesperson said:
The NAIC is aware of the recent news release from FASB. Much of the guidance is consistent with previous exposure drafts on the same topic. The NAIC, through its Statutory Accounting Principles (E) Working Group, will be reviewing it more closely in the near future to begin considering it for statutory accounting, consistent with what is described in the introductory paragraph of our most recent comment letter to FASB on the topic.
The spokesperson also sent me the most recent NAIC comment letter. The letter, dated December 12, 2016, was over the signature of Dale Braggeman. He is a staff person in the Ohio Department of Insurance and chairs the NAIC's Statutory Accounting Principles (E) Working Group. The NAIC's 2016 comment letter is in the package offered at the end of this post. Here is the introductory paragraph:
The Statutory Accounting Principles (E) Working Group of the NAIC is responsible for the development and enhancement of Statements of Statutory Accounting Principles (SSAPs) used by U.S. insurers in their statutory filings. Statutory Accounting Principles (SAP) presents an effective, comprehensive and understood approach, which has been built using the framework established by U.S. GAAP [Generally Accepted Accounting Principles]. Under the SAP process, all new GAAP issuances are considered and ultimately adopted, adopted with modification, or rejected. Although SAP may make some modifications, it is preferred to have minimal differences in accounting methodologies between SAP and GAAP, with as limited variations as possible to meet regulatory objectives. Consequently, proposals that significantly revise GAAP standards are a vital matter for U.S. regulators.
The Long-Term Care Insurance Connection
The regulatory implications of developments in the long-term care (LTC) insurance market have been well known for a long time. The departure of major companies from the LTC insurance market has been going on for many years. The problems at Penn Treaty festered for many years before the company was finally placed in liquidation last year. The problems at Genworth have been well known for a long time, and we still await final word on the proposed takeover of the company by a Chinese conglomerate. And then there was the General Electric fiasco in January 2018, when the company shocked the market by announcing it had to take a whopping $15 billion charge after ignoring for many years its growing liabilities on a legacy block of LTC insurance business.

We already know that the problems associated with LTC insurance are likely to cause major changes in the entire system of state guaranty associations. Now I wonder about the extent to which the problems associated with LTC insurance prompted FASB to move more rapidly with its long-planned ASU than it might otherwise have moved. After all, the first of the five major requirements in the ASU is that the companies must update, at least annually, the assumptions used in calculating their liabilities.

General Observations
I am not sufficiently familiar with life insurance accounting practices to comment on the full implications of the ASU. However, I believe that the changes will improve financial statements significantly and will be of great benefit to users of the statements. I also believe that the changes are so extensive that they will require enormous compliance efforts by the affected companies. It remains to be seen whether the companies will be ready to comply fully by the effective date.

Available Material
I am offering a complimentary 10-page PDF consisting of the FASB press release (2 pages), the ACLI general bulletin (1 page), the ACLI comment letter (3 pages), and the NAIC comment letter (4 pages). Email jmbelth@gmail.com and ask for the August 2018 FASB/ASU package.