Follow-up on Targeted Improvements to Long-Duration Insurance Contracts

Submitted by Cynthia Braman on Wed, 08/16/2017 - 8:35am

FASB makes adjustments to accounting for long-duration insurance contracts.By Barry Wilhelm

FASB continues to redeliberate its proposals regarding the accounting for long-duration insurance contracts originally proposed in a September 2016 exposure draft.

At the August 2, 2017 FASB Board meeting, the FASB redeliberated the accounting for the liability for future policy benefits arising from nonparticipating traditional and limited-payment insurance contracts.  FASB decided to retain the retrospective catch-up approach for updating assumptions and to change the discount rate from a “high-quality fixed-income instrument yield” (interpreted to be an AA yield) to an “upper-medium graded fixed-income instrument yield” (interpreted to be an A yield).  The Board also decided that reporting entities could transition to the new standard using a prospective transition approach.  However, if certain necessary criteria are met, a retrospective transition approach may be used.

 

Retrospective Approach for Updating Assumptions Related to the Liability for Future Policy Benefits

FASB affirmed the following at its August 2 meeting:

  • Cash flow assumptions used to measure the liability for future policy benefits should be updated on an annual basis, at the same time each year, or more frequently in interim reporting periods if evidence suggests prior assumptions should be revised.
  • The impact of these assumption changes should be calculated on a retrospective “catch up” basis.
  • The provision for the risk of adverse deviation and the premium deficiency test should be eliminated for nonparticipating traditional and limited-payment insurance contracts and the net premium ratio capped at 100%.  Premium deficiency test would still be required for universal life-type contracts.
  • Reporting entities are permitted, but not required, to unlock expense assumptions, such as termination and settlement expenses,
  • For aggregation purposes, contracts from different issue years should not be grouped, but contracts within an issue year may be grouped, in order to calculate the liability for future policy benefits.

 

Discount Rate for Liability for Future Policy Benefits

FASB changed the following at its August 2 meeting:

  • Discount rate representing the “upper-medium grade fixed-income instrument yield” (interpreted as an “A” rate) should be used
  • Changes in the discount rate updated each accounting period through Other Comprehensive Income
  • Previously, FASB had proposed the use of a “AA” rate – this was very unpopular with respondents to the exposure draft.

 

Liability for Future Policy Benefits – Transition

FASB changed the following at its August 2 meeting:

  • Previously, FASB had proposed a cumulative catch-up adjustment to the opening balance of retained earnings at the transition date, unless impracticable
  • Reporting entities may now use a prospective transition approach, but with an option to elect a retrospective transition approach.

The FASB expects to continue redeliberating other targeted improvement areas.  No date has been set for adoption.

 

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