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Actuaries Make a Case for Converged Insurance Standard in Comment Letter

The FASB’s recent decisions on its insurance contracts project have all but erased the prospect of a converged standard in U.S. GAAP and IFRS.The moves have also put the board on a path to do little more than make some targeted changes to insurance company accounting.In the view of the American Academy of Actuaries, the decisions mean the FASB is missing an important opportunity to improve the financial reporting for insurers.

The American Academy of Actuaries asked the FASB in a June 30, 2014, comment letter to move its proposed model for insurance accounting closer to the model the IASB is considering for its planned standard.

“The building block approach described in the exposure draft, with the inclusion of some critical changes outlined in our comment letter, provides the best opportunity for a high-quality accounting standard for long-duration contracts,” the actuaries wrote. “This approach would not only address key deficiencies within existing U.S. GAAP, but also would produce an essentially converged standard with IFRS.”

A FASB spokesman said in an email that the board’s policy is to not issue public responses to individual comment letters.

The FASB’s June 2013 Proposed Accounting Standards Update (ASU) No.2013-290,Insurance Contracts (Topic 834),offers two alternative accounting models.The building-block approach measures an insurance contract with a combination of the present value of its future cash flows and a profit margin that’s adjusted for the risks that the cash flows will vary over time.A second approach, called premium allocation, uses the premiums to measure an underwriter’s liability for the contract’s remaining coverage.

Earlier this year, the FASB abandoned much of what it had been considering from the proposal.The board decided to leave the accounting for short-term contracts largely intact.Some targeted improvements are being considered for long-term contracts, including life insurance and long-term care, but the board has all but given up on using either the building-block or premium-allocation approach.

The comment period for Proposed ASU No.2013-290 ended in October, and the actuaries submitted a comment letter by the deadline.The more recent letter was an effort to steer the FASB toward some specific changes the actuaries prefer.

The IASB, which expects to continue debating the responses to its Exposure Draft (ED) No. 2013-7,Insurance Contracts,through the end of the year, has settled solely on the building-block approach.

The actuaries wrote that if the FASB sticks with its current plan, it should make targeted changes to the guidance in Topic 944,Financial Services — Insurance,some of which dates back to the 1980s and 1990s and the publication of SFAS No. 60,Accounting and Reporting by Insurance Enterprises,SFAS No. 97,Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments,and SFAS No. 120,Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts—an amendment of FASB Statements 60, 97, and 113 and Interpretation No. 40.

The guidance from SFAS No. 60 should be expanded to make it clear that health insurance companies are covered by Topic 944, the actuaries said.

The actuaries also asked that more information be provided in financial statement footnotes when premiums aren’t enough to cover claims.More information should be provided about the assumptions used to estimate losses on long-term insurance contracts, including life insurance, disability insurance, and long-term care.If the premiums are fixed, but interest rates decline or claims increase sharply, GAAP doesn’t require insurers to report the losses right away.

The footnote disclosures are something of a low-cost compromise position in the view of the actuaries, who would prefer more extensive changes.

The comment letter also asks for a closer alignment of the valuation for the assets and liabilities in long-term policies.The assets are priced at fair value and move with interest rates.The liabilities are fixed on the balance sheet, and over time the relationship between the two numbers erodes.

“Right now, GAAP only shows half of the equation,” said Leonard Reback, who chairs the Academy’s Financial Reporting Committee, in a phone interview withAccounting & Compliance Alert.The investment assets can include 30-year bonds that are very sensitive to interest rates.

“The longer the contract the bigger the problem because the assets you’re buying to back the long-duration contracts are inherently longer term,” Reback said.

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