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Life Insurers May Have to Disclose More Details About Liabilities

The FASB agreed that underwriters of long-term insurance policies will have to provide investors with more details about their future liabilities. The board’s decision marked its first significant progress for a project intended to make some limited changes to the accounting for life insurance and other long-term policies.

The FASB began its work on some limited changes to the accounting for life insurance and other long-term insurance policies at its August 27, 2014, meeting with a number of decisions regarding insurers’ treatment of the liability for future benefits they will pay.

If the changes the board approved are published as final amendments to U.S. GAAP, insurance companies will have to update the assumptions they use to calculate the liability for future policy benefits for traditional long-term contracts, limited payment contracts, and participating life insurance contracts during each year’s fourth quarter. Changes to the liability will have to be reflected in net income.

Board members want insurers to provide footnote disclosures about the liability and the assumptions they use to calculate it. The disclosures will have to include a breakdown of the balance of the liability and the weighted-average discount rates used in measuring the liability. Additional information about amounts and rates that significantly affect the discount rates will have to be included in the disclosure.

The disclosures will also have to include a breakdown of the quantitative and qualitative methods used to measure the liability. Insurers will have to provide the assumptions they used, such as the interest rate, or discount rate, they use to calculate the current value of future claims. Insurers will also have to say how they used estimates of policyholders’ mortality rates, the pace at which policies are expected to terminate or lapse, and the costs for servicing accounts.

The disclosures will also have to break down how insurers reconcile a liability’s opening balance with its closing balance. Separate disclosures will have to provide changes to the liability balance due to new contracts, benefit payments, changes in assumptions, and de-recognition of contracts.

The project to update the accounting for long-term insurance contracts is related but separate from project for short-term policies, which include property-and-casualty and health insurance. The project for short-term policies made significant progress on August 13, when the board decided to publish a final update to U.S. GAAP based upon Proposed Accounting Standards Update (ASU) No. 2013-290, Insurance Contracts (Topic 834), from June 2013.

The amendments the board approved call upon insurance companies to disclose more information about their estimates of the liabilities for short-term policies.

The changes to insurance accounting are intended to help investors, financial analysts, and rating agencies evaluate an insurer’s capacity to meet its obligations to policyholders.

The accounting changes for long-term policies and revised disclosure requirements for short-term policies were split into separate projects earlier this year. The FASB plans to evaluate the final amendments to insurance accounting the IASB produces based upon its June 2013 Exposure Draft (ED) No. 2013-7, Insurance Contracts, and determine if they’re suitable for U.S. GAAP.

Despite the decisions the FASB reached about some disclosure requirements, board members failed to agree on a method for calculating the discount rate. Board members seem all but certain to change the existing guidance in Subtopic 944-40, Financial Services — Insurance — Claim Costs and Liabilities for Future Policy Benefits, which bases the calculation of the liability on the insurer’s assets.

The board gave the issue an extensive debate, but the most it could produce was 4-3 decision to have its staff continue its research.

The staff recommended that the board vote in favor sticking with the guidance in Subtopic 944-40, partly because it’s the least expensive alternative.

Several board members, including Thomas Linsmeier, argued that a discount rate based on the liability was preferable, because insurers manage their assets to produce a return above their projected costs and the anticipated payouts for claims. Others said the insurance industry hasn’t established a consensus about using a discount rate based upon the liability. At one point, board member Lawrence Smith accused Linsmeier of engaging in “circular” reasoning and insisted that using a liability-based rate was inappropriate.

Marc Siegel said both the asset-based rate and liability-based rate are wrong, at least within the context the board was debating them, because the liability-based rate failed to take into account the cash flows from policy premiums and future benefits.

The debate appeared to frustrate all of the FASB’s seven members.

“We sat here for 20 minutes and debated what the perfect theory was, and I think we could do that for another 20 years,” Vice Chairman James Kroeker complained. He added that the purpose of the discussion was instead to come up with “targeted” improvements, and that the disclosures the board approved would go a long way to help investors understand whether a company’s discount rate was appropriate, regardless of the method used to set it.

At that point, FASB Chairman Russell Golden suggested that the staff do more research and look for a practical method for using a liability-based discount rate.

Both Smith and board member Harold Schroeder expressed skepticism that the staff would be able to produce a workable solution.

“I’ll vote with you, but with a time limit on it,” Smith said to Golden.

Schroeder simply wished the staffers “good luck.”

The FASB began its work on some limited changes to the accounting for life insurance and other long-term insurance policies at its August 27, 2014, meeting with a number of decisions regarding insurers’ treatment of the liability for future benefits they will pay.

If the changes the board approved are published as final amendments to U.S. GAAP, insurance companies will have to update the assumptions they use to calculate the liability for future policy benefits for traditional long-term contracts, limited payment contracts, and participating life insurance contracts during each year’s fourth quarter. Changes to the liability will have to be reflected in net income.

Board members want insurers to provide footnote disclosures about the liability and the assumptions they use to calculate it. The disclosures will have to include a breakdown of the balance of the liability and the weighted-average discount rates used in measuring the liability. Additional information about amounts and rates that significantly affect the discount rates will have to be included in the disclosure.

The disclosures will also have to include a breakdown of the quantitative and qualitative methods used to measure the liability. Insurers will have to provide the assumptions they used, such as the interest rate, or discount rate, they use to calculate the current value of future claims. Insurers will also have to say how they used estimates of policyholders’ mortality rates, the pace at which policies are expected to terminate or lapse, and the costs for servicing accounts.

The disclosures will also have to break down how insurers reconcile a liability’s opening balance with its closing balance. Separate disclosures will have to provide changes to the liability balance due to new contracts, benefit payments, changes in assumptions, and de-recognition of contracts.

The project to update the accounting for long-term insurance contracts is related but separate from project for short-term policies, which include property-and-casualty and health insurance. The project for short-term policies made significant progress on August 13, when the board decided to publish a final update to U.S. GAAP based upon Proposed Accounting Standards Update (ASU) No. 2013-290, Insurance Contracts (Topic 834), from June 2013.

The amendments the board approved call upon insurance companies to disclose more information about their estimates of the liabilities for short-term policies.

The changes to insurance accounting are intended to help investors, financial analysts, and rating agencies evaluate an insurer’s capacity to meet its obligations to policyholders.

The accounting changes for long-term policies and revised disclosure requirements for short-term policies were split into separate projects earlier this year. The FASB plans to evaluate the final amendments to insurance accounting the IASB produces based upon its June 2013 Exposure Draft (ED) No. 2013-7, Insurance Contracts, and determine if they’re suitable for U.S. GAAP.

Despite the decisions the FASB reached about some disclosure requirements, board members failed to agree on a method for calculating the discount rate. Board members seem all but certain to change the existing guidance in Subtopic 944-40, Financial Services — Insurance — Claim Costs and Liabilities for Future Policy Benefits, which bases the calculation of the liability on the insurer’s assets.

The board gave the issue an extensive debate, but the most it could produce was 4-3 decision to have its staff continue its research.

The staff recommended that the board vote in favor sticking with the guidance in Subtopic 944-40, partly because it’s the least expensive alternative.

Several board members, including Thomas Linsmeier, argued that a discount rate based on the liability was preferable, because insurers manage their assets to produce a return above their projected costs and the anticipated payouts for claims. Others said the insurance industry hasn’t established a consensus about using a discount rate based upon the liability. At one point, board member Lawrence Smith accused Linsmeier of engaging in “circular” reasoning and insisted that using a liability-based rate was inappropriate.

Marc Siegel said both the asset-based rate and liability-based rate are wrong, at least within the context the board was debating them, because the liability-based rate failed to take into account the cash flows from policy premiums and future benefits.

The debate appeared to frustrate all of the FASB’s seven members.

“We sat here for 20 minutes and debated what the perfect theory was, and I think we could do that for another 20 years,” Vice Chairman James Kroeker complained. He added that the purpose of the discussion was instead to come up with “targeted” improvements, and that the disclosures the board approved would go a long way to help investors understand whether a company’s discount rate was appropriate, regardless of the method used to set it.

At that point, FASB Chairman Russell Golden suggested that the staff do more research and look for a practical method for using a liability-based discount rate.

Both Smith and board member Harold Schroeder expressed skepticism that the staff would be able to produce a workable solution.

“I’ll vote with you, but with a time limit on it,” Smith said to Golden.

Schroeder simply wished the staffers “good luck.”

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