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Big Insurers Jump to Rally Around FASB’s Proposed Delay of Life Insurance Accounting Rules

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

By Denise Lugo

Some of the nation’s biggest life insurance companies have thrown their full support behind a FASB proposal to defer long-term insurance contracts rules by one year, a second delay in months some say would not benefit investors.

Metlife Inc., Aflac Inc., Cigna Corp., Great American Insurance, and Globe Life Inc. – in separate comment letters – moved early to laud the proposed delay on grounds it would minimize operational burdens of implementing the rules amid the COVID-19 crisis.

“An additional year to implement the standard will allow insurance companies to continue to progress under their implementation plans while exercising flexibility to react to the impacts of the COVID-19 pandemic on our businesses without compromising the quality of the implementation,” Mary Hoeltzel, vice president tax and chief accounting officer at Metlife, said in an August 7, 2020, letter.

COVID-19, the respiratory disease brought on by a new coronavirus strain, created a global and nationwide shutdown since March. Restrictions have been lifting in the U.S. though states differ in how it is being done.

Insurers said they are faced with persistent operational challenges brought on by the pandemic that forced them to reprioritize the business goals and timelines of many of their strategic and tactical projects.

The ultimate economic impact of the crisis is still unpredictable for insurers both here and abroad including in product development and distribution, Aflac said in an August 6 letter.

“Insurance companies such as ours with a significant international presence face added challenges of managing change in light of this unprecedented uncertainty in various international jurisdictions where pandemic trajectories may vary significantly,” June Howard, Aflac’s senior vice president and chief accounting officer, wrote.

Cigna, Great American Insurance, and Globe Life raised similar points.

Investors’ Concerns Flagged

The FASB on July 9 floated the delay under Proposed Accounting Standards Update(ASU) No. 2020-400, Financial Services—Insurance (Topic 944): Effective Date and Early Application, with an August 24 comment deadline.

Board academic, Christine Botosan, included a written dissent in the proposal, stating investors and policyholders waited long enough to get more transparent information about the sector. The rules have been in the works for over a decade, Botosan said. “During recent earnings calls, investors asked questions that would be specifically addressed by the new insurance guidance,” she stated in the dissent.

Botosan said it would ultimately harm investors and policyholders to have to wait until 2023 for large public companies and though 2025 for smaller ones before they can get information that is not old or opaque. “Investors and policyholders struggled to assess a) the longer-term effects of the pandemic; b) a prolonged period of low interest rates on the financial health of insurers,” she said.

The delay would harm the insurance sector because it struggles to attract investors and experiences a higher cost of capital due in part to poor quality in financial reporting, Botosan also wrote.

Specifically, the proposal would for the second time delay ASU No. 2018-12Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, from 2022 to 2023 for large public companies, from 2024 to 2025 for smaller reporting companies (SRCs), and from 2024 to 2025 for private companies and not-for-profit organizations. The first delay to the rules was granted in November 2019 after companies said they needed more time to adopt the changes which – though targeted – require systems to be overhauled.

The rules provide simpler and more transparent ways to report technical aspects of life insurance, disability income, long-term care, and annuity payouts.

In proposing the delay, a majority of the FASB said they recognized that investors will have to wait longer to get more decision useful information, particularly during a global pandemic and a prolonged period of low interest rates, but the wait would be worth it. Without a deferral, some companies, strapped for resources would not be able to implement the rules in a quality manner, highly important for the sector which investors typically find complex and challenging to figure out, most of the board said.

Insurance Advocates State Their Case

The American Council of Life Insurers (ACLI), a major advocate for the sector at large, met with FASB staff and also laid out the case for the sector in an August 4 letter.

The organization said insurance companies are experiencing significant business challenges that are causing strain on internal resources required for both effective implementation efforts and new critical business initiatives resulting from the pandemic.

“Companies have been evaluating expected delays in implementation efforts, specifically on actuarial and finance system build and testing, particularly in cases when they are reliant on third parties for assistance,” ACLI wrote. “Absent a deferral in the effective date, tight deadlines required by the ASU were in jeopardy as the pace of implementation activities have slowed significantly. Given the experience of many member companies over the last several months and recent indications that conditions will not improve soon, we have significant concerns in meeting the existing effective date without creating execution risk,” it states.

ACLI said while it acknowledges that the standard would ultimately enhance information for users of financial statements, large public life insurers continue to attract and retain investors and are able to provide transparency into the key drivers of their financial results through existing quarterly and annual financial reporting requirements.

“Many investors and analysts that cover the life insurance industry have acknowledged the challenges with implementing the ASU during this global pandemic and support the deferral proposed in this ED, so member companies can provide high quality and decision-useful information,” ACLI’s letter states.

 

This article originally appeared in the August 11, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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