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Insurance Amendments Positioned for Third Quarter Release Despite Industry Complaints

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

The FASB plans to hold what Chairman Russell Golden believes will be the last public debate on its much-watched insurance accounting project in June. Golden said the board does not plan to reopen the debate on the method by which life insurers must update their cash flow assumptions, a central part of the plan that has been criticized by insurers.

Insurance companies are complaining that the FASB is making a mistake with its planned amendments for insurance accounting, but the board plans to wrap up its deliberations for the insurance project by June.

The FASB is scheduled to hold what FASB Chairman Russell Golden described as the last meeting on its much-watched insurance accounting project on June 6, 2018.

“If the board believes they have sufficient information, sufficient research, I will then ask for a final vote,” Golden told the FASB’s parent group, the Financial Accounting Foundation (FAF), at the foundation’s May 23 meeting in Washington. “It looks like it will be our final meeting on that project.”

The board last discussed insurance publicly in November and since then has focused on efforts behind the scenes. Insurance companies want the FASB to alter the amendments that are expected to appear in the final Accounting Standards Update, and have lobbied for the changes in meetings with FASB staff members and select board members. Several insurance companies and an industry trade group, the American Council on Life Insurers (ACLI), have written to the FASB in a last-ditch attempt to get the board to reopen debate on the project’s most contentious features. (See Two Insurers Question Proposed Changes to Guidance for Long-Term Policies in the April 23, 2018, edition of Accounting & Compliance Alert.)

Prudential Financial Inc. and Lincoln National Corp. told the FASB in an April 18 letter that the board has not done enough research or sought enough input to justify its planned changes. The insurers called out the board for not speaking to enough investors and securities analysts.

Massachusetts Mutual Life Insurance Co. on May 8 wrote that the board needed to address several “critical” issues before finalizing the update.

The FAF trustees asked the FASB about the industry complaints, including the board’s outreach to securities analysts and investors. FASB member Marc Siegel said the accounting board had done more than enough outreach to justify finalizing the amendments, which have taken more than 10 years of work and four draft versions to complete.

“Over those 10 years, I think we had over 450 comment letters, 150 individual meetings with users — and I think that’s even a conservative estimate,” Siegel said. “Throughout the project, we were getting a lot of outreach and navigating our way through it and changing course as a result of the feedback.”

The FASB issued an invitation to comment in 2007, an exposure draft in 2010, a second proposal in 2013, and then the latest set of proposed amendments in 2016.

The 2016 Proposed Accounting Standards Update (ASU) No. 2016-330, Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was dubbed “targeted improvements” after earlier drafts attempted to converge U.S. GAAP’s insurance accounting with the IASB’s guidance and called for major changes to accounting practice.

The 2016 proposal attempts to address long-standing complaints that existing accounting standards make the financial statements of insurance companies akin to a black box. The central criticism revolves around the relevance of insurance company financial details when current U.S. GAAP requires insurers to measure their liabilities using assumptions on investment returns, expenses, mortality, policy cancellations, and missed payments that are established when a policy is sold. For long-term life insurance policies, this means assumptions could be years or even decades out of date.

The proposal, which only applies to long-term insurance policies, such as life, annuities, disability, and long-term nursing home care, requires insurers to make current, updated measures of contract liabilities and to use a periodically updated discount rate to measure them. Insurer liabilities are the payments they have to make to policyholders.

Insurers have told the FASB that they agree with the central premise of the plan and that assumptions about their liabilities should indeed be regularly updated. But almost all have told the board they disagree with the method the FASB wants insurers to use for updating the liability estimates. The board says insurers need to use a so-called retrospective method to adjust the liability for future policy benefits for updated cash flow assumptions.

This method will require insurers to record changes in cash flow assumptions due to both actual experience, and expected future outcomes through net income, which could lead to volatility in insurance company earnings, MassMutual wrote to the FASB.

The ACLI also believes the FASB is mistaken with the liability estimates and wants to reopen the debate.

“We’ve spoken to scores of analysts and not one analyst thought this would be useful information to them,” said Michael Monahan, the ACLI’s senior director of accounting policy. “It’s a huge cost and huge effort, and none of the analysts we spoke to thought it would be helpful.”

Prudential CFO Robert Falzon said the FASB’s planned amendments would cause large movements in earnings that are unconnected to the economics of the policies.

“These are not issues around the edges,” Falzon said. “Our concern is that they’ve fundamentally got some of these things wrong, which is significantly adverse to this community.”

The FASB appears to be determined to keep the retrospective method in place. When asked by Accounting & Compliance Alert if the cash flow update method was up for debate at the June 6 meeting, Golden said the board’s research staff, which drafts the memos for public meetings, “right now is not recommending we redeliberate that.”

Golden also said he personally voted for the retrospective update method when the FASB debated it in 2017. While the FASB chairman, like all of the board’s seven members, has only a single vote in its decision-making, the chair tends to cast a vote that reflects a consensus view.

“I think that’s been a good process,” Golden said.

If the board completes its work at the June 6 meeting, the update to U.S. GAAP would be published in the third quarter of 2018, Golden said.

Siegel acknowledged that the insurance industry was in for a big change, despite the use of the phrase “targeted improvements” in the proposed version of the amendments.

“Targeted improvements means we sort of have a narrower set in mind of objectives,” Siegel said. “That doesn’t mean there’s not going to be an important, significant impact. It just means we’re dealing with fewer areas.”

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