Accounting for insurance contracts

The FASB has been focused on making targeted improvements to the insurance guidance in US GAAP as part of two distinct projects, one focused on short-duration contracts and a second focused on long-duration contracts.

Video Perspectives

Hear PwC’s Anna Kajirian discuss some new FASB guidance affecting financial services companies - specifically, short duration insurance contracts, the NAV practical expedient, and collateralized financing entities.


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Short-Duration Contracts

  • The FASB issued ASU 2015-9, Disclosure about Short-Duration Contracts, in May 2015, which does not impact current accounting, but instead calls for enhanced disclosure. Disclosures include disaggregated incurred and paid claim development tables not to exceed 10 years (including the most recent reporting period presented in the statement of financial position; each period that precedes the current reporting period is considered to be required supplementary information); a reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for unpaid claims; disclosure of IBNR plus expected development on reported claims for each accident year in the development tables; quantitative and qualitative information about claim frequency; and additional qualitative information about liability estimates. The amendments are effective for public business entities for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. All other entities have an additional year to comply with the amendments. Early adoption is permitted.
  • A key objective of the disclosures is to provide transparent information about initial estimates and subsequent changes to those estimates to allow users to see how management’s estimates develop over time.
  • Based on questions from preparers, the AICPA Insurance Expert Panel has had informal discussions with the FASB staff on implementation questions, and is seeking input from the SEC staff about how to reflect the impact of acquisitions, dispositions, and foreign exchange translation in the required disclosures.
  • The enhanced disclosures for short-duration contracts will include information that has not previously been disclosed in US GAAP financial statements, including up to 10 years of disaggregated claims data. The new disclosures may require the accumulation and reporting of new and different groupings of claims data by insurers from what is currently captured for US statutory and other reporting purposes. Processes, systems, and controls will likely need to be updated to capture the data at a new level of detail and categorization.


Long-Duration Contracts

  • Although the FASB has decided to pursue targeted improvements to US GAAP rather than write a new comprehensive standard, the resulting differences from existing GAAP could still be significant for long-duration contracts.
  • From 2014 through the second quarter of 2016, the FASB made tentative decisions regarding targeted improvements to the accounting for long-duration insurance contracts. In August 2016, the FASB voted to proceed with the issuance of an exposure draft with a 75-day public comment period. An exposure draft was issued in September 2016, see our In brief for further information.
  • The significant decisions expected to be included in the exposure draft are as follows:

    – Cash flow assumptions used in determining the liability for future policy benefits for traditional long-duration, limited-payment contracts, and participating life insurance contracts would be updated on an annual basis (or more frequently if actual experience or other evidence indicates a need for revision). A provision for adverse deviation would no longer be required given that assumptions would be regularly updated. An insurer would retrospectively unlock the net premium ratio for cash flow changes and record the impact in current and future periods’ income, while the impact of changes in discount rates would be recorded immediately through other comprehensive income (OCI).

    – The legacy SOP 95-1/FAS 120 (subsequently codified into ASC 944) participating contracts model for participating life insurance contracts (both those issued by mutual insurance entities and those held in closed blocks of demutualized insurers) would be revised. Under the new model, the liability for future policy benefits would be calculated using a net level premium, but assumptions such as investment yields, mortality, lapse, and expense would need to be updated and it would call for the explicit inclusion of expected future dividend payment cash flows.

    – The discount rate used in the calculation of the liability for future policy benefits would be the rate of return on a reference portfolio of high-quality fixed-income instruments, as a proxy for a liability rate. This rate would be used for contracts that currently use an expected investment yield under existing GAAP. The discount rate would be updated on a quarterly basis.

– Fair value accounting would be required for guarantees with other-than-nominal capital market risk that are associated with variable products, such as those offered through separate accounts. The change in fair value relating to a company’s own credit risk would be presented in OCI, with the remainder of the change presented in net income. Under existing US GAAP, some market guarantees that are related to an insurance event or otherwise fail to meet the embedded derivative definition despite their market risk are accounted for under an insurance spreading model (SOP 03-1).

– The deferred acquisition costs (DAC) amortization method will be simplified. DAC would be amortized over the expected life of a book of contracts in proportion to the amount of insurance in-force, or on a straight-line basis if the amount of insurance in-force is variable and cannot be reliably predicted or is otherwise not readily determinable. In computing amortization, no interest would accrue to the undiscounted balance of capitalized acquisition costs and DAC would not be subject to a recoverability test.

– Additional disclosures will be required, including disaggregated rollforwards of liability balances and DAC, and qualitative as well as quantitative information about estimates and assumptions.

– The following transition provisions would be required:

  • retrospective application of the new measurement guidance for the liability for future policy benefits will be required as of the transition date (earliest period presented). If this approach is impracticable, the insurer would apply the guidance to those in-force contracts on the basis of the existing carrying amounts at the transition date and updated future assumptions.
  • retrospective application will be required for fair value measurement of market risk benefits, and
  • prospective application will be required for the provisions related to DAC. This means that existing DAC at the transition date would be retained, except that any accumulated other comprehensive income relating to “shadow DAC” adjustments would be reversed with a corresponding increase or decrease to the DAC balance


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