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.
- The FASB has completed its redeliberations for short-duration contracts and issued ASU 2015-9 on May 21, 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 the number of claims and IBNR plus expected development on reported claims for each accident year in the development tables; quantitative and qualitative information about claim frequency; and adding additional qualitative information in 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.
- The FASB redeliberated possible targeted improvements to the accounting for long-duration contracts under existing US GAAP, and voted unanimously to unlock assumptions used in determining the liability for future policy benefits for traditional long duration contracts, limited-payment contracts, participating life contracts, and the additional liability for universal life-type contracts. The FASB subsequently considered how companies would unlock the assumptions and voted on a retrospective model where cash flow changes (assumptions) would be recorded in the income statement and the impact of changes in discount rates would be recorded immediately through other comprehensive income. The FASB had originally voted that assumptions would be updated annually during the fourth quarter, but in light of recent discussions, the board is expected to revisit this conclusion. Additionally, the FASB has discussed that the discount rate used to reflect the time value of money 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 investments.
- Most recently, the board also voted to require fair value accounting for all types of guarantees embedded in variable contracts that expose the insurance entity to other-than-nominal capital market risks. The staff is still discussing whether the change in fair value relating to a company’s own credit risk should go through net income or OCI. Another targeted improvement relates to simplifying the deferred acquisition costs (DAC) amortization method. The board voted unanimously that 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.
- 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.
- The enhanced disclosures for short-duration contracts will include information that has not previously been disclosed, such as ten 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 and systems will likely need to be updated to capture the data at a new level of detail and categorization.
Video: Insurance, NAV, and CFEs
12/07/2015
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.
In depth: Insurance-Q3 targeted improvements to long-duration contract accounting
06/24/16
The FASB is expected to propose significant changes to the accounting for long-duration life insurance in Q3 2016.
IASB/FASB Insurance Contracts Project - Meeting summaries
04/01/16
Insurers currently use a variety of different and largely inconsistent local approaches to measure the value of insurance contracts within their statutory financial statements. This diversity makes it difficult to compare companies and may fail to reflect the true economic value of insurance business, which can put insurers at a considerable disadvantage when competing for capital.
01/24/16
The FASB and IASB have been jointly deliberating insurance contract accounting with a goal of issuing a single, high-quality global standard on insurance contract accounting. CFOdirect offers a roundup of PwC’s reports and insights on the insurance contracts project.
12/07/15
Learn how new FASB guidance is affecting financial services companies.
In depth: FASB issues enhanced disclosure guidance for insurer claim liabilities
06/18/15
Enhanced insurance contract disclosures may create new and different reporting of claim data for insurers.
In brief: FASB issues enhancements to disclosure requirements for insurers
05/22/15
The short-duration insurance contract disclosures may create new and different reporting of claim data for insurers.
Point of view: Insurance contract accounting: The path forward
11/21/13
If a single global insurance accounting standard is not achieved, PwC believes the FASB should only make targeted enhancements to its existing standards.
PwC comments on FASB's proposed ASU: Insurance Contracts
10/28/13
PwC supports a converged standard. In the absence of a converged standard, we would support making targeted changes to current US GAAP.
09/12/13
The FASB and IASB issued exposure drafts related to insurance contracts that may change the accounting by non-insurers that sell fixed-fee service contracts.
08/14/13
The FASB and IASB issued exposure drafts that would fundamentally change the accounting by insurers and other entities that issue contracts with insurance risk.
