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Accounting for insurance contracts

Accounting for long-duration contracts of insurers

FASB’s new guidance will likely mean big changes for insurers

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Key findings from the insurance industry

PwC's US GAAP long duration targeted improvement survey 2018

Insurers are likely to face major changes as they implement FASB’s new standard on long-duration insurance contracts issued in August 2018. The new standard, ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts, is effective for calendar year-end public business entities (PBEs) on January 1, 2021; all other entities have an additional year. Early adoption is permitted.

The IASB issued its final comprehensive standard on insurance contracts in May 2017.

Quick update on what is changing

For long-duration contracts (principally life and annuity contracts), major changes are imminent due to the release of FASB's final standard, ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts.

The amendments revise key elements of the measurement models for traditional nonparticipating long-duration and limited-payment insurance liabilities, as well as the recognition and amortization model for deferred acquisition costs (DAC) for most long-duration contracts. In addition, the FASB has moved to a fair value model for all guaranteed minimum benefits that have other-than-nominal capital market risk. Significant additional disclosures will be required, including disaggregated rollforwards of the liability for future policy benefits, policyholder account balances, market risk benefits, DAC, and sales inducements. The guidance is effective for calendar year-end public business entities on January 1, 2021. All other entities have an additional year, and early adoption is permitted.

Due to the required modified retrospective adoption, insurers will need to begin to capture and retain additional data as early as January 2019. The implementation effort will require significant changes to systems, processes, and controls, and will likely require the accumulation of data that has not previously been captured and included in the actuarial models in the format and grouping needed for the measurement.

Watch our video on new accounting for long-duration insurance contracts

After more than a decade, the FASB published a new standard in August 2018 which provides for Targeted Improvements to the Accounting for Long-Duration Contracts. The new standard is only applicable for insurers and reinsurers. Despite the name "targeted improvements", the new standard has very significant impacts to the accounting for long duration contracts. There are four major changes in the new standard, which include: (1) the calculation of the liability of future policy benefits, (2) a simplified amortization method for deferred acquisition costs, (3) recording market risk benefits at fair value, and (4) enhanced disclosures. Watch our video for a quick walk through of each of these changes.

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