Targeted Improvements to the Accounting for Long-Duration Contracts: Product Implications

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Sep 21, 2018

Under the FASB’s long-duration targeted improvements, opening equity at transition, volatility of future earnings and the timing of profit recognition will change. What exactly should insurers expect?

 

The FASB’s recently released Accounting Standards Update 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts, will significantly change the GAAP accounting measurements (balance sheet and income statements) for traditional nonparticipating long-duration and limited-payment insurance liabilities, as well as the 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 (GMxB) that have other-than-nominal capital market risk.

Over the lifetime of a product cohort, accounting models will not affect the total profits earned. However, revisions from historical GAAP will impact the opening GAAP equity, as well as the projected profit emergence timing and potential earnings volatility. In this document, we discuss those potential impacts on and how they may vary by the following product groups:

  • Traditional Non-participating Life Products
  • Life Contingent Limited-Pay Contracts
  • Long-Term Care
  • Participating Whole Life
  • Universal Life Products
  • Fixed Deferred Annuities and Fixed Indexed Annuities without GMxB
  • Variable Annuities and Fixed Indexed Annuities with GMxB

In order to effectively transition to and then use the new standard, we recommend the following course of action:

  • Implementers of ASU 2018-12 should continue to evaluate their accounting policies, system capabilities, and control procedures in order to gauge the impact the new standard will have on their products.
  • Opening equity at transition, volatility of future earnings and the timing of profit recognition will change and will be directly affected by the transition approach companies choose for existing business. All of these indicators are extremely important and will need close monitoring.
  • Delving into the specific drivers of change will provide an increased understanding of 1) the transition and ongoing financial implications of accounting policy choices and 2) how they may impact management decisions, product design and risk management strategies.

 

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Matt Adams

Matt Adams

US Insurance Practice Leader, PwC US

David Schenck

David Schenck

US Insurance Tax Leader , PwC US

Richard de Haan

Richard de Haan

Global Actuarial Leader, PwC US

Mary Saslow

Mary Saslow

Managing Director, National Professional Service Group, PwC US

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