Long-Duration Contracts Issued by Insurance Entities Accounting Issues

Identified Implementation Issues for Targeted Improvements to the Accounting for Long-Duration Contracts

Below is a list of potential implementation issues related to FASB ASU 2018-12: Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, identified by the Insurance Expert Panel. The list will be updated as the Insurance Expert Panel continues its discussions. Full implementation issues will be posted below for informal comments after review by the AICPA Financial Reporting Executive Committee (FinREC).

Staff Contact: Kim Kushmerick, kim.kushmerick@aicpa-cima.com

Issue Number


Description of Implementation Issue

Status

1

Claim Liabilities - Claim reserves associated with long duration traditional insurance contracts. Questions related to the interaction of the active life reserve, and disabled life reserve; including:

a)    Under FASB ASU 2018-12, would an insurer be required to continue to account for these long duration traditional insurance contracts as being comprised of two liability measurement components (i.e. two separate units of account for measurement purposes for a single legal contract/cohort)?

b)    When an entity has elected to present the incurred claim component of the liability measurement separately from the liability for future policy benefits as a claim liability, are changes in the estimate of claim cost amounts and/or timing relating to the claim liability required to be reflected as an adjustment to the cash flows used in the net premium ratio, which is used in the calculation of the liability for future policy benefits for claims?

c)     When an entity has elected to present the incurred claim component of the liability measurement separately from the liability for future policy benefits as a claim liability, what is the appropriate discount rate for discounting claim liability cash flows? In addition, should the claim liability be remeasured using current rates each period with the impact of the change recorded through OCI, consistent with the remeasurement required for the liability for future policy benefits?

d)    Transition considerations: How would an entity adopt the above guidance at the transition date for existing transactions if the modified retrospective transition method is selected (i.e., using the guidance in FASB ASC 944-40-65-2(c) and (d)?

Comment Period ended April 10, 2020. Final version available on the Online Publication Library. Click here for purchase of the Online Subscription to view the final version. 
2 Loss Recognition - Discussion of revised units of account under FASB ASU 2018-12, and allocation of liability for future policy benefits to revised units of account at transition for blocks of business that had loss recognition prior to the transition date [FASB ASC 944-40-65-2D(6)] Comment Period ended February 10, 2020. Final version available on the Online Publication Library. Click here for purchase of the Online Subscription to view the final version.

3

Market Risk Benefits – Considerations for determining if a contract or contract feature meets the conditions in FASB ASC 944-40-25-25C and should be recognized as a market risk benefit. Expert Panel is developing an Issue Paper. This paper will be available to the public in the future during the comment period process.

4ABCD

Market Risk Benefits - Considerations related to transition, including:

a)     The use of hindsight as noted in FASB ASC 944-40-65-2f.  Discussed on the 11/15/2018 FASB webcast: IN FOCUS: FASB Accounting Standards Update on Insurance

b)    Clarification that the fair value framework of FASB ASC 820 should be applied to the initial and subsequent measurement of market risk benefits at fair value.

c)    Clarification on accounting for the retrospective application of MRBs when considering transition guidance for DAC (FASB ASC 944-40-65-2 e.1.)

d)    Business combinations - Impact on PVFP/VOBA for the fair value of MRBs that existed as reserves prior to the adoption of ASU 2018-12, and if the revised PVFP/VOBA should be amortized using existing or revised estimated gross profits.

Comment Period for #4AB ended April 10, 2020. Final version available on the Online Publication Library. Click here for purchase of the Online Subscription to view the final version

Expert Panel to discuss Issues #4CD and develop an Issue Paper.

5AB

Market Risk Benefits – Considerations related to

a)    Attributed fees as discussed in FASB ASC 944-40-30-19C, including discussion of “total contract fees and assessments collectible from the contract holder.”

b)    Unit of account for application of the fair value framework in FASB ASC 820 to market risk benefits.

Expert Panel is developing an Issue Paper. This paper will be available to the public in the future during the comment period process.

6

Discount rate – Considerations related to the use of a curve as discussed in FASB ASC 944-40-30-9.

Expert Panel discussion

7AB

Deferred Profit Liability – Considerations related to

a)    Transition for limited payment contracts where a separate deferred profit liability is not recorded, and a breakeven discount rate was used in accordance with Chapter 7: Liabilities for Future Policy Benefits, of the 2018 AICPA Audit and Accounting Guide: Life and Health Insurance Entities.

b)    Disclosure - Whether a company is precluded from combining the deferred profit liability with the corresponding liability for future policy benefits in its reserve rollforward disclosures for certain products to enhance the meaningfulness of the disclosure to financial statement users.

Expert Panel is developing an Issue Paper. This paper will be available to the public in the future during the comment period process.

8

Updating cash flow assumptions in the net premium ratio, including clarifications related to

a)    What is meant by “beginning of the current period” in FASB ASC 944-40-35-6A(a)1.

b)    The assessment for updating cash flow assumptions and actuals in the net premium ratio.

Comment Period ended April 10, 2020. Final version available on the Online Publication Library. Click here for purchase of the Online Subscription to view the final version. 
9

DAC Amortization (FASB ASC 944-30-35-3 through 35-3B) –

a)    Considerations for evaluating whether the amortization on a constant-level basis for grouped contracts approximates straight-line amortization on an individual basis.

b)    Interaction of cash flow assumption updates and DAC amortization assumption updates.

c)     Updating of DAC experience as of the beginning or end of period

d)     Considerations for determining the "expected term of the contract" as discussed in FASB ASC 944-30-35-3A.

9ABC resolved during the FASB November 2018 webcast IN FOCUS: FASB Accounting Standards Update on Insurance;

Issue paper for #9ABC out for informal comment. Comments due back by April  10, 2020.

Issue paper for #9D out for informal comment. Comments due back by May 15, 2020.

10

Other Intangibles Generated in a Business Combination (i.e., Present value of future profits [PVFP], value of business acquired [VOBA]) – Considerations for determining the level of aggregation and discount rate to be used in the premium deficiency test for PVFP relating to traditional and limited-payment contracts (FASB ASC 944-60-25-3 and 944-30-35-63).

Expert Panel is developing an Issue Paper. This paper will be available to the public in the future during the comment period process.

11

Reinsurance – Considerations for application of FASB ASU 2018-12 to ceded reinsurance contracts.

 

11A

Considerations related to potential issues associated with reinsurance recoverable measurement of the liability for future policy benefits for traditional and limited-payment contracts, that may exist as a result of FASB ASU 2018-12. For example, does the requirement to update insurance assumptions or the requirement to remeasure the liability for future policy benefits balance using the current balance sheet discount rate pose any accounting or operational issues for reinsurance recoverable measurement?

Expert Panel is developing an Issue Paper. This paper will be available to the public in the future during the comment period process.

11B

When reinsuring existing (“inforce”) traditional and limited payment long-duration insurance contracts, what are the direct liabilities for future policy benefits relating to the underlying reinsured contracts that should be used to recognize the reinsurance recoverable and to determine the cost of reinsurance. Issue paper for #11B  out for informal comment. Comments due back by July 17, 2020.

11C

Considerations related to the impact of caps (100%) and floors (can’t be negative) on the ceded NPR:

a)    How should the guidance for direct contracts relating to the 100% net premium ratio limitation/immediate loss recognition be applied to ceded reinsurance transactions? Should the cedant recognize an immediate gain on the ceded reinsurance to the extent it has recognized a loss on the direct contracts due to a net premium ratio in excess of 100%? Would the answer differ depending on whether the loss on the direct contracts occurs:

                     I. prior to or at inception of a reinsurance transaction

                    II. subsequent to inception of the reinsurance transaction or

                   III. at transition.

Expert Panel is developing an Issue Paper. This paper will be available to the public in the future during the comment period process.

11D

Cost of Reinsurance: Clarification related to:

a)    If an insurance entity included the cost of reinsurance (in a net debit or asset position) in premium deficiency testing prior to the adoption of FASB ASU 2018-12, upon adoption of ASU 2018-12 should the entity continue to include the cost of reinsurance in premium deficiency tests

b)    In conjunction with the adoption of ASU 2018-12, if an entity decides to change its accounting policy with respect to the treatment of cost of reinsurance (in a net debit, or asset position) should it be accounted for as a voluntary change in accounting principle and subject to the provisions of ASC 250, Accounting Changes and Error Corrections, or the transition provision of ASU 2018-12.

Out for informal comment. Comments due back by May 15, 2020.

11EF

Reinsurance of Market Risk Benefits - Attributed fee for both ceded and assumed reinsurance

a)    Attributed fee for both ceded and assumed reinsurance – Are there limitations on the fees attributed when measuring the separate and distinct MRBs (similar to FASB ASC 944-40-30-19C)? Do considerations vary depending on whether the cession includes the entire contract which contains an MRB or the cession only pertains to the MRB?

Presentation and Disclosure - When MRBs are ceded, should the ceding arrangements be measured and presented as new and distinct MRBs?

Expert Panel is developing an Issue Paper. This paper will be available to the public in the future during the comment period process.

12

Reinsurance – Considerations for application of FASB ASU 2018-12 to assumed reinsurance contracts

 

12A

Is assumed reinsurance (outside of a business combination), also subject to the guidance in FASB ASC 944-40-65-2D(6), i.e., should the date the reinsurance contract is entered into be considered the “original contract issue date?”

Expert Panel is planning to include in #12B.

12B

Unit of account/contract boundary/cash flows included in Net Premium Ratio (NPR).

Questions on assumed reinsurance contract with a fixed noncancellable term, specifically:

a)    What is the appropriate unit of account for assumed reinsurance contracts under the ASU?

b)    Should an assuming reinsurer include or exclude expected cash flows on unwritten direct insurance policies in measuring its liability for future policy benefits (LFPBs)?

What discount rate(s) should an assumed reinsurer use to measure the liability for future policy benefits at inception, and subsequently?

Expert Panel is developing an Issue Paper. This paper will be available to the public in the future during the comment period process.

12C

Considerations for determining the unit of account for assuming reinsurance contracts that contain multiple products, specifically:

a)    When determining the unit of account for assuming reinsurance contract that contains multiple products, is the assuming company prohibited, required, or permitted to disaggregate the contract into lower units of account?

b)    What is the accounting if separation is deemed to be required or permitted in situations where none of the net premium ratios of the separated units of account exceed 100%?

c)     What is the accounting if separation is deemed to be required or permitted in situations where one or several of the net premium ratios of the separated units of account exceed 100%?

Expert Panel is developing an Issue Paper. This paper will be available to the public in the future during the comment period process.

13

Impact of FASB ASU 2018-12 on shadow accounting (as referenced in FASB ASC 320-20-S99-2). Issue paper for #13 out for informal comment. Comments due back by July 17, 2020.

14

Presentation & Disclosure –

a)    Clarification of items within other comprehensive income as discussed in FASB ASC 220-10-45-10A(m) and 45-10A(n), including the disclosure requirements for items reclassified from accumulated other comprehensive income.

b)    Liability for Policyholders’ Account Balances, including clarification on interest expense (FASB ASC 944-40-50-7A & Example 3 ASC 944-40-55-29E).

Expert Panel discussion

15

Transition -

a)    Considerations for determining the balance for future policy benefits as discussed in FASB ASC 944-40-65-2c and 65-2d.

b)    Changes in method for balances currently amortized using amortization methods similar to DAC as discussed in FASB ASC 944-65-2c [e.g., sales inducements and unearned revenue liability (required), cost of reinsurance and PVFP (election)].

Expert Panel discussion

16

Unit of account for liability for future policy benefits – Considerations related to definition of issue year – Is the issue year required to be a calendar year or can it be any twelve-month period?

Expert Panel is developing an Issue Paper. This paper will be available to the public in the future during the comment period process.

17

Impact of FASB ASU 2018-12 on Premium Deficiency (FASB ASC 944-60). Clarify the application of premium deficiency guidance to universal life-type contracts.

Expert Panel discussion

1, 2 Issue Paper refers to a working draft to be reviewed by FinREC and then posted for informal comments, after which will be included in the AICPA Audit and Accounting Guide: Life and Health Insurance Entities.