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. Issue paper for #3 out for informal comment. Comments due back by July 29, 2021.

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 market risk benefits 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 market risk benefits that existed as reserves prior to the adoption of FASB 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 Issue #4C and develop an Issue Paper.

Issue paper for #4D out for informal comment. Comments due back by July 29, 2021.

5

Market Risk Benefits – Measurement Considerations, including:

a)    The unit of account for determining total attributed fees collectible from the contract holder, as required by FASB ASC 944-40-30-19C.

b)    What constitutes “contract fees and assessments collectible from the contract holder.” as described in FASB ASC 944-40-30-19C.

c)    Use of valuation approaches for determining the fair value of market risk benefits as explained in FASB ASC 944-40-30-19D.

d)   Accounting for changes in the fair value of market risk benefits due to changes in instrument-specific credit risk when the market risk benefit is in an asset or liability position; and changes in counterparty credit risk.

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 for the use of discount rates or yield curves for interest accretion on insurance liabilities under FASB ASU 2018-12, including:

a)     The use of a locked-in yield curve that is applied to updated cash flows, or an equivalent level rate that is locked-in at contract inception for new business.

b)     Are all contracts within a cohort, required to use the same locked-in discount rate to accrete interest?

c)     Once an insurer has selected the interest accretion rate at contract issue date (which includes the method used to determine the interest accretion rate), whether there is a prohibition from changing the interest accretion rate (or the method of determining the rate) in a subsequent measurement period for that existing cohort.

d)     Determining the interest accretion rate and current discount rate on the liability for future policy benefits in a foreign jurisdiction where market data for an upper-medium grade fixed-income instrument yield is limited or not observable.

e)     When applying the modified retrospective approach under FASB ASC 944-40-65-2d(1), is it acceptable to change the interest accretion rate (including the method used to determine the interest accretion rate) for contracts issued before the transition date?

 Issue paper for #6 out for informal comment. Comments due back by July 29, 2021.

 

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.

Comment Periods ended April 10 and May 15, 2020. Final version available on the Online Publication Library. Click here for purchase of the Online Subscription to view the final version.

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.

 

11ABC Ceded Reinsurance — Recognition of the Reinsurance Recoverable and Cost of Reinsurance Measurement; The Liability for Future Policy Benefits to Be Used to Reinsure Existing Traditional Life Insurance Contracts; and Application of the 100% Net Premium Ratio Cap and "Floor" (No Negative Liability) Provisions Relating to the Liability for Future Policy Benefits on Ceded Reinsurance Transactions Comment Periods ended July 17 and September 25, 2020. Final version available on the Online Publication Library. Click here  for purchase of the Online Subscription to view the final version.

11D

Upon Adoption of ASU No. 2018-12, Is It Permissible for an Entity to Change Its Accounting Policy for All Products to Include the Cost of Reinsurance in Loss Recognition Testing?

Comment Period ended May 15, 2020. Final version available on the Online Publication Library. Click here for purchase of the Online Subscription to view the final version.

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 of traditional and limited payment long-duration insurance contracts, specifically, the level of aggregation at which reserves are calculated under FASB ASC 944-40-30-7. 

Issue paper for #12 out for informal comment. Comments due back by April 15, 2021.

 

13

Impact of FASB ASU 2018-12 on shadow accounting (as referenced in FASB ASC 320-20-S99-2). Comment Period ended July 17, 2020. Final version available on the Online Publication Library. Click here for purchase of the Online Subscription to view the final version.

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

Considerations for the level of aggregation for the measurement the liability for future policy benefits, including:

a) The definition of issue year.

b) Establishing cohorts.

c) Once cohorts are established, can they be changed later? 

 Issue paper for #16 out for informal comment. Comments due back by July 29, 2021.

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.