Long-Duration Insurance 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)    Assuming that the current practice of maintaining two separate liabilities for these products is acceptable, 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 actual historical benefits in the net premium ratio, which is used in the calculation of the liability for future policy benefits (LFPB)?

c)     Does this interaction of the two liabilities impact the discount rate that is appropriate for discounting claim liability cash flows?

d)    Should the initial claim liability rate used to record claim expense in the income statement be based on the rate at contract inception, or the rate at the date the claim is incurred?

e)    If based on the rate at contract inception, should the claim liability rate be updated to current rates each period with the impact of the change recorded through OCI?

f)      If based on the rate at the date the claim is incurred, should the claim liability rate determined at the incurred date be locked in for income statement purposes or updated each period to the current rate through income? If locked in for income statement purposes, should the claim liability be remeasured using current rates each period with the impact of the change recorded through OCI?

g)    Transition – To be written after the previous questions are resolved.

 

Questions submitted to FASB Staff as a Technical Inquiry

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)]

 

 

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

3

Market Risk Benefits – Indicators 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.

4A


Market Risk Benefits - Considerations related to transition, including 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.

Resolved during the FASB November 2018 webcast IN FOCUS: FASB Accounting Standards Update on Insurance; Expert Panel is developing an Issue Paper. This paper will be available to the public in the future during the comment period process.

4B

Market Risk Benefits – Considerations related to transition, including measurement at fair value for contracts issued prior to FASB ASC 820. Do the retrospective application requirements in FASB ASU 2018-12 and defined by FASB ASC 250 allow companies to consider the accounting framework at a point in time prior to the adoption of FASB 157?

a) Should entities include the effect of nonperformance risk in the determination of the attributed fee for market risk benefits related to contracts issued prior to the effective date of FASB 157?

b) Should entities include an explicit risk margin in the determination of the attributed fee for market risk benefits related to contracts issued prior to the effective date of FASB 157?

Expert Panel discussion

5

Market Risk Benefits – Considerations related to attributed fees as discussed in FASB ASC 944-40-30-19C, including discussion of “total contract fees and assessments collectible from the contract holder.”

 

Expert Panel discussion

6

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

 

Expert Panel discussion

7

Discount rate – Transition considerations [FASB ASC 944-40-65-2d(1)] 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.

 

 

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 –

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

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

 

 

 

 

 

Resolved during the FASB November 2018 webcast IN FOCUS: FASB Accounting Standards Update on Insurance; Expert Panel is developing an Issue Paper. This paper will be available to the public in the future during the comment period process.

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" - In the absence of specific guidance, how should entities determine the expected term of the contract (as discussed in FASB ASC 944-30-35-3A). Should the contract term should be viewed as the accounting term or legal term? For this discussion, the accounting term of the contract ends when an insurer changes accounting models for the liability (e.g., from an NPR calculation to a separate claim liability or from a fair value MRB to a payout annuity), while the legal term continues as long as the insurer is performing on the contract, including the claim paying period, regardless of the accounting for the liability.

 

9a), b) & c) resolved during the FASB November 2018 webcast IN FOCUS: FASB Accounting Standards Update on Insurance; Expert Panel to discuss expected term of the contract and to develop an Issue Paper. This paper will be available to the public in the future during the comment period process.

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 discussion

11B

Considerations related to whether the accounting for a cession of an existing group of inforce contracts should mirror the accounting for the existing direct contracts in the balance sheet, income statement, and other comprehensive income:

a)  When a cedant enters into a reinsurance contract to reinsure existing (“inforce”) traditional life insurance contracts, is the liability for future policy benefits that is used to calculate the cost of reinsurance:

                      I.  the “book value” liability (i.e. using the locked in discount rate), referred to as a “mirroring” approach or

                     II.  the “current value” liability (i.e. using the current discount rate at the date of the reinsurance transaction)?

b)  What are the mechanics of the accounting if an insurer accounts for the reinsurance contract under View II in Question a, rather than under the “mirroring” method in various scenarios, including not only changes in interest rates, but also changes in cash flows?

Question a)- submitted to FASB Staff as a Technical Inquiry

Question b) - Expert Panel discussionn

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.

How should the guidance for direct contracts relating to the limitation that the liability for future policy benefits cannot be negative be applied to ceded reinsurance transactions? 

Expert Panel discussion

11D

Cost of Reinsurance:

a)    Is the cost of reinsurance in a net debit or asset position subject to premium deficiency testing in accordance with the provisions of Subtopic 944-60?

                      I.  Upon adoption of FASB ASU 2018-12, is it permissible for an entity to continue to subject cost of reinsurance to loss recognition testing if this was its existing policy given the ASU eliminated the impairment test requirement of DAC?

                     II.  Is it permissible for an insurance entity to change their accounting policy in conjunction with the adoption of ASU 2018-12 if it previously subject cost of reinsurance to loss recognition testing?

                   III.   Would the change need to be applied retrospectively?

b)    Considerations for explicitly measuring the cost of reinsurance under FASB ASU 2018-12, if under current GAAP the cost of reinsurance is implicitly included with DAC.

 

Expert Panel discussion

11E

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

a)  When ceding or assuming a MRB, is there a limitation on the attributed fee? If so, is the limitation determined based on the original MRB feature (i.e., attributed fees limited to amounts collectible from the original contract holder) or is the limitation determined based on the relationship between the ceding company and the reinsurer (i.e., attributed fees limited to cash flows between the ceding and assuming companies)?

b)  Are there different considerations for the ceding company and the reinsurer? That is, could the ceding company be limited to the original contract terms including the MRB feature, while the reinsurer is able to consider cash flows between itself and the ceding company based on the new contract? Are these considerations impacted by the timing of the arrangement (i.e., contemporaneous or non-contemporaneous)?

Expert Panel discussion

11F

Reinsurance of Market Risk Benefits – Presentation and Disclosure:

a)    When MRBs are ceded, should the ceded MRB be presented as a separate purchased MRB?

b)    If the answer to Question a is “yes”, how should the purchased MRBs be presented in the balance sheet and within the rollforward disclosures as required in FASB ASC 944-40-50-7B and 50-7C? That is, should an insurer separately present direct MRBs (i.e., contracts written to the underlying policyholders) and purchased MRBs (i.e., arrangements to cede MRBs) that are in the same position (i.e., asset or liability), either on the balance sheet or in the rollforward disclosures?

c)     If the answer to Question a is “no”, should the ceding arrangement then be evaluated against the criterion for embedded derivatives and then additional liabilities (i.e., SOP 03-1 liabilities), as suggested by FASB ASC 944-40-25-40 through 25-41, before reinsurance accounting is considered for classification?

d)    If analysis from Question c results in classification as reinsurance, should each line in the rollforward be presented net of ceded market risk benefits to present the net amount at risk with the total amount of reinsurance recoverable presented as one item within the rollforward as illustrated in FASB ASC 944-40-55-29G, or should a separate column be included to attribute the changes in the ceded MRB to the various categories? Should the reinsurance recoverable representing ceded MRBs be presented separately on the balance sheet from other non-MRB reinsurance recoverables?

Expert Panel discussion

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

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 discussion

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 discussion

13

Impact of FASB ASU 2018-12 on various shadow accounts (as required in FASB ASC 320-20-S99-2). This will discuss shadow accounts no longer required due to changes in accounting under FASB ASU 2018-12, and shadow accounts that are unchanged.

 

Expert Panel discussion

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).

b)    Limited payment contracts, deferred profit liability disclosure issues:  Is a company 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?

c)     Liability for Policyholders’ Account Balances, including clarification on interest expense and cash surrender value as discussed in FASB ASC 944-40-50-7A.

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)].

c)     PVFP/VOBA clarification on transition related to changes in reserves or MRB fair value.

Expert Panel discussion

16

Unit of account – Considerations related to:

a)    Definition of issue year – Is the issue year required to be a calendar year or can it be any twelve-month period? Are all products or locations required to have the same calendar or twelve-month issue year?

b)    Long duration group contracts – Whether the unit of account for annual grouping is at the certificate level or group contract level, specifically:

               I.  For purposes of determining the issue year for a long duration group policy, similar to business acquisitions or assumed reinsurance blocks, should the insurer consider the point in time a group policy is initially underwritten and established? Alternately, should the insurer “look through” the group contract and consider the point in time individual certificate holders are provided insurance coverage? Can the insurer make this determination individually for each product, based on the economics and specific contractual features?

              II.  If the unit of account is determined to be the group contract, can expected future issuances of individual certificates be used as an assumption when measuring the liability for future policyholder benefits?

Expert Panel has recently identified this issue and will discuss at future meetings

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 has recently identified this issue and will discuss at future meetings

1 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.