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 use a two liability approach, 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 use a two liability approach, 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)?

 

Expert Panel is developing an Issue Paper1. This paper will be available to the public in the future during the comment period process.

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)] Out for informal comment. Comments are due back by February 10, 2020. 

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 & 4B

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 should apply the fair value framework of FASB ASC 820 to the initial and subsequent measurement of market risk benefits at fair value.

Resolved during the FASB November 2018 webcast IN FOCUS: FASB Accounting Standards Update on Insurance

Issue paper #4A discussed at November 2019 FinREC meeting.

#4B to be included in #4A. This paper will be available to the public in the future during the comment period process.

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).

 

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

Issue paper for #9ABC discussed at November 2019 FinREC meeting.

Expert Panel to discuss expected term of the contract (#9D) 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 is developing an Issue Paper. This paper will be available to the public in the future during the comment period process.

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?

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

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 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:

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

11E & 11F

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?

b)    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?”

 

To be included 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?

Questions submitted to FASB Staff as a Technical Inquiry

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 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 (FASB ASC 944-40-50-7A & Example 3 ASC 944-40-55-29E) and cash surrender value (FASB ASC 944-40-50-7Ab(3)).

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 discussion

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.