Proposed Rules on Life Insurance Contracts Forthcoming

The Accounting Policy & Practice Report ® provides financial accounting policy makers, advisors, and practitioners with the latest news, expert insights, and guidance on emerging, evolving, and complex accounting issues. Expert News & Commentary.

By Denise Lugo

Aug. 31 — Potential accounting rules on life insurance contracts would likely affect such companies as Northwestern Mutual, New York Life Insurance Co., and others in the industry.

“What we have done is a great improvement in the areas that we have chosen to target,” said Financial Accounting Standards Board member Marc Siegel. FASB said it will publish the potential rules for public comment either in late September or early October.

The forthcoming proposal would revise accounting rules for long-term insurance contracts in areas like assumption updates, amortization of deferred acquisition costs (DAC), market risk benefits and disclosures.

Companies will have 75 days to comment. FASB also plans to hold a roundtable discussion sometime March next year, according to FASB's Aug. 31 discussions.

Benefits Greater Than Costs

The revisions are expected to incur some initial application costs, including costs to educate employees about how to apply the rules and costs to explain the effects and costs to update existing systems and processes, the discussions indicated.

The benefits would, however, justify those, costs and there would also be some cost savings, FASB said.

A Black Box of Rules

“Many users and many non-users alike have said that the amortization of the DAC model that we have with respect to gross profit is the poster child for a ‘black box' and the inability to decipher what's really going on,” Siegel said.

The complexity of insurance accounting and the industry as a whole has led some to refer to insurance accounting as a “black box” set of rules.

The board discussions indicated that while the potential revisions should help those that are already well-versed on insurance rules, challenges would remain for those who aren't as knowledgeable on the subject.

“I think it's an extremely complex industry to follow—I think the analysts who follow it are very dedicated, but very honestly I don't think many of them understand the accounting that really is the root of the numbers,” said FASB member Harold Schroeder. “I think that they make investment decisions on far different things,” he said.

The potential rules are incremental improvements, as opposed to wholesale changes, that will shed more light to those who are already dedicated to the industry, Schroeder said. “I don't think it's going to bring a lot of new investors into the industry because I think the industry will continue to be complex, but I think for those that are dedicated to understanding the industry, this is a major step forward,” he said.

Four Significant Changes

There are four main changes that were highlighted that would be proposed.

FASB affirmed it would propose that assumptions used to measure the liability for future policy benefits for traditional, limited pay and participating contracts would be unlocked. Cash flow assumptions would be updated, and, at least annually, discount rate assumptions would be updated at each reporting date. Furthermore, expected future cash flows would be discounted at a high quality, fixed income instrument yield.

Second, all market risk benefits would be measured at fair value, and the portion of any change in fair value attributable to a change in credit risk would be recognized in other comprehensive income.

Third, deferred acquisition cost (DAC) would be amortized in proportion to the amount of insurance in force along a straight line basis.

Fourth, enhanced disclosures would be required, including various roll forwards and the disclosure of quantitative and qualitative information about significant inputs, judgements and assumptions.

“The areas targeted broadly represent improvements,” FASB Vice Chairman James Kroeker said. “I suspect there will be some areas where we get feedback on refinements—some of these are not easy areas—you get stark differences in accounting today based on nuance difference in form for things like market risk benefits,” he said.

Among other challenging areas that might generate comment include accounting for participating contracts where there's the suggestion to use a different discount rate, Kroeker said.

Third Try

The proposal will be FASB's third public comment document on insurance contracts.

In 2010, FASB issued a discussion paper, followed in 2013 with an exposure draft. Following heavy push back from U.S. companies, the board decided to split the project to address only disclosures for short-duration contracts and for long-term contracts to make targeted improvements. Final disclosures for short-term contracts were issued May 2015 (11 APPR 505, 6/5/15).

The objective of this batch of revisions to long-term contracts is to develop targeted improvements to the existing recognition, measurement and disclosure requirements issued by insurance companies.

To contact the reporter on this story: Denise Lugo in Norwalk, Conn.,

To contact the editor responsible for this story: Ali Sartipzadeh at

Copyright © 2016 Tax Management Inc. All Rights Reserved.