Life Insurers Say Forthcoming Accounting Changes Demanding

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By Denise Lugo

Potential FASB rule changes for life insurance and annuities contracts would be significant and could possibly fail a cost-benefit analysis, four life insurance companies that tested the proposed rules said in a report.

Manulife Inc., Metropolitan Life Inc., New York Life and Prudential Financial Corp., said companies would probably need at least four years to implement the Financial Accounting Standards Board proposal.

They added that their systems couldn’t test some of the revisions.

“We were unable to test several of the targeted improvements because the necessary information was not available from our current systems and is unlikely to be available for any of us without major system changes,” the companies said in a December report to FASB.

FASB has said the proposed rules would bring better and more consistent information about the underlying economics of life insurance and annuities products.

Better Measurement of Obligations

FASB issued the proposal, Financial Services—Insurance (ASC 944), Sept. 29 to require a “current and better” measure of the obligations of long-duration insurance contracts.

The proposal addresses four categories of rules:

  •  updating assumptions and discount rate in relation to the reserve for traditional contracts;
  •  deferred acquisition costs (DAC)—meaning large upfront costs, such as commissions to sales agents, incurred when acquiring new customers;
  •  market risk benefits; and
  •  disclosures.
The FASB revisions seek to modernize an accounting model that dates back more than 35 years. FASB said the existing model fosters differences in how accounting is applied and doesn’t adequately address new insurance products.

Inherently Complex

Some practitioners have said some of the revisions would indeed bring simplifications to accounting for life insurance and annuities, but would also carry significant implications for insurance companies because of the inherent complexity and workings of that sector.

The rules are expected to be finalized late next year, following a roundtable panel discussion and redeliberations of the issue by FASB.

Vetting Group Needed

In the U.S. alone, Manulife, Metropolitan Life, New York Life and Prudential Financial held about $1.6 trillion of total statutory admitted assets as of Dec. 31, 2015.

This accounted for about 25 percent of the total net admitted assets in the U.S. life insurance industry.

The companies’ field tests were based on actual experience between 2007 and 2012, a period of significant volatility in both interest rates and stock market performance, according to the report. The goal was to examine whether the proposed accounting improvements produce financial results that reasonably represent performance during that period.

Companies Urge Group to Aid Transition

Given the widespread fundamental changes the improvements represent, the insurers said, FASB should strongly consider establishing a transition resource group (TRG) to address potential differences in interpretation and other practical accounting application issues before it issues a final standard.

The TRG should be composed of financial statement preparers and representatives from the actuarial, auditor, investor and regulatory communities to consider and avoid problems in adopting the new standard and meeting its effecting date, the companies said.

Some Changes Helpful

Some of the changes, for example, simplifying DAC, would be helpful, the companies said.

Also helpful are proposed requirement to use other comprehensive income (OCI) to reflect any required updates in current discount rate assumptions for traditional life and annuity contracts, and allowing alternative methods to implement the transition to the new accounting.

But revisions surrounding requiring an annual assumption update, among other areas, “cause concern and warrant further discussion,” the companies said.

Implementing the rules would therefore require a major undertaking for almost all preparers and their auditors as well as analysts, investors, regulators and rating agencies. They would “need to be re-educated to be able to fully understand the impacts to insurers’ financial statements,” the report states.

To contact the reporter on this story: Denise Lugo in New York at dlugo@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

For More Information

For a copy of the insurance companies' report, go to http://src.bna.com/kUE.

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