FASB Proposes Another Delay for Updated Insurance Standard
On July 9, the Financial Accounting Standards Board (FASB) issued a proposal that would give insurers an additional year to implement the updated accounting standard for long-duration contracts. Insurers requested the delay in light of COVID-19 challenges.
Update calls for major changes
Accounting Standards Update (ASU) No. 2018-12, Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued in August 2018 to improve and simplify the reporting requirements for long-term insurance policies. The long-duration insurance update covers life, long-term health care and disability insurance, as well as annuity payments. Specifically, it requires insurers to:
- Review annually the assumptions they make about their policyholders, and
- Update the liabilities on their balance sheets if the assumptions change.
Under the updated guidance, insurance companies must measure updated liabilities using a standardized, market-observable discount interest rate based on the yield from an upper-medium-grade, fixed-income instrument. The method required by ASU No. 2018-12 is a more conservative approach than one used for insurance policies under existing guidance.
The FASB believes that these changes will more accurately reflect the economics of how long-term insurance contracts work and give a clearer picture of insurance companies’ financial obligations and risks. When the updated standard was issued, the original effective dates were fiscal years beginning after December 15, 2020, for public companies and a year later for private companies.
Insurers request multiple delays
In November 2019, ASU No. 2019-09, Financial Services — Insurance (Topic 944): Effective Date, postponed the standard’s effective date from 2021 to 2022 for public companies. It was delayed until 2024 for private companies. The FASB granted the delays to give insurance companies more time to update their software and methodology, train their staff, and conduct educational outreach to investors.
In March, the American Council of Life Insurers (ACLI), the trade organization that represents the sector, requested an additional delay, citing unprecedented challenges stemming from the COVID-19 crisis. In a letter to the FASB, the ACLI said that the impacts of the pandemic continue to escalate, with little clarity about how long the capital markets may persist within their current turbulent state.