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Public insurers: It’s time to implement new guidance on long-term contracts

April 4, 2023

Contributors: Thomson Reuters

The Financial Accounting Standards Board (FASB) issued updated guidance on reporting long-term insurance contracts in 2018. After the standard’s effective date was deferred twice, it’s time for large public insurance companies to implement the changes. However, private insurers have until 2025 to comply.

Targeted improvements

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 updated guidance took 16 years to develop, and it’s expected to initially require significant, expensive software changes.

The guidance 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 these changes will more accurately reflect the economics of how long-term insurance contracts work. In turn, the changes will provide a clearer picture of insurance companies’ financial obligations and risks. When the update was issued, the original effective dates were fiscal years beginning after December 15, 2020, for public companies and a year later for private companies.

Double 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 staffs, and conduct educational outreach to investors.

The FASB deferred the effective date again in 2020, as a one-year buffer to help insurers navigate hurdles brought by the COVID-19 pandemic. The deferral allowed insurers to focus their limited resources on disruptions and other priorities arising from the new and challenging social and economic environments.

Ready, set, implement

The clock has now run out: Insurance companies that are registered with the Securities and Exchange Commission, excluding smaller reporting companies that have a public float of less than $250 million, must adopt the changes for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. For all other companies, the standard will be effective for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025.

Early adoption is strongly encouraged by the FASB. Contact your CPA for more information.

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