FASB Releases Updated Guidance on Long-Term Insurance Policies

August 22, 2018

The Financial Accounting Standards Board’s (“FASB”) latest amendments impact companies that sell long-term insurance products such as life and disability insurance. Accounting Standards Update (“ASU”) No. 2018-12 – Financial Services —Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, changes how insurers and underwriters assess liabilities for long-term policies. Underwriters are now required to frequently update their assumptions to estimate payouts to customers and apply a standardized discount rate to calculate liabilities.

When underwriting a customer’s policy, insurers previously had to lock in assumptions regarding a customer’s life expectancy or missed payments. The guidance meant liability estimates for long-term insurance products could be outdated for years. With ASU No. 2018-12, according to FASB chairman Russell Golden, the amendments offer investors and financial statement users improved transparency and more timely information on an insurance company’s long-term contracts.

Another change under the new standard is the simplification of how companies amortize the costs of obtaining new policyholders. Insurers are also required to modify how they assess insurance policies with market risk benefits. Additionally, companies will have to disclose additional information concerning their assumptions to predict liabilities. The disclosures must also focus on how changes in the assumptions could impact future cash flows.

For public companies, ASU No. 2018-12 is effective for fiscal years starting after December 15, 2020, and must be applied to first-quarter 2021 reports. Private companies must implement the changes to fiscal years starting after December 15, 2021, and for interim reporting periods in fiscal years that begin after December 15, 2022. Early application is acceptable.