To combat the effects that the Coronavirus Disease 2019 (COVID-19) pandemic has on insurance entities, the Financial Accounting Standards Board (FASB) issued amendments to the Accounting Standards Update (ASU) No. 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI). The update aimed to streamline the disclosure of long-duration contracts issued by insurance entities. Long-duration contracts include whole-life, guaranteed renewable-term life, endowment, annuity, and title insurance contracts, which are all expected to remain in effect for an extended period.
With this update, FASB intends to provide an extension for all insurance entities by deferring the effective date of the update by one year. Additionally, this update aids the transition for early election of LDTI and expedites the production of refined data for investors and other users.
Effective Date Deferral
The effective date for LDTI contracts beginning after December 15, 2021 has been pushed back one year with this update. This change affects all public businesses that meet the SEC filer definition and excludes smaller reporting companies (SRCs). For all other entities, the effective date for LDTI contracts beginning after December 15, 2023 has been deferred to December 15, 2024. At the effective date, an insurance entity must comply with sections regarding liability for future policy benefits and deferred acquisitions cost, market risk benefits, and transition disclosures.
Summary of Amendments
|Liability for Future Policy Benefits and Deferred Acquisitions
- To determine the ratio of net premiums to gross premiums, an insurance entity must maintain the discount rate assumption used to calculate the liability immediately before applying these amendments.
- The present value of net future benefits minus the transition date carrying amount must be compared with the present value of future gross premiums used to calculate the ratio of net premiums to gross premiums.
- Affected entities must adjust the opening balance of retained earnings if net premiums exceed gross premiums.
- Affected entities must compare liabilities for future policy benefits using the discount rate assumption. The difference in the liability for the future policy benefits balance must be recorded to opening accumulated other comprehensive income.
- The transition date must be considered the revised contract issue date for purposes of subsequent adjustments but not for purposes of contract grouping.
- Contracts issued before the transition date are currently in effect; an insurance entity can not group contracts from different contract issue years. The entity must group contracts into quarterly or annual groups to calculate the liability for future policy benefits. For contracts that were acquired, the acquisition date must be considered the original contract issue date.
Market Risk Benefits
At the transition date, an insurance entity must recognize adjustments to:
- The effect of adjustments in the credit risk of specific instruments between the contract issue date and transition date and these effects must be recognized in accumulated other comprehensive income as of the transition date.
- The change between fair value and carrying value, excluding adjustments to the opening balance of retained earnings, must be recognized as of the transition date.
At the transition date, an insurance entity must disclose:
- A disaggregated roll forward of the ending balance of the reporting period before the transition date to the opening balance at the transition date. If the entity chooses to apply the transition amendments with a cumulative catch-up adjustment, the entity must further disaggregate the effects of the retrospective application and the modified application.
- Must provide qualitative and quantitative information about the transition adjustments regarding :
- the opening balance of retained earnings
- accumulated other comprehensive income
- net premiums exceeding gross premiums
- the establishment of a premium deficiency as required in Subtopic 944-60
A detailed description of the impacts these amendments will have can be found here.
Early Application Transition Relief
Additionally, this update provides transition relief for the early application of LDTI and encourages accelerated delivery of quality information to investors and other users. For example, if a large public insurance organization selects early application of LDTI, the entity could disclose an LDTI as of January 1, 2021 and also document a transition adjustment on its 2022 financial statements. If the entity chooses not to elect early application, an LDTI will be disclosed in its 2023 financial statements.
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