Insurers, auditors return to new insurance accounting rules

Insurance companies, trade groups, and the Big Four audit firms support a U.S. accounting rulemaker proposal that aims to ease compliance headaches as companies prepare for major new insurance accounting rules.

The proposal, issued in July, allows insurers that have recently sold life, annuity, or other long-term insurance business lines to retroactively opt out of compliance with the Financial Accounting Standards Board’s new rules when they go live next year.

“We agree that such contracts are no longer relevant to the company’s continued operations, future cash flows, and overall economics of the business,” the American Council of Life Insurers wrote in support of the plan.

Publicly traded insurers that sell long-term policies, such as life and annuities, to customers must comply with the FASB’s new rules in 2023, but the rules apply to contracts effective January 1, 2021.

That nuance is Allstate Insurance Co., which plans to sell its long-term insurance business lines in 2021. and Assurant Inc. Some insurers will be caught. The companies asked the FASB for relief, and the board agreed to propose a narrow tweak to the part of the new accounting standard that deals with how companies will transition to the new rules.

The FASB’s insurance accounting standard is expected to transform the way insurers report their financial health and introduce more volatility into their earnings. It calls on insurers who offer long-term policies to revise what they report about the promises they make to customers and the projections they use to estimate payouts.

Without the FASB’s proposed changes, insurers that recently sold or disposed of long-term policies would be required to reclassify a portion of previously recognized gains or losses due to the adoption of the new accounting standard, the FASB said. Comments on the proposal were due August 8.

Cigna, MetLife, Wells Fargo

Cigna Corporation supports this plan and said that it will be beneficial. The company sold its Hong Kong, New Zealand, Indonesia, South Korea, Taiwan and Thailand life, accident, and supplemental benefits businesses to Chubb INA Holdings Inc. in July. The $5.4 billion in sales includes insurance policies that are covered by the FASB’s new accounting rules. , the company said.

Not having to worry about accounting for those contracts will save the company time and money and avoid confusion, Cigna said. “The notion of adjusting previously recognized gains or losses to account for the transition/adoption of a new accounting standard will be confusing to investors and not an appropriate decision for financial statement users,” the company wrote.

Some companies asked the FASB to tweak or extend the break further. MetLife Inc. asked for flexibility in choosing transactions that can avail relief. Some insurers may have already reconciled previously disposed contracts using the new accounting rules, the company said, and it may take more work to open the new accounting.

“For example, we must allocate time and resources to correct accounts, change test plans and change cohort level reserves if applicable,” MetLife said. Operational burdens “will outweigh the perceived benefits,” it said. Audit firm Deloitte & Touche LLP made a similar request for flexibility in its letter.

Wells Fargo & Co. Going a step further, a single letter writer emerged as requesting the expansion of the proposal to include all other types of business transactions. A bank that has a subsidiary that sells reinsurance products asked whether the FASB could apply the proposed relief, called reinsurance products. A reinsurance takes back some or all of the risk originally transferred to the reinsurer, the bank said.

“From a reinsurer’s perspective, a transaction in which the original cedant recovers 100% of the reinsurance contract from the reinsurer has the same economic and financial statement impact as a contract repudiated due to sale or disposal,” the bank said.

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