The Road to Long-Duration Insurance Contract Accounting Continues…

If your company issues long-duration insurance contracts, such as life, disability, long-term care and annuities, the FASB’s recently issued Proposed Accounting Standards Update (PASU) could change how insurers account for these contracts. The PASU recommends changes to the recognition, measurement, presentation, and disclosure of long-duration insurance contracts. How could these proposed changes affect your current process? The changes impact four key areas as described below:

Assumptions Used to Measure the Liability for Future Policy Benefits

The proposal aims to improve the timeliness of recognizing changes in the liability for future policy benefits by requiring that cash flow assumptions be updated annually, during the same reporting period. Assumptions would be updated more frequently if there is evidence supporting the need. To reflect updated cash flow assumptions, a revised net premium ratio will be calculated using actual historical experience and updated cash flow assumptions. The effects of updates to the cash flow assumptions will be recorded in net earnings in the current period.

Discount rate assumptions are updated each reporting period using a “high-quality, fixed-income instrument yield” that reflects the duration characteristics of the liability. The effect of the change in discount rate assumptions will be reflected in Other Comprehensive Income (OCI).

Market Risk Benefits

The market risk benefit is simply a liability that protects variable contract holders from adverse capital market risks (ex. separate account products where the policy holder makes the investment election).  All market risk benefits are measured at market value and the change in fair value attributed to instrument-specific credit risk would be recognized in OCI, except for the change in “owned credit” risk.

Simplification to DAC

The PASU simplifies the amortization of deferred acquisition costs (DAC).  Except for certain investment contracts, DAC will be amortized in proportion to policies in-force or on a straight-line basis if the in-force amount is not reasonably estimated.  This is different from the previous update as you will no longer need to calculate the estimated gross profit or margins, as this is now replaced by projections of insurance in-force.


FASB proposes significant additional disclosures be provided for the benefit reserves of both traditional and non-traditional insurance products. Disaggregated roll-forwards of the liability balances, policyholder account balances, market risk benefits, separate accounts and DAC will be required. Also required is additional information about the significant inputs, estimates and judgments, and assessments, including information on the change and the effect on the measurement of the liability. Lastly, a reconciliation of the disaggregated roll-forwards to the aggregated amounts in the balance sheet and income statement will be required.


The proposal requires insurers to apply the guidance on measuring the liability for future policy-holder benefits retrospectively as of the transition date, using historical information at the unit of account at which the reserves are calculated. If impractical to apply retrospectively for all periods, insurers would use a prospective approach.

For more detail on the proposed changes, click here.

Comments on the PASU are due December 15, 2016, and can be submitted here.


Carrie Rice
Carolyn Rice | Partner