Insurance companies, trade groups and Big Four audit firms are backing a proposed US accounting regulation that aims to ease compliance headaches as companies prepare to to new major insurance accounting standards.
The proposal, released in July, allows insurers that have recently sold life, annuity or other long-term lines of business not to follow the new Financial Accounting Standards Board rules retroactively when the rules they come into force next year.
“We agree that these contracts are no longer relevant to a company’s ongoing operations, future cash flows and overall business economics,” the American Council of Life Insurers wrote in support of the plan.
Publicly traded insurers that sell long-term policies to customers, such as life and annuities, must follow FASB’s new rules by 2023, but the rules apply to contracts that were in effect after the January 1, 2021.
This nuance means that some insurers, including Allstate Insurance Co. and Assurant Inc., which sold its long-term insurance business lines in 2021, would be stuck. Companies asked FASB for relief, and the board agreed to propose a narrow adjustment to the part of the new accounting standard that deals with how companies 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 asks insurers that offer long-term policies to review what they report about the promises they make to customers and the projections they use to estimate payouts.
Without the FASB’s proposed change, insurers that recently sold or disposed of long-term policies would have to reclassify a portion of previously recognized gains or losses due to the adoption of the new accounting standard, FASB said. Comments on the proposal were due on August 8.
Cigna, MetLife, Wells Fargo
Cigna Corp. he wrote in support of the plan, saying he would benefit from it. The company in July sold its life, accident and additional benefits businesses in Hong Kong, New Zealand, Indonesia, South Korea, Taiwan and Thailand to Chubb INA Holdings Inc. The $5.4 billion sale included insurance policies covered by new FASB accounting standards. , the company said.
Not having to worry about accounting for those contracts would save the company time and money and avoid confusion, Cigna said. “The notion of adjusting a previously recognized gain or loss to account for the transition/adoption of a new accounting standard would be confusing to investors and would not be a useful decision for users of financial statements,” the company wrote .
Some companies asked FASB to modify or further expand the break. MetLife Inc. asked for flexibility in choosing which transactions could take advantage of the relief. Some insurers may have already accounted for already eliminated contracts using the new accounting rules, the company said, and additional work may be needed to roll out the new accounting.
“For example, we would need to allocate time and resources to fix records, change testing plans, and possibly change cohort-level reserves, if appropriate,” MetLife said. The operational burden would “outweigh the perceived benefits,” he said. Audit firm Deloitte & Touche LLP made a similar request for flexibility in its letter.
Wells Fargo & Co. went a step further, standing out as the only letter writer calling for an expansion of the proposal to include another type of business transaction. The bank, which has a subsidiary that sells reinsurance products, asked whether FASB could apply the proposed relief to what’s called a clawback of reinsurance products. A recovery recovers some or all of the risk originally transferred to the reinsurer, the bank said.
“From a reinsurer’s perspective, transactions whereby the original cedant recovers 100% of a reinsurance contract from the reinsurer have the same economic and financial impact as a contract that is terminated due to a sale or disposal,” the bank said.