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Insurers, Auditors Back Tweak to New Insurance Accounting Rules

Aug. 22, 2022, 8:45 AM

Insurance companies, trade groups, and the Big Four audit firms back a US accounting rulemaker proposal that aims to ease compliance headaches as companies gear up for major new insurance accounting rules.

The proposal, released in July, allows insurers that recently sold off life, annuity, or other long-term insurance business lines to skip following the Financial Accounting Standards Board’s new rules retroactively when the rules go live next year.

“We agree that such contracts are no longer relevant to a company’s continuing 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 customers long-duration policies like life and annuities must follow FASB’s new rules in 2023, but the rules apply to contracts that were in force as of Jan. 1, 2021.

That nuance means some insurers, including Allstate Insurance Co. and Assurant Inc., which sold their long-term insurance business lines in 2021, would be caught up. The companies asked 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 transition to the new rules.

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

Without the change FASB is proposing, insurers that recently sold or disposed of long-term policies would be required to reclassify a portion of the previously recognized gains or losses because of the adoption of the new accounting standard, FASB said. Comments on the proposal were due Aug. 8.

Cigna, MetLife, Wells Fargo

Cigna Corp. wrote in support of the plan, saying it would benefit from it. The company in July sold its Hong Kong, New Zealand, Indonesia, South Korea, Taiwan, and Thailand life, accident, and supplemental benefits businesses to Chubb INA Holdings Inc. The $5.4 billion sale included insurance policies that are covered by FASB’s new accounting rules, the company said.

Not having to worry about accounting for those contracts would save the company time and money and would 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 not decision useful to financial statement users,” the company wrote.

Some companies asked FASB to tweak or expand the break further. MetLife Inc. asked for flexibility in choosing which transactions could take advantage of the relief. Some insurers may already have tallied already-disposed contracts using the new accounting rules, the company said, and it could take extra work to unwind the new accounting.

“For example, we’d have to allocate time and resources to fix ledgers, to change testing plans and to possibly change cohort level reserves, if applicable,” MetLife said. The operational burden “would outweigh the perceived benefits,” it said. Audit firm Deloitte & Touche LLP made a similar plea for flexibility in its letter.

Wells Fargo & Co. went a step further, standing out as the only letter writer asking for an expansion of the proposal to include a whole other type of business transaction. The bank, which has a subsidiary that sells reinsurance products, asked if FASB could apply the proposed relief to what’s called recapture of reinsurance products. A recapture takes back some or all of the risk originally transferred to the reinsurer, the bank said.

“From a reinsurer’s perspective, transactions whereby the original cedant recaptures 100% of a reinsurance contract from the reinsurer have the same economic and financial statement impact as a contract that is derecognized due to a sale or disposal,” the bank said.

To contact the reporter on this story: Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editor responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com