5 Things for Agents to Know About the Big New Accounting Thing

FASB plans to post the comment letters online. The link to the comment letter folder will likely appear here, with a title that includes the term “long-duration contracts.”

3. The delay could affect your ability to know how well life insurers are prepared to make good on promises to you and your clients.

State guaranty associations offer limited protection for policyholders against the effects of life and health insurer failures. The guaranty associations do not protect agent and broker compensation.

(Related: What Agents Need to Know About the Penn Treaty Liquidation)

Rating agency analysts and securities analysts have complained for years that each life insurer handles reporting on its insurance and annuity obligations differently, and that knowing what’s really going on inside insurers is difficult because of the lack of clear information about the value of benefits obligations.

4. Implementing the regulations could give you, clients and investors a distorted picture of how life insurers are doing.

Publicly traded life insurers have had frozen, non-mark-to-market valuations of promised benefits in their financial statements for more than 100 years. Many of them have been in business, in more or less the same form, using similar-looking financial statements, since before Teddy Roosevelt was president.

New ups and downs from benefits value updates could make life insurer net income go up and down more without making the companies any more volatile than they were before the new rules took effect.

In some cases, the new rules could make life insurers’ net income figures look like a car alarm that goes off so often that everyone ignores it.

Other accounting rule changes, for example, now require life insurers to mark derivatives holdings and other holdings to market in a new way. In the first quarter, of this year, marking derivatives to market led to Brighthouse reporting a $1.3 billion derivatives loss for the first quarter, and contributed to a $735 million net loss, on $691 million in revenue.

Securities analysts did not bother to ask Brighthouse executives about the derivatives loss during the company’s quarterly earnings call. Investors were so uninterested in the net loss that it had little apparent effect on the company’s share price.

5. Implementing the regulations could reduce publicly traded life insurers’ interest in offering products with long-term guarantees.

When executives at publicly traded life insurance companies hold quarterly earnings calls, they often talk to security analysts about how well they have managed to limit sales of annuities that come with living benefits guarantees.

Some talk about how successful efforts to use benefits buyback offers and other strategies to shed the long-term guarantee risk associated with universal life guarantees.

Implementing ASU 2018-12 could further increase pressure on life insurers to move toward selling products such as investment-only variable annuities, dental insurance, vision insurance, and short-term health insurance that involve few or no long-term benefits guarantees.

— Read New Accounting Rules to Put Life Insurers on GAAP Reporting Rollercoaster, on ThinkAdvisor.

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