In 2018, the Financial Accounting Standards Board (FASB) released Accounting Standards Update 2018-12 (ASU 2018-12), Targeted Improvements for Long-Duration Contracts. It represents a fundamental change in the measurement and reporting of long-duration insurance contracts that will alter the incidence and volatility of reported income and equity.
In this paper, Milliman’s François Dauphin and William Hines illustrate the potential impacts of ASU 2018-12 relative to current US GAAP accounting with respect to four blocks of business: level term insurance, single premium immediate annuities, long-term care insurance, and universal life insurance. They followed the income emergence over a five-year period under both accounting standards using a valuation process a company might follow, including the random termination of individual policies, issuance of new policies, cash flow assumption updates and movements in market yield rates. The results show the importance of having accurate information on which to base the key decisions that need to be made well in advance of the January 1, 2021, implementation date, and that required calculations from actuarial systems will increase in order to meet the new requirements and explain the emergence of income.