International Financial Reporting Standard (IFRS) 17 and US GAAP long-duration contract targeted improvements (LDTI) will both become effective on January 1, 2022. Both frameworks require a current estimate of insurance liabilities instead of following a traditional net level premium reserve approach using assumptions locked in at policy issue. However, the source of period-by-period profit, and the resulting profit signatures due to experience or assumption changes, could differ significantly between the two. This briefing note by Milliman consultants Takanori Hoshino and William Hines illustrates these potential differences using a traditional level premium endowment contract.
The changes to the measurement and reporting of long-duration insurance contracts will have a profound impact on the emergence and volatility of earnings under US GAAP. In this paper, Milliman’s Francois Dauphin, William Hines, and Dan Skwire illustrate the potential impacts of Accounting Standards Updates 2018-12, Targeted Improvements for Long-Duration Contracts, relative to current US GAAP accounting with respect to products with long claim periods such as individual disability insurance and highlights some practical implementation challenges.
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.