Last Thursday, the Financial Accounting Standards Board (FASB) issued an exposure draft on a proposed update to accounting standards for insurance contracts. The proposal would significantly change the way that insurance companies measure liabilities in their income and earnings statements, requiring them to value liabilities in each financial reporting period by re-forecasting the liabilities’ impact on cash flow using up-to-date assumptions.
“Today, insurance is typically accounted for using assumptions that were made when a product was sold,” explains Donald Doran, national professional services financial instruments co-leader with PwC. For example, he says, life insurance companies determine the value of their liabilities by assessing issues such as: “‘What do we think lapses will be? What do we think deaths will be? What do we think expenses will be?’ All these assumptions are locked in on day one, so there’s very little volatility in the liabilities on a life insurance company’s financial statements.”