Accounting and Financial Reporting Update (2015)
This edition of our annual accounting and financial reporting update discusses topics that may be of particular interest to insurance entities. It summarizes notable developments and activities that occurred during 2015 and early 2016, including (1) the issuance of new guidance on short-duration insurance contract disclosures, (2) the FASB’s work on long-duration insurance contracts, and (3) the SEC’s continued focus on rulemaking, particularly in connection with its efforts to complete mandated actions under the Dodd-Frank Act.
In many ways, the insurance industry is better positioned to grow than it has been for quite some time. The improving economy and steadily falling unemployment rate should be more conducive to the marketing of carriers’ products and services. However, plenty of challenges — some new, some ongoing — are keeping industry executives on their toes. For example, whether they’re dealing with the evolving threat of cybercrime, the effort to quantify and mitigate the impact of climate change, or how to most effectively manage capital at a time when funds from alternative investors entering the market are expanding capacity while undermining pricing leverage and profitability, insurance leaders will have their hands full. The larger industry players continue to face stricter government regulations than in the past, and accounting developments on the horizon may affect the financial statements of insurers. Entities in the sector will need to carefully assess the impact of these changes on their business.
While low interest rates continued to propel overall growth in the insurance sector (along with reduced unemployment), they also resulted in continued lower investment income. Thus, several insurance entities considered compensating for their anemic organic growth by expanding their size, market reach, and capabilities through mergers and acquisitions (M&As). Many carriers also continued the recent trend of allocating excess capital to boost shareholder value with stock buybacks or dividend payments rather than attempting potentially more problematic M&As.
On the regulatory front, insurers will be called upon to implement a number of significant compliance changes for 2015. For one, they will file their first Own Risk and Solvency Assessment (ORSA) this year. ORSA reflects the new wave of insurance regulation, in which static examinations conducted every five years are replaced by an ongoing dialogue between regulators and the regulated.
The pace of regulatory evolution is unlikely to slacken soon, so it may be time for insurers to consider the process of compliance transformation. This may include enterprise-wide aggregation of core regulatory-change activities, the establishment of a coordinated response process for foreseeable regulations, and the use of scenario planning techniques for the unknown, along with the formation of rapid-response teams. Such transformation may help the ongoing process of planning for and responding to change. In addition, we expect the regulatory requirements to continue to increase in scope and number as state, federal, and international regulators battle for the supremacy of their standards and regimes. Even if certain companies are not technically subject to new regulations at first, they may eventually have to comply with them. Carriers should expect ongoing regulatory uncertainty as authorities jockey for position and debate whose set of rules the industry must ultimately follow.
In May 2015, the FASB issued a final ASU on disclosure requirements for short-duration insurance contracts. The Board is continuing to redeliberate targeted improvements for long-duration insurance contracts. Although timing is uncertain, redeliberations are expected to be completed in 2016.
The IASB’s new insurance standard (expected to be issued in 2016) is likely to establish an accounting model and disclosure requirements that differ significantly from those under U.S. GAAP. Further, in December 2015, the IASB issued an ED to address IFRS 9 adoption for entities that are subject to the insurance standard.
For additional information about industry issues and trends, see Deloitte’s 2015 Financial Services Industry Outlooks.