Perspectives

Insurance

Accounting and Financial Reporting Update (2017)

The January 2018 edition of our annual update highlights selected accounting and reporting developments that may be of interest to entities in the insurance sector. Among other topics, the publication discusses (1) the guidance on accounting for short-duration insurance contracts, (2) the FASB’s continued deliberation of its proposed targeted improvements to the accounting for long-duration insurance contracts, (3) the issuance of targeted improvements to hedge accounting, and (4) the new leasing and revenue recognition standards.

Introduction

The past year brought many opportunities and challenges. Insurers entered 2017 on their strongest financial base in 10 years, which allowed them to focus on the development of new products and services as well as on entering into new markets. Along with these opportunities, however, there have been significant obstacles. For example, insurers continue to deal with the increasing risk of cybercrime, significant changes in consumer behavior, and a large number of weather-related catastrophes. In addition to these challenges, regulators continue to focus on standard setting that will have widespread effects on the insurance sector. Insurers need to be more nimble than ever to successfully navigate the changing marketplace.

Economic Growth

The U.S. economy experienced growth in 2017, but this did not always translate into profitability for insurers. Although the Federal Reserve increased interest rates and bond rates followed suit, margins have been shrinking, keeping yields low. In addition, while unemployment rates declined steadily in 2017, the decrease is not expected to translate into long-term growth in workers’ compensation premiums since there is likely to be a continued push toward labor reduction through innovation and automation. Further, it will be harder for insurers to capitalize on the economic growth in the near and long term because of changes in consumer behavior. Younger populations are not purchasing homes, vehicles, or life insurance policies at the same rate as older generations, thus creating a need for insurers to revise their strategies for targeting those markets.

Accounting Changes

In 2017, the FASB continued to work on the proposed ASU that would change the accounting for certain long-duration insurance contracts by amending both the accounting and disclosure requirements under U.S. GAAP for insurers that issue long-duration insurance contracts. The Board believes that the proposed targeted improvements would provide more timely and useful information to users of the financial statements and would simplify certain aspects of the existing accounting model. As of the date of this publication, the Board is continuing to deliberate the proposed standard on the basis of feedback from insurance entities and users of their financial statements, and it is expected that the Board will issue a final standard in 2018.

With respect to IFRSs, the IASB issued IFRS 17 in May 2017 to help financial statement users better understand the risk exposure, profitability, and financial stability of insurance entities. This fundamental overhaul of insurance accounting under IFRSs differs significantly from current and proposed accounting guidance under U.S. GAAP, including the FASB’s proposed targeted improvements (currently under revision) to the accounting for long-duration insurance contracts.

In addition, on December 22, 2017, President Trump signed into law the tax legislation commonly known as the Tax Cuts and Jobs Act (the “Act”). Under ASC 740, the effects of new legislation are recognized upon enactment, which (for federal legislation) is the date the president signs a bill into law. Accordingly, recognition of the tax effects of the Act is required in the interim and annual periods that include December 22, 2017. For more information, see Deloitte’s January 3, 2018 (last updated January 19, 2018), and January 12, 2018, Financial Reporting Alert newsletters.

For additional information about industry issues and trends, see Deloitte’s 2018 Financial Services Outlooks.

Insurance — Accounting and Financial Reporting Update (2017)
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