GAAP and SEC Updates. Ed Chanda John Snoble

Transcription

1 GAAP and SEC Updates Ed Chanda John Snoble

2 Long Duration Contracts

3 Insurance Contracts FASB Initiatives Short-Duration Contracts (Final Standard ASU Issued May 2015) Long-Duration Contracts (Exposure Draft Issued September 2016) Focused efforts on targeted improvements to disclosures Focused efforts on targeted improvements to both accounting and disclosures No change to current U.S. GAAP model for recognition and measurement Change to current U.S. GAAP model for recognition, measurement, presentation and disclosure 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. NDPPS

4 Long Duration Contracts Agenda Overview Assumptions and discount rate Long-duration contracts with market-risk benefits Deferred acquisition costs (DAC) Disclosures Transition Requirements 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. NDPPS

5 Overview - Changes to Liability for Future Policy Benefits Best Estimate Assumptions Cash flow assumptions updated at least annually on a retrospective basis Discount rate assumptions updated each reporting period on an immediate basis Reserving Model Retained the net premium reserving model Provision for adverse deviation and premium deficiency reserve removed from determination of liability as assumptions are now unlocked and best estimate ASU Long Duration Liability Income Statement Impact Cash flow assumption changes reflected in P&L Discount rate assumption changes reflected in OCI Market-risk benefit changes in instrument-specific credit risk reflected in OCI Disclosures Several new disclosures required, including liability rollforwards and qualitative and quantitative information about significant inputs, judgments, and assumptions used in measurement 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. NDPPS

6 Assumption Changes Cash Flow Assumptions Unlocking of assumptions is meant to provide more relevant estimates of liabilities for future policy benefits Key Changes: Updated at least annually, but more frequently if experience warrants - Management can establish the timing of the update as other than fourth quarter but must consistently use the same quarter each year Unlocked and updated on a retrospective basis through net income Participating contracts would also include an assumption for expected dividend payments Discount Rate Unlocking of the discount rate better reflects the market environment of the liabilities Key Changes: Updated at each reporting date - Includes market risk benefits measured at fair value Based on a reference portfolio Unlocked and updated on an immediate basis in other comprehensive income Reflected in the Net Premium % Not Reflected in the Net Premium % 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. NDPPS

7 Net Premium Reserving Model Value t = PV (Benefits + Expenses) PV (Net Premium %) All Cash Flow Assumptions Unlocked Net Premium % = PV (Benefits + Expenses) PV (Premiums) 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. NDPPS

8 Discount Rate Current practice is that the discount rate can vary depending on the type of insurance contract. Discount rates can be currently based on: expected investment yield, policy crediting rate, or dividend interest rate. The new ASU guidance will create a consistent approach across the industry by using a reference portfolio. Determine discount rate using a reference portfolio of high-quality, fixed income investments independent of an insurance company s expected investment portfolio - High-quality interest rates that approximate a risk-free rate plus a liquidity adjustment are currently required by U.S. GAAP in discounting pension obligations Insurance entities would be required to: - Use reliable information that reflects duration characteristics of the liability for future policy benefits - Maximize the use of observable inputs and minimize the use of unobservable inputs - Use the interest accretion rate as the original discount rate IMPACT: Discount rate on assets and liabilities are no longer connected; therefore, the Asset Liability Management reported discount rate will be out of sync with financial statement discount rate 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. NDPPS

9 Long Duration Contracts with Market-risk Benefits Approach Creates one measurement model for all types of contracts with market-risk benefits (e.g., contracts guaranteed minimum death benefits, accumulation, income, withdrawal, and withdrawal-for-life benefits) Market-risk benefits would be measured at fair value, with the carrying amount presented as a separate line item on the statement of financial position The change in the fair value recognized: in other comprehensive income (OCI) when attributable to a change in the instrument-specific credit risk as a separate line item in the statement of operations for the portion not attributable to a change in the instrument-specific credit risk Changes in Fair Value Attributable to Instrument Specific Credit Risk Requirement to recognize changes in fair value attributable to changes in an entity s instrument-specific credit risk through OCI meeting two criteria: 1) The contract holder has the ability to direct funds in separate account investment alternatives and takes on the investment risk 2) The insurance entity provides a benefit that protects the contract holder from adverse capital-market performance IMPACTS: 1. Because all market-risk benefits would follow this model, insurance entities no longer would evaluate whether these market-risk benefits would be derivatives 2. Increased volatility in the P&L due to changes in FV from variable annuities 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. NDPPS

10 Deferred Acquisition Costs (DAC) All long duration contracts will now amortize DAC on a ratable basis as follows: Inforce that can be reasonably estimated In proportion to the undiscounted amount of insurance inforce over the expected term of the related contract - The expected term of a book of contracts would consider assumptions such as persistency, mortality, and morbidity or Inforce that cannot be reasonably estimated (variable inforce) On a straight-line basis, if the amount of insurance inforce is variable and cannot be reasonably estimated over the expected term of the related contract - For example, certain universal or investment contracts Concepts that would be eliminated under the proposed standard: Accruing interest on the unamortized balance of DAC Adjusting DAC for the effect of investment performance (shadow DAC) or changes in expected future liability cash flows Impairment analysis on DAC 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. NDPPS

11 Disclosures Additional disaggregated disclosures for the liabilities for future policy benefits and DAC would include rollforwards of opening and closing balances and quantitative and qualitative information about significant inputs, judgments and assumptions used in the measurement of the liabilities for future policy benefits and DAC. Would provide a principle for determining how to disaggregate the new disclosures to provide meaningful information without requiring a large amount of insignificant detail or aggregation of items with significantly different characteristics. Guidance provides examples of disaggregation characteristics (e.g., type of coverage, etc.). An insurer would consider how information about its liabilities for future policy benefits or DAC has been disaggregated for other purposes when determining which categories would be the most relevant and useful. Would clarify that the aggregation of the disclosures would at a minimum be consistent with segment-related disclosures. IMPACT: The proposed ASU would significantly expand the disclosure requirements for longduration contracts in the annual and interim financial statements KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. NDPPS

12 Disclosures (continued) Future Policy Benefits Policyholder Acct Balances Market-risk Benefits Disaggregated tabular rollforward of the beginning balance to the Ending balance with separate presentation of the expected future net premiums and benefits Ending balance Ending balance disaggregated by type of market-risk benefit Each disaggregated rollforward should include the Undiscounted ending balance for the expected future net premiums and benefits Gross premiums recognized Reinsurance receivable Weighted-average duration of the liability Qualitative and quantitative information used to measure the liability Weighted-average earned rate and the weighted-average crediting rate Guaranteed benefit amounts in excess of current account balances Cash surrender value Guaranteed benefit amounts in excess of current account balances Qualitative and quantitative information used to measure the asset or liability Reconciliation of each disaggregated rollforward to the aggregate ending carrying amount Of the liability, and the total interest and gross premiums recognized in the period Qualitative and quantitative information about Adverse development at the level of aggregation that reserves are calculated that resulted in a charge to current period benefit expense due to: Net premiums exceeding gross premiums in the current period; and Establishing an additional liability for a universal life contract or investment contract in the current period The significant inputs, judgments, and assumptions used to conclude that no losses for annualization benefits or deaths and other insurance benefits are expected for any contract where the entity did not recognize a liability Of the liability Objectives, policies, and processes for managing risks, including hedging activities Tabular presentation of policyholder account balances by range of guaranteed minimum crediting rates, and the related range of differences between rates being credited to policyholders, and the respective guaranteed minimums Disaggregated between asset and liability positions Objectives, policies, and processes for managing risks arising from market-risk benefits 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. NDPPS

13 Disclosures (continued) Deferred Acquisition Costs and Sales Inducements Separate Account Assets and Liabilities Disaggregated tabular rollforward of the beginning balance to the Ending balance, with qualitative and quantitative information about the inputs, judgments, and assumptions used to determine amortization amounts Ending balance Each disaggregated rollforward should Be consistent with the disaggregation of the liability Include the related cash surrender values, and a reconciliation to the aggregated carrying amount of the liability Additional disclosures should include the Nature of the acquisition costs capitalized Method of amortizing the deferred costs only for sales inducement assets General nature of the contracts reported in separate accounts Basis for presentation for separate account assets and liabilities and the related activity Aggregate fair value of assets, by major investment category, supporting separate accounts as of each date for which a statement of financial position is presented Amounts of gains and losses recognized on assets transferred to separate accounts for the periods presented 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. NDPPS

14 Transition Requirements Effective Date The FASB will set an effective date after it reviews comments, which are due December 15 Market-Risk Benefits Liability for Future Policy Benefits The ASU would be applied retrospectively, using actual historical information, with a cumulative catch-up recognized in opening retained earnings If that is impracticable, the guidance would be applied to in-force contracts based on their existing carrying amounts at the transition date and future assumptions would be updated The cumulative effect of changes in discount rates would be recognized in accumulated other comprehensive income The difference between fair value and carrying value at the transition date, excluding changes in instrumentspecific credit risk, would be recognized in opening retained earnings The cumulative effect of changes in instrumentspecific credit risk would be recognized in accumulated other comprehensive income Deferred Acquisition Costs The guidance on amortizing deferred acquisition costs would be applied as of the transition date to the existing carrying amount at that date, which would be adjusted to remove amounts included in other comprehensive income, such as shadow deferred acquisition costs The same transition method would be applied to other balances, such as sales inducement assets, which are amortized consistent with the amortization of deferred acquisition costs Disclosures During the Year of Adoption Information required for a change in accounting principle, but on a disaggregated basis consistent with recurring disclosure disaggregation If retrospective application is impracticable, the portion of the liability not subject to retrospective application Qualitative and quantitative information about transition adjustments related to net premiums that exceed gross premiums; and establishing an additional liability for a universal lifetype or investment contract 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. NDPPS

15 Short Duration Contracts

16 Scope ASU Disclosure standard No change to measurement or recognition Applies to short-duration contracts 4

17 Overview ASU , Disclosures about Short Duration Contracts - Incurred and paid loss development tables - Information about the claim frequency and incurred but not reported claims - Discounted claim reserves - Estimation and changes in methodologies and assumptions - Claim duration information - Rollforwards of claims liabilities - Health insurance claims 5

18 Effective date Public Business Entity - Annual periods beginning after December 15, Interim periods beginning after December 15, 2016 All other entities - Annual periods beginning after December 15, Interim periods beginning after December 15,

19 Principle based approach In a manner that allows users to understand the amount, timing, and uncertainty of cash flows arising from the liabilities and the development of the loss reserve estimates Increase transparency Improve comparability Provider financial statement users with additional information to facilitate analysis 7

20 Disclosure Audited and RSI Most recent reporting period covered by the audit opinion on the financial statements All preceding periods required supplementary information (RSI) FASB has the expectation that the complete table should be presented together but didn t provide specific requirements 8

21 Claims development information Disaggregated net incurred and paid claim and allocated claim adjustment expense development must be disclosed by accident year - Information for period of time claims typically remain outstanding - Period of time need not exceed 10 years - Net outstanding amount for all accident years not separately presented must be disclosed - Aggregate amounts for other reconciling items such as unallocated claim adjustment expense must be presented A reconciliation of the total net amount for all tables presented to the amounts in each statement of financial position presented is required with disclosure of disaggregated reinsurance balances 9

22 Claims development information example The example on the following slide is from the ASU s implementation guidance and illustrates the information that an insurance entity with one major short-duration product line would disclose. Note X: Liability for Unpaid Claims and Claim Adjustment Expenses The following is information about incurred and paid claims development as of December 31, 20Y6, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts. The information about incurred and paid claims development for the years ended December 31, 20X7, to 20Y5, is presented as supplementary information. 10

23 Claims development table Audited and RSI Homeowners Insurance 000s Incurred claims and allocated claim adjustment expenses, net of reinsurance As of December 31, 20Y6 Accident year 20X7 20X8 20X9 20Y0 20Y1 20Y2 20Y3 20Y4 20Y5 20Y6 Total of incurred-butnot-reported liabilities plus expected development on reported claims Cumulative number of reported claims 20X7 $10,000 $9,900 $9,700 $9,800 $9,750 $9,750 $9,600 $9,650 $9,575 $9, X8 10,950 11,000 10,500 10,750 10,850 10,600 10,250 10,150 10, X9 12,000 11,750 11,500 10,900 10,900 10,850 10,750 10, Y0 12,250 12,500 12,550 12,400 12,200 12,150 12, Y1 12,300 12,500 12,650 12,750 12,800 12, Y2 12,800 12,900 12,750 12,700 12,700 1, Y3 13,000 13,250 13,100 12,150 1, Y4 12,150 12,250 12,300 2, Y5 13,500 12,250 3, Y6 13,750 5, Total $121,300 11

24 Claims development table Audited and RSI (continued) Homeowners Insurance 000s Cumulative paid claims and allocated claim adjustment expenses, net of reinsurance Accident year 20X7 20X8 20X9 20Y0 20Y1 20Y2 20Y3 20Y4 20Y5 20Y6 20X7 $3,000 $5,000 $5,500 $6,000 $6,800 $7,500 $8,500 $9,000 $9,050 $9,075 20X8 3,500 5,750 6,500 7,500 7,750 8,250 8,500 9,000 9,500 20X9 3,750 6,000 6,500 7,500 7,900 8,250 8,950 9,700 20Y0 3,750 6,250 7,250 7,750 8,900 9,700 9,950 20Y1 4,250 5,500 6,750 8,000 8,950 9,250 20Y2 4,125 5,250 7,000 8,000 9,000 20Y3 4,500 5,750 7,250 7,750 20Y4 4,600 6,000 6,950 20Y5 4,750 6,125 20Y6 4, 850 TOTAL $82,150 All outstanding liabilities before 20X7, net of reinsurance 1,400 Liabilities for claims and claims adjustment expenses, net of reinsurance $40,550 12

25 Claims development reconciliation Audited The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated statement of financial position is as follows: Net outstanding liabilities December 31, 20Y6 Homeowners insurance $40,550 Other short-duration insurance lines 1,976 Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance 42,526 Reinsurance recoverable on unpaid claims Homeowners insurance 12,880 Other short-duration insurance lines 283 Total reinsurance recoverable on unpaid claims 14,163 Insurance lines other than short-duration 3,315 Unallocated claims adjustment expenses 2,420 Other 10 Total gross liability for unpaid claims and claim adjustment expense $62,

26 Claim frequency information Audited Disclosure providing information about claim frequency, unless it is impracticable to do so, is required and should include: - Quantitative claim frequency information - Explanation of the methodologies used to determine claim frequency No prescribed format may be tracked differently by or within organizations If impracticable to disclose, required to describe why - Some reinsurance arrangements - Participation in residual market pools - Other 14

27 Claim duration information RSI Disclose the average annual percentage paid claims by age based on the information in the paid claims development table Cover the same number of accident years presented in the claims and claim expense development tables Disaggregate consistent with the claims and claim expense development tables Disclosure is not required for health insurance claims The ASU s implementation guidance includes example claims duration calculations and disclosure 15

28 Implementation considerations Disaggregation Not a prescribed approach, principle based (paragraph H) Disaggregate in a manner where useful information is not obstructed Should not cross segments (paragraph D) 16

29 Disaggregation and segment reporting Should consider how reserve information presented for other purposes Segment Reporting - SEC Hot Topic - Diversity in number of segments Evaluation of disaggregation - Consistency with conclusion on segments - Confirming or disconfirming evidence - Don t aggregate items with significantly different characteristics - Need not disclose claims development for insignificant categories 17

30 Implementation considerations Disaggregation Factors MD&A Annual reports Earnings releases, including supplemental financial information Statutory reports CODM packages Investor or analyst presentations Categories Type of coverage Geography Customer type Market (e.g., personal vs. commercial) Average expected duration Information used to allocate resources 18

31 Implementation considerations Presentation alternatives - Acquisitions/Disposals retrospective (recast the prior year data) vs prospective (no change to prior year data) - Foreign exchange variety of views Evaluation requires judgment 19

32 Considerations Audited Subject to management process and review like other disclosures For integrated audits, audited disclosures are subject to internal controls - Possible new or updated processes - Possible new or updated controls Remember a disclosure standard, no change to recognition or measurement - Will be in large part an aggregation exercise within management s judgments about disaggregation 20

33 Auditor considerations RSI PCAOB and AICPA standards for auditor responsibility for RSI Slight differences between required procedures PCAOB Standards (PCAOB AS 2705) - Include explanatory paragraph only for certain exceptions (AS ) - Limited procedures required (AS ) AICPA Standards (AU-C 730) - Include Other Matter paragraph always (AU-C ) - Limited procedures required (AU-C ) 21

34 Statutory considerations Status of NAIC considerations Evaluation under OCBOA - Disclosure requirements - RSI Effective Date Disclosure that: allows users to understand the amount, timing, and uncertainty of cash flows arising from the liabilities and the development of the loss reserve estimates. 22

35 Key points to remember! Principal based disclosure usefulness Disaggregation - Can t cross segments - Consider other communications with financial statement users Many judgments to be made and a lot of data Consider a dry run 23

36 Questions 33

37 Thank you

38 kpmg.com/socialmedia The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS The KPMG name and logo are registered trademarks or trademarks of KPMG International.