Article
2023 Year-end insurance industry key takeaways
Dec. 11, 2023 · Authored by Daniel E. Buttke, Brian P. Rozek, John Romano, Dave DuVarney, Gideon Gradman, Tim Kramer, Wes Young
For the insurance industry, 2023 was a tumultuous year riddled with challenges and unpredictability, including staffing shortages, inflation, severe weather and cybersecurity woes. During Baker Tilly’s annual year-end insurance industry update, a team of our industry specialists gave key updates on the latest accounting guidance, regulatory matters and new tax developments. They discussed ways that insurance organizations can take advantage of the New Markets Tax Credits (NMTC) program, along with other important tax credits and incentives updates, and the importance of implementing an artificial intelligence (AI) governance model that is appropriate for your organization.
Below is an overview of key takeaways and a recording of the webinar. Contact us for questions or further discussion on any of the below topics.
New accounting guidance and key updates
One of the most talked about changes is the CECL standard (Accounting Standard Update (ASU) 2016-13 and related ASUs) that was required to be implemented by Jan. 1, 2023. It replaces the legacy Generally Accepted Accounting Principles (GAAP) concept of the insured loss model.
The standard will affect all GAAP filers to some extent, depending on their individual circumstances. In many cases, the ultimate accounting will not change drastically and the numbers reported in an organization’s financial statements may not differ from what it has historically reported. However, because the company may need to alter its policies, procedures and internal controls as it is implementing CECL, it should change the way it reaches its conclusion.
The National Association of Insurance Commissioners proposed a complete rejection of CECL at its fall national meeting. The rejection is exposed for comment until Feb. 2024.
A new concept that will significantly affect statutory accounting is the NAIC’s bond project. The initiative stemmed from the increasing sophistication of investments that were showing up on insurers’ balance sheets, specifically items that were reported as bonds but had equity-like characteristics. To understand from an accounting perspective, the NAIC established this bond project which has yielded two primary components: 1) the principles-based bond definition and 2) reporting changes to follow the implementation of accounting changes.
The NAIC has created a decision tree to help organizations determine if an investment qualifies as a bond. The majority of insurers’ portfolios will be minimally affected. In fact, holders of only traditional issuer obligations will likely not feel any impact. The assets that will require additional analysis include:
- Those that are collateralized by underlying equity investments
- Those collateralized by nonfinancial assets relying heavily on cash flows not contractually secured
- Those with other unique or complex structures, particularly when third party market validation is not present to help support conclusion
Insurers should collaborate with their investment advisors during 2024 to be prepared for adoption of the standard effective Jan. 1, 2025.
ASU 2018-12 will target improvements for long-duration contracts. Its four main areas of focus are:
- A more current measure of insurance liability
- Consistent measurement of market risk benefits
- Simplified amortization of deferred acquisition costs
- Enhanced disclosures
This is effective for fiscal years beginning after Dec. 15, 2022 for public companies and effective calendar year 2025 for all other entities.
- See the webinar recording below for a summary of additional GAAP and SAP updates and revisions which are effective in 2023 and beyond.
- The Statutory Accounting Principles Working Group met to adopt SSAP revisions on Dec. 1, 2023. Read our article summarizing actions taken by the Statutory Accounting Principles Working Group.
