Proposed Rules for Treatment of Certain Municipal Obligations as HQLA
As a follow up to our July LRA, on August 22 the bank regulatory agencies issued an interim final rule to amend the liquidity coverage ratio rules to treat certain municipal securities as Level 2B high-quality liquid assets (HQLA). The new rule defines the term “municipal obligation” to mean an obligation of
- A state or any political subdivision thereof; or
- Any agency or instrumentality of a state or any political subdivision thereof.
Pursuant to the rule, municipal obligations need to be “liquid and readily-marketable” and “investment grade” to qualify as Level 2B HQLA.
This change stems from the Economic Growth, Regulatory Relief, and Consumer Protection Act.
The interim final rule will take effect upon publication in the Federal Register, and comments will be accepted for thirty days following publication.
FASB Targeted Improvements to the Accounting for Long-Duration Contracts
In August, the Financial Accounting Standards Board (FASB) published Accounting Standards Update (ASU) 2018-12, which seeks to implement targeted improvements to the recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by insurance entities.
Note: the amendments do not apply to policyholders of long-duration contracts.
During FASB’s deliberation process, we confirmed with various BOLI carriers that BOLI contracts are subject to this accounting standard. Key changes set forth in ASU 2018-12 include
- Liability Measurement: An insurance entity must review and update (if necessary) assumptions used to measure cash flows at least annually and update the discount rate assumption at each reporting date.
- Change in liability as a result of cash flow assumptions must be recognized in net income;
- Change in liability estimate as a result of discount rate assumption must be recognized in other comprehensive income.
- Market Risk Benefits: An insurance entity must measure all market risk benefits associated with deposit (or account balance) contracts at fair value.
- DAC Amortization: The amortization of DAC has been simplified and will now require the balances to be amortized on a constant level basis over the expected term of the related contracts. These new rules will apply to in force contracts. DAC will be required to be written off for unexpected contract terminations, but will not be subject to an impairment test.
- Disclosures: Disclosure requirements have been meaningfully expanded to require insurance entities to disclose disaggregated rollforwards of beginning to ending balances of the liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, and DAC.
The amendments in this ASU Update are effective for fiscal years beginning after December 15, 2020 (public business entities) or December 15, 2021 (all other entities).
We will review these new accounting rules in more detail and will engage with insurers to better understand their views on the relative impact.
FASB Proposes Narrow-Scope Improvements to Credit Losses Standard
On August 20, FASB issued a proposed ASU that would impact the transition requirements of the credit losses standard (ASC 326) that was originally issued in 2016. The proposed ASU would extend the transition period by one year, requiring that entities implement the standard for fiscal years beginning after December 15, 2021.
FASB is seeking comments on the proposed amendments, with the comment period extending to September 19.
COI Litigation Updates
On August 10, John Hancock reached a settlement to pay $59.75 million in compensation to policyholders in a class action lawsuit. In this lawsuit, plaintiffs who owned Flex V-II variable whole life insurance policies alleged that John Hancock had breached the policies by overcharging policyholders for COI and expense charges. John Hancock denied all liability or wrongdoing.
This is one of several cases that the law firm Miller Schirger has prosecuted on behalf of policyholders. In March 2016, an Indiana court granted final approval of a nationwide class action settlement valued at approximately $2.25 billion against Lincoln National Life Insurance Company.
In June 2018, a jury verdict in Missouri awarded $34.3 million on behalf of policyholders against State Farm Life Insurance Company. In that matter, State Farm has filed a motion for judgment as a matter of law seeking to overturn the verdict and/or obtain a new trial. We will continue to monitor this lawsuit for further developments.
Citation: Barbara Larson vs. John Hancock Life Insurance Company (U.S.A.) (Superior Court of California, Alameda County)
Comments on SEC Best Interest Standard for Broker-Dealers
On August 3, the ACLI posted comments on the SEC’s “Regulation Best Interest” for broker-dealers. The ACLI stated that the SEC standard is a vastly superior approach to the vacated Department of Labor standard. The comments also advised that the ACLI believes that “life insurers strongly support protections serving the best interests of customers, which can be meaningfully safeguarded with disclosure about services and material conflicts of interest.”
Alternatively, Senator Elizabeth Warren commented that the proposal is flawed in its current form and suggested certain revisions, including that
- The final rule should make absolutely clear that all financial professionals must act in their clients’ best interest by applying a fiduciary standard to the brokerage industry;
- The SEC should explicitly ban the most obvious forms of conflicted advice;
- The SEC should not rely on disclosure alone to protect customers;
The SEC should include a strong enforcement mechanism by allowing investors to sue advisers who scam them.