Summary of New Standards for Insurance Accounting

The Financial Accounting Standards Board is the organization responsible for setting the standards that all accountants should follow. In June 2013, the organization announced a new plan that would affect those working in insurance accounting. Though those new standards won't go into effect until 2018, the announcement of the new policy led to questions and concerns from those working in the accounting world.

According to Elizabeth Festa, the new standards will apply to any insurance contract, including those issued by companies that do not specialize in insurance. The accounting standards require accountants to look at the cash flow of the company and ensure that all claims are covered four times a year, regardless of when the company pays out on a claim. For example, if you issue a claim worth $100,000, you must account for $25,000 of that claim every quarter, even if your company won't pay on the claim for several years. The US Generally Accepted Accounting Principles do not currently have the same requirements with regards to insurance accounting, but the FASB hopes that these accounting standards will go global in the coming years.

The new standards will apply to all companies working in insurance accounting, including banks and service providers. When the standards were first announced, accountants wondered what this held for the future. Many questioned how American companies could compete with overseas insurers who don't follow the same standards. However, the announcement that international markets would use the same set of standards has made most view the changes in a positive light.

When you sell life insurance, you take on the risk that your client might die earlier than estimated, and when you offer bank loans, you accept that some borrowers will default on those loans. The new changes to insurance accounting won't change the way the system handles credit swaps, situations in which one person takes over the loan of another, but it will affect how life insurance companies operate. These companies can no longer credit premiums and payments when customers make those payments; instead, they can only credit accounts once payouts on the policies have been made. This means that you cannot use one client's money to pay off the account of another because you must keep the funds separate. Those working in insurance accounting note that this might limit the resources of life insurance and health insurance providers.

The FASB has introduced these changes to how companies report money paid by clients in the hopes of creating a standardized system around the world. These changes to standard accounting principles will change the way your company handles insurance accounting.

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