Is FASB About to Fix Insurance Accounting Volatility

Think of an insurance company like a tightrope walker juggling long-term promises while interest rates swing below. One wrong move in accounting, not economics, and suddenly the numbers look shaky even when the strategy is solid. That’s exactly the disconnect FASB is now trying to fix. With its latest move to explore extending the portfolio layer method (PLM) to liabilities, FASB isn’t just tweaking a rulebook. It’s stepping into a long-standing pain point for insurers where risk management works in practice, but GAAP reporting tells a messier story.

Why FASB Is Looking at Insurance Hedging Now

Let’s be real, interest rates haven’t exactly been “chill” lately. Insurers managing annuities, life policies, and long-term care products are constantly adjusting to market swings, policyholder behavior, and embedded guarantees. Here’s the issue: Insurance companies already use derivatives to hedge these risks. Economically, these hedges make sense. But under current GAAP, many of them don’t qualify for hedge accounting, forcing gains and losses to hit earnings unevenly. As one stakeholder pointed out to FASB, this mismatch leads to “earnings volatility arising from the use of derivative gains and losses”, even when the underlying hedge is working. That’s why this project is hitting the agenda now. The accounting rules haven’t kept up with how insurers actually manage risk in a high-volatility environment.

Assets Got the Tool, Liabilities Got Left Hanging

The portfolio layer method already works for financial assets, letting companies hedge a “layer” of a portfolio instead of tying the hedge to specific instruments that might prepay or default. FASB Chair Richard Jones summed up the appeal pretty cleanly: “You know something’s going to be out there, but you just don’t know which one… You can pull breakage out of the equation.” But flip to the liability side, where insurers actually live, and that flexibility disappears. Insurance companies manage long-term promises, not just assets. Think guaranteed interest rates, surrender options, and policyholder behavior tied to market movements. These liabilities are just as complex, but the accounting tools haven’t matched up. That’s the gap FASB is now trying to close.

What Changes If This Goes Through?

If PLM gets extended to liabilities, insurers could finally align accounting with how they actually hedge risk.

1. Smoother Earnings, Less “What Just Happened?” Moments

Right now, derivatives can create sharp swings in earnings because the liability side doesn’t move in sync. That leads to what many call “artificial volatility.” With PLM applied to liabilities, more hedges would qualify for hedge accounting, meaning:

• Gains and losses align better
• Earnings reflect actual risk management
• Fewer surprises for investors

Or simply put, less accounting noise, more economic clarity.

2. Less Reliance on Non-GAAP Storytelling

Let’s call it what it is: companies often rely on adjusted metrics to explain what GAAP doesn’t capture well. Stakeholders, including insurers and actuaries, have flagged this issue clearly. When hedge accounting fails, companies lean on non-GAAP to tell the real story. Fix the accounting model, and suddenly:

• Financials become more transparent
• Investors don’t need a decoder ring
• Comparability across insurers improves

That’s a big win for anyone analyzing insurance companies.

3. Stronger Capital and Credit Signals

This isn’t just about reporting optics. The American Council of Life Insurers warned that failing hedge accounting can lead to:

• Volatile earnings
• Credit rating pressure
• Higher cost of capital

Fix the mismatch, and insurers could present more stable financial metrics, which matters for:

• Rating agencies
• Debt markets
• Investor confidence

In short, better accounting could actually influence funding costs. That’s not small potatoes.

Scope Is Where Things Get Tricky

This project sounds promising, but the hard part is the scope. FASB will need to decide which liabilities qualify and how the portfolio should be defined. Board members have already raised concerns about applying the method too broadly, especially to open pools of liabilities. That concern is understandable. A closed portfolio is easier to identify, track, document, and audit. An open pool, by contrast, may include future contracts or future obligations that do not yet exist. That creates a tougher question: can you hedge a layer of something that is not fully locked in?

For insurers, this scope decision is everything. If FASB writes the rule too narrowly, the change may not solve the real problem. If it writes the rule too broadly, the model may become difficult to apply and audit. The sweet spot is a framework that is practical enough for real insurance portfolios but disciplined enough to keep financial reporting credible.

What’s in It for Professionals?

• For accounting and finance professionals, this project deserves attention even before a proposed ASU is issued. Why? Hedge accounting is not something companies can fix at the end of the reporting period with a memo and a calculator.
•  Auditors should also stay alert. A liability-side PLM model would bring audit questions around completeness of the portfolio, appropriateness of the hedged layer, support for management’s expectations, and the mechanics of fair value hedge accounting. The audit file will need more than “management says the hedge works.”
•  For CFOs and controllers, the bigger opportunity is communication. If the final standard reduces earnings noise, companies may be able to explain hedging results more cleanly to investors, boards, and rating agencies. The accounting function could move from damage control to clearer reporting.
•  Tax professionals may not be the primary audience for this standard-setting project, but they should still watch it. Changes in hedge accounting can affect financial statement presentation, deferred tax analysis, statutory reporting conversations, and disclosures. In insurance, accounting changes rarely stay in one lane.

Is GAAP Finally Catching Up?

For years, insurers have been saying the same thing: “Our hedges work, but our financials don’t show it.” That disconnect between economic reality and accounting presentation has been a persistent frustration across the industry. FASB’s latest move could finally start closing that gap by bringing liability-side hedging into a framework that better reflects how risk is actually managed.

Extending the portfolio layer method to liabilities has the potential to reduce earnings volatility, improve transparency, and align financial reporting more closely with real-world risk management practices. Instead of relying on non-GAAP explanations to bridge the gap, insurers may be able to present cleaner, more intuitive financial results that better communicate performance to investors and analysts.