FASB Increases Disclosure Requirements for Short-Duration Insurance Contracts

 

In May 2015, the Financial Accounting Standards Board (FASB) adopted Accounting Standards Update (ASU) 2015-09 - Financial Services - Insurance: Disclosures about Short-Duration Contracts. The recognition and measurement requirements for such contracts has remained consistent with existing requirements of the FASB's Accounting Standards Codification (ASC), Topic 944. However, disclosure requirements have increased.

 

The amendments described below have the following effective dates (it should be noted that this ASU should be applied retrospectively by providing comparative disclosures for each period presented):

 

• Public business entities: Annual periods beginning after December 15, 2015, and interim periods beginning after December 15, 2016.

• Other business entities: Annual periods beginning after December 15, 2016, and interim periods beginning after December 15, 2017.

• Early adoption is permitted.

 

Disclosure Requirements

Increased disclosure requirements of the liability for unpaid claims and claims adjustment expense, as summarized by the FASB, require insurance entities to disclose for annual reporting periods the following information about the liability for unpaid claims and claim adjustment expenses (on an aggregate or disaggregate basis as to not obscure the analysis):

 

1. Incurred and paid claims development information by accident year, on a net basis after risk mitigation through reinsurance, for the number of years for which claims incurred typically remain outstanding (that need not exceed 10 years, including the most recent reporting period presented in the statement of financial position). Each period presented in the disclosure about claims development that precedes the current reporting period is considered to be supplementary information.

2. A reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses, with separate disclosure of reinsurance recoverable on unpaid claims for each period presented in the statement of financial position.

3. For each accident year presented of incurred claims development information, the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses, accompanied by a description of reserving methodologies (as well as any changes to those methodologies).

4. For each accident year presented of incurred claims development information, quantitative information about claim frequency (unless it is impracticable to do so) accompanied by a qualitative description of methodologies used for determining claim frequency information (as well as any changes to these methodologies).

5. For all claims except health insurance claims, the average annual percentage payout of incurred claims by age (that is, history of claims duration) for the same number of accident years as presented in (3) and (4) above.

 

These changes are intended to allow a user of the financial statements to understand the amount, timing, and uncertainty of cash flows arising from the liabilities. The amendments also require the disclosure of information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including the reason for the change and the effects on the financial statements; adjustments to the roll forward of unpaid claims and claims adjustment expenses; discount information related to present value presentation; policies and methodologies for estimating difficult-to-estimate liabilities such as asbestos-related illnesses; and specific items related to health care claims. An implementation guide and illustrations are included in the ASU.

 

Accounting for Long-Duration Contracts

The FASB is in re-deliberations on accounting for long-duration contracts. We will continue to monitor developments and we will provide insights as soon as the FASB has finalized an update.

 

Start Early

While we expect ASU 2015-09 to have a limited impact on insurance entity operating activities, this update significantly increased the disclosure requirements for short-duration insurance contracts; therefore, we expect this ASU to cause financial reporting departments increased workload, especially in the year or two leading up to the requirements for added disclosure. Starting early and monitoring implementation of such standards will be best practices. Please contact a member of Eide Bailly's insurance industry group with any questions as you prepare for these changes.