Insurance Contracts – New Accounting Disclosures
James Boissonneault, Audit Senior Manager
In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-09 Financial Services—Insurance (Topic 944), Disclosures about Short-Duration Contracts. The purpose of this ASU is to improve and enhance the disclosures made in the financial statements of insurance entities. Many of these entities are required to make significant estimates in their financial statements regarding claims that have occurred but have not been reported to the insurance entity. Insurance entities typically use actuaries to assist them with making these estimates. The new disclosure requirements of ASU 2015-09 are intended to provide the users of the financial statements with more transparent and comparable information to allow them to evaluate the significant estimates of similar insurance entities.
ASU 2015-09 became effective a year ago for public entities, but became effective for private entities with annual periods beginning after December 15, 2016. In other words, for private entities with a calendar year-end, ASU 2015-09 will need to be adopted for the December 31, 2017 financial statements. Entities subject to ASU 2015-09 are required to adopt the new ASU retrospectively, meaning that private companies with a calendar year-end will need to present the required information for both 2017 and 2016, assuming they are presenting comparative financial statements.
ASU 2015-09 adds five disclosures to an insurance entity’s financial statements:
- Incurred and paid claims development information by incident year (net of reinsurance) for a period of time, not to exceed 10 years, for which claims typically remain unsettled. Any information provided outside of the current reporting period is considered supplemental information to the basic financial statements. Also, in the first year of adoption, an entity can choose to limit the disclosure to 5 years of activity. After the initial year of adoption, the entity will add 1 year’s activity, until 10 years is reached.
- A roll-forward of the unpaid claims and claims adjustment expense liability from the prior year to the current year.
- For each incident year presented under disclosure requirement #1, the total incurred-but-not-reported claims and claims adjustment expense liability, the methods used to estimate that liability, and any changes in the methods used from the prior year.
- For each incident year presented under disclosure requirement #1, the number of claims reported in each incident year.
- The average annual percentage payout of incurred claims by age. Due to the short-term nature of health care claims, these types of claims are exempt from this disclosure requirement.
The information required to be disclosed under ASU 2015-09 must also be presented in a manner that is meaningful to the company. For example, the information could be presented by coverage type, geography, reportable segment, or type of customer. The FASB recommends that consideration be given to information regularly reviewed by the entity’s chief decision-maker in his or her evaluation of financial performance. Also, the entity should consider how any information is already published for other outside parties. For example, many domestic insurance entities are already required to disclose claims information in their regulatory filings. Management should consider these factors when determining how to disclose this information.
As we approach the calendar year-end for 2017, private insurance entities reporting under Generally Accepted Accounting Principles in the United States should review this new ASU to determine the best methods to accumulate this information and present it in their financial statements.
If you have any questions, please contact James Boissonneault at 1.800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.