In June 2013, the Financial Accounting Standards Board (FASB) issued its Exposure Draft on Insurance Contracts. Feedback from respondents was overwhelmingly in support of retaining the current guidance for recognition and measurement for short-duration contracts existing in US Generally Accepted Accounting Principles (GAAP). However, financial statement users commented that expanded disclosures about the liability for unpaid claims and claim adjustment expenses would increase the transparency of significant estimates and provide insight into the ability of the insurance entity to underwrite and anticipate claims.
Based upon the feedback received, the FASB decided that it would focus on making targeted improvements to the existing disclosure requirements. It is anticipated that the FASB will issue an Accounting Standard Update (ASU) related to these disclosure requirements by the end of 2014. Baker Tilly has been given the opportunity to complete a fatal flaw review of the proposed ASU.
Changes in the proposed ASU
The proposed ASU will require enhanced disclosures about the liability for unpaid claims and claims adjustment expenses, specifically the development of claims, the frequency and severity of claims, and expanded disclosures about reserves that are discounted. The following additional disclosures are being proposed by the FASB:
- Separate information about incurred and paid claims, and claims adjustment expenses on a net basis after risk mitigation (reinsurance) by accident year. This disclosure is intended to provider a user with information about claims development and is required to present information for the number of years for which claims incurred typically remain outstanding, but not to exceed 10 years.
- Reconciliation of the disclosure about claims development to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses, with ceded reinsurance disclosed separately.
- For each accident year presented in the claims development disclosure, the cumulative number of reported claims and the amount of incurred by not reported liabilities (IBNR) must be disclosed.
- For health insurance claims, entities must disclose the amount of IBNR in their interim financial statements for public companies.
- Disclosure of the average annual percentage payout of claims for each year beginning with the earliest accident year presented in the claims development disclosure, up to the end of the most recent year presented (history of claims duration). Health insurance claims are excluded from this disclosure.
- The disclosures described above shall be aggregated or disaggregated so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have significantly different characteristics. The FASB deliberated whether specific factors should be used as the basis for disaggregating the disclosures, but ultimately decided the most useful disaggregation of disclosures depends on the characteristics of the contracts an insurance entity writes and on various entity-specific factors to be used as the basis for disaggregating disclosures. The FASB board decided that specifying a principle for providing disaggregated information will result in the most useful information for users because it enables an insurance entity to disaggregate the disclosures into categories that are meaningful for its business.
- Because insurance companies utilize a wide variety of actuarial methods to calculate the liability for unpaid claims and claim adjustment expenses, the proposed ASU requires entities to disclose material changes in judgments made in calculating the liability for unpaid claims and claim adjustment expenses, including the reasons for the change and the effects on the financial statements.
- Existing US GAAP requires insurance entities to disclose the carrying amount of reserves presented at present value (i.e., discounted reserves) and the range of interest rates used to discount the reserves; however, there is no requirement to disclose the amount of the discount. The proposed ASU would require disclosure of the aggregate amount of discount, the amount of interest accretion recognized during the years presented, and the line item(s) in the statement of comprehensive income in which interest accretion is classified.
Factors to consider
The proposed ASU provides implementation guidance when deciding the extent to which information should be aggregated or disaggregated for the purposes of the disclosures above. This decision depends on the facts and circumstances that pertain to the characteristics of the liability for unpaid claims and claim adjustment expenses. Some insurance entities may meet the objective by using only one type of category, while other entities may need multiple categories. When selecting the categories, entities should consider how information has been presented for other purposes, including:
- Disclosure presented outside the financial statements
- Information regularly viewed by the chief operating decision maker for evaluating financial performance
- Other information that is similar to the types of information identified in the previous two bullets and that is used by the entity or users of the entity’s financial statements to evaluate the entity’s financial performance or make resource allocation decisions
Some examples of categories that might be appropriate include:
- Type of coverage (e.g., major product line)
- Reportable segment as defined by FASB ASC 280
- Market or type of customer (e.g., personal or commercial lines)
- Claim duration (e.g., short- vs. long-tailed products)
The proposed ASU will be applicable to public business entities for annual reporting periods beginning after December 15, 2014 and interim reporting periods within annual reporting periods beginning after December 15, 2015. All other entities should apply the disclosure requirements for the annual reporting period beginning after December 15, 2015 and interim reporting periods within annual reporting periods beginning after December 15, 2016. Early application is permitted.
Comparative disclosures are required for each reporting period ending after initial adoption (i.e., retrospectively), except for the claims development table and material changes in judgments disclosures. Additionally, in the year of initial application, previously unpublished information about claims development that occurred earlier than five years before the end of the first financial reporting year in which the disclosures are applied is not required.
The expanded disclosures proposed by the FASB are intended to significantly enhance the transparency of the entities claims development and estimates process to provide more useful information to users of the financial statements. For US domiciled insurance entities, much of the information will be readily available in Schedule P of the Annual Statement, however the level of disaggregation may be different than the Annual Statement schedules.
For more information on this topic, or to learn how Baker Tilly insurance specialists can help, contact our team.