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ASC 606 update: Insurance revenue streams affected

Initially, insurance organizations thought ASC 606 would have minimal impact on the industry because insurance contracts accounted for under ASC 944 were out of scope. Insurance organizations believed they could disregard the major change in accounting standards. However, as companies and accounting specialists delved into the standard, they discovered that many insurance organizations have revenue streams that fall under the scope of ASC 606.

Insurers should carefully review whether they are affected by ASC 606 with an advisor that understands their specific revenue streams and methods of accounting. Organizations may find that while their insurance contracts are out of scope, they have multiple other revenue streams that should be analyzed to determine if they are in scope and may require ASC 606 to be implemented.

Examples of revenue streams impacted

Below are some examples of insurance-related contracts and services that may be impacted by ASC 606 and should be evaluated by insurance and insurance-related organizations.

  1. High deductible insurance policies: High deductible insurance policies (e.g., workers’ compensation, commercial auto or liability) for which the insurer also provides claims handling, adjudication, payment and loss control services for all claims including those below the deductible.
  2. Third party administrative services: Situations in which an insurance-related entity provides third party administrative or, program management services for a related or unrelated insurer or for a self-insured plan. The contract includes a commission for underwriting the policy, policy management services, claims handling services and could be expressed as a single amount or percentage of premium written. Certain contracts may include a performance-based profit commission or bonus based upon ultimate underwriting profit performance, persistency or no claims bonuses related to the underlying insurance business written.
  3. Title insurance contracts: An entity issues title insurance contracts, where services may also include escrow closing and construction disbursement services, as well as real estate information products, national default management services, and a variety of other services pertaining to real estate transfers and loan transactions.
  4. Administrative services only contracts: An insurance entity issues an administrative services only (ASO) insurance contract. The entity may also issue a stop loss contract to the insured (may be issued in the structure of a captive or rent-a-captive type arrangement). The ASO contract or services component of the stop loss contract includes enrollment and member services, and/or claim payment adjustment services, including recovery and subrogation services.
  5. Revenue of non-insurance subsidiaries: Insurance holding companies may include subsidiaries or affiliates such as investment advisory services companies, premium financing companies or other entities with non-insurance revenues.

What to do now

It is important for insurance companies to begin a detailed analysis of all revenue streams in the company and/or its consolidated group to determine those that are impacted by ASC 606. Implementation may affect multiple areas of the entity, so ample time will be needed to ensure internal controls, processes and systems are effective.

Public business entities should apply the guidance to annual reporting periods beginning after December 15, 2017. All other entities should apply the guidance to annual reporting periods beginning after December 15, 2018. ASC 606 provides the option to apply the standard retrospectively or to use a simplified transition method. If using the simplified method an entity will not restate prior periods.

For more information on ASC 606, or to learn how Baker Tilly’s insurance industry specialists can help, contact our team.

© 2024 Baker Tilly US, LLP

Jonathan Zeigler
Managing Principal

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