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GAAP Amended With More Disclosures for Short-Term Insurance Contracts

The FASB published an update to U.S. GAAP to require property-and-casualty insurers to provide more information in their financial statement footnotes about policyholder claims.The update stems from the standard-setter’s work to make the liabilities of insurance companies easier to understand.

The FASB on May 21, 2015, published Accounting Standards Update (ASU) No. 2015-09,Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts, to require underwriters of automobile, healthcare, catastrophic, and other short-term insurance policies to provide new information in their financial statement footnotes about customer claims.

The changes are intended to give investors and analysts more information about an insurer’s ability to underwrite and anticipate costs associated with claims.The amendments apply to insurers that issue short-term contracts as they are defined in Topic 944,Financial Services — Insurance.

“The disclosures required by this ASU are intended to provide investors a clearer picture of an insurance company’s claim-related liabilities on the balance sheet and how those liabilities change over time,” FASB Chairman Russell Golden said in a statement.

The amendments require insurers to provide tables that break down the claims they incurred and the amounts paid on the claims for the years the claims remain outstanding, the FASB said.This information “need not exceed” 10 years.Insurers also have to reconcile the amounts in the tables to the liabilities for claims reported on the balance sheet.Other disclosures have to give investors the total number of claims that have not been reported and the insurer’s estimate of expected increases in claims.

In addition, insurers must reveal significant changes in the methods and assumptions they use to calculate liabilities, including the reasons for the change and the effect on the financial statements.

For all claims other than health insurance claims, an insurance company will provide a history of a claim’s duration, presented as the average annual payout of incurred claims by age.

Insurers will be given leeway to determine how to break down the information.The update says insurers should combine or break down the information in the disclosures “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 new data should be helpful to investors and analysts and an improvement over current practice, in which companies typically only present one year of information, said PricewaterhouseCoopers LLP partner Donald Doran.

“Analysts obviously want to be able to predict how good a company is at making estimates,” Doran said. “Any one year’s worth of changes may not be indicative; they could have had a catastrophe.Any one year could affect the estimated changes in a way that’s not indicative of how good management is at predicting the ultimate loss reserves.”

Insurers should have much of the information the FASB is requiring on hand to comply with U.S. regulatory filing obligations.U.S. companies that have overseas operations will have more work to do, Doran said.

Public companies have to follow the disclosures in fiscal years that start after December 15, the FASB said.Public companies will apply the changes to quarterly reports and other periods less than a year for fiscal years that start after December 15, 2016. Private companies and not-for-profit organizations will apply the changes for fiscal years that begin after December 15, 2016, and to quarterly reports and other periods less than a year for fiscal years that start after December 15, 2017.

All companies will be allowed to follow the requirements ahead of the effective date.

The update is the result of several years of debate about how best to convey the liabilities that insurers expect to incur through claims from customers.Investors and analysts have long compared insurance liabilities, particularly for life insurance, to a “black box.” The complaints prompted the FASB and IASB to try to come up with a single, global accounting standard to force more reliable estimates of future payments.

The boards could not agree on several aspects of the project, and the FASB took its own path in June 2013, releasing Proposed ASU No.2013-290,Insurance Contracts (Topic 834). The proposal included a wide definition of insurance and called for changes to accounting for both short-term policies, such as theft and fire, and life and other long-term policies.

The standard-setter faced immediate resistance, particularly from underwriters of short-term policies, who were satisfied with the accounting they use.In April 2014, the board decided to focus the project’s more extensive amendments on the accounting for life insurance and other long-term policies.The planned revisions for short-term insurance contracts were limited to the upgraded disclosure rules.

“The feedback received from respondents overwhelmingly supported retaining in generally accepted accounting principles (GAAP) the existing recognition and measurement guidance for short-duration contracts,” the update reads. “Those respondents noted that the existing accounting model for short-duration contracts works well and that no changes should be made to existing guidance other than to disclosure requirements.”

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