The Financial Accounting Standards Board (FASB) has been diligently studying the accounting and reporting for insurance contracts for some years now and has finally issued ASU 2015-09 “Disclosures about Short-Duration Contracts” in May 2015. This new standard requires ONLY new disclosures, so no accounting changes for short-duration contracts! (This is not necessarily going to be true for long duration contracts, so don’t get too comfortable, if you are in that line of business. The FASB is still working on that project.)
But after we celebrate the lack of accounting changes for a brief moment, let us come down to earth and face the new disclosures. The Board has thought through them all long and hard, and believes that users of financial statements need a lot more information about an insurance company’s claims and claims liabilities, including the data underlying claims liabilities, and its reserving methodologies.
What do these expanded disclosures primarily include now?
- Continued disclosure of the roll-forward of the liability for unpaid claims and claim adjustment expenses (LUCCAE), now required to be tabular, and the reasons for the change in incurred claims and expenses due to insured events of prior years (annual and interim (new))
- Undiscounted incurred and paid claims development tables by accident year, net of reinsurance, for the number of years for which claims incurred typically remain outstanding (no more than 10 years are required), disaggregated as appropriate (annual)
a. Only data for the most recent year needs to be in the footnote
b. The full presentation of up to 10 years can be in a footnote clearly identified as required supplemental information (RSI), or in a required supplemental schedule
c. Reconciliation of this data to LUCCAE must be disclosed for the most recent reporting period, with a separate disclosure of reinsurance recoverable on unpaid claims
- Total of incurred but not reported (IBNR) claims plus expected development on reported claims included in the LUCCAE for each accident year included in the claims development table, disaggregated as appropriate, along with a description of reserving methodologies and any changes thereto (annual)
- Cumulative claim frequency data for each accident year included in the incurred claims development tables, disaggregated as appropriate, unless impractical, along with a description of methodologies used to determine claim frequency and any changes thereto (annual)
- History of claims duration by age for the same number of accident years as above, disaggregated as appropriate, for all claims except health insurance claims (supplementary information) (annual)
Health insurance claims only: Aggregating or disaggregating the following in order to avoid obscuring useful information, by either (1) including a large amount of insignificant detail; or (2) aggregating items with different characteristics
a. Total of IBNR liabilities plus expected development on reported claims included in the LUCCAE
b. LUCCAE roll-forward (annual and interim)
- Significant changes in methodologies and assumptions used in calculating LUCCAE, including reasons for the change and the effects of the change on the most recent year presented (annual)
- Transition relief – disclosures of claims developments limited to 5 years of data (rather than up to 10 years), if difficulties encountered in obtaining the older data needed to complete the required disclosures. Each subsequent year’s minimum number of years would increase by one year, as appropriate, until the required number of years is achieved.
What is meant by the “disaggregated as appropriate” references in the above disclosure requirements?
The Board has noted that the LUCCAE can be a “composite amount” arising from insurance policies with varying characteristics of claim frequency and severity, resulting in differing amounts and timing of cash flows. The Board believes that this summarization can obscure important information needed for financial statement user analysis. As a result, the Board decided that the indicated disclosures should be made in a way such that users can understand aspects of the insurance company’s expected future cash flows, and should be aggregated/disaggregated into meaningful categories without drowning the user in detail.
How much disaggregation are we talking about here?
In addition to specifying this overall principle for disaggregation in the preceding paragraph, the Board has added guidance regarding the selection of a category for guidance, which indicates that the company should consider how this information has been presented “for other purposes.” In addition, the Board’s guidance includes some examples of categories. These examples include:
- Major product line
- Reportable segment
- Market or type of customer
- Claim duration
If you sense from this list that the footnotes in the financial statements will most likely grow by a few pages, you are correct!
Much of this data however may already be prepared for use in in statutory reports or in Annual Reports on 10-K, if the insurance company is publicly held. Some groupings may be different, resulting in the need to make changes in data collection processes.
Woe to the international insurance companies, who may have to scramble a bit to collect this data for their foreign operations!
When are these expanded disclosures effective?
- For public business entities, annual periods beginning after December 15, 2015 (aka calendar 2016), and then interim periods thereafter (aka calendar 2017 and after)
- For all other entities, annual periods beginning after December 15, 2016 (aka calendar 2017), and then interim periods thereafter (aka calendar 2018 and after)
- Early application is permitted
What does Plante Moran recommend that insurance companies do to get ready?
As with any change in accounting and reporting standards, insurance company financial personnel should first familiarize themselves with the requirements of the new standard.
Next, they should consider what data presentations and disaggregations would be most meaningful to the financial statement users, keeping in mind the overall principle of assisting financial statement users in understanding the insurance company’s future cash flows.
Next, they should consider if the company’s systems and processes currently produce the newly required information and, if not, what changes need to be made.
Lastly, they should be sure to have in place or develop the proper controls regarding the production of this data.