New Disclosure Requirements for Short-Duration Contracts Issued by Insurance Companies on GAAP Financial Statements
Non-public companies face new disclosure requirements for U.S. generally accepted accounting principles (GAAP) basis financial statements related to short-duration contracts beginning with calendar year 2017 financial statements. The disclosures require more than simply pulling a Schedule P from the current NAIC annual statement. This guidance applies to short-duration contracts for property & casualty, life and health insurance providers.
Taking a Step Back
In May 2015, the FASB released accounting standards update 2015-09 (ASU 2015-09), requiring additional disclosures related to short-duration contracts issued by insurance entities. The purpose of ASU 2015-09 is to increase the comparability and decision-making usefulness of insurance liability presented in an entity’s financial statements. ASU 2015-09 has been incorporated into FASB ASC 944-40-50 with transition guidance at ASC 944-40-65-1 and implementation guidance and illustrations included within ASC 944-40-55.
Public companies included these disclosures in their December 31, 2016, form 10-K filings. All GAAP filers reporting after December 15, 2016, will need to include these disclosures in their 2017 financial statements. Certain additional limited disclosures will be required for the interim period financial statements prepared for periods beginning after December 15, 2017.
What are the Additional Disclosure Requirements?
GAAP provides flexibility in the level of disaggregation required to be disclosed; however, there are a number of key disclosures needed. ASC 944-40-50 provides all of the detail regarding required disclosures, including:
- Claims triangles showing incurred and paid claim development information by accident year (including allocated claim adjustment expenses), net of reinsurance, for the number of years for which claims incurred typically remain outstanding (not to exceed 10 years).
All years prior to the most recent reporting period presented are considered “supplementary information” (i.e., these years will be labeled “unaudited”).
Note: In the year of adoption, you do not need to present claims development information that occurred earlier than five years before if it is impractical to do so. For each subsequent year, the number of accident years reported will increase by at least one, but will not exceed 10 years.
- A reconciliation of incurred and paid claims development information to the carrying amount of the reserves for unpaid claims and loss adjustment expenses, with separate disclosure of reinsurance recoverable for the most recent reporting period.
- For accident years presented in the claims development:
- Total of incurred-but-not-reported (IBNR) reserves plus expected development on reported claims, along with a description of reserve methodologies.
- Quantitative information about claim frequency on a cumulative basis along with a description of claim frequency determination methodology, unless it is impracticable to do so. See ASC 250-10-45-9 for information on what meets the definition of impracticable.
- For all claims (excluding health insurance), the average annual percentage payout of incurred claims by age, net of reinsurance.
- Disclosure of the following assumptions related to unpaid claims and loss adjustment expenses for each period presented in the statement of income:
- Time value of money discount
- Amount of interest accretion recognized
- The line item in which interest accretion is included
- Additional disclosure of significant changes to methodologies and assumptions, including reasons for the change and the effect on the financial statement, is also required.
Where to Start?
In addition to reading this and the related FASB guidance, start by determining the level of disaggregation needed to ensure that useful information is apparent to the reader. It is anticipated that this will involve showing separate schedules for each significant line of business and may possibly involve reporting based on geography or other criteria. Start by looking at what information is used internally by management and the board of directors when making business decisions and considering that level of disaggregation. Next, develop an approach and utilize system information to pull the supporting data to complete the data elements.
Companies should discuss their approach with their audit firm and involve their actuaries to avoid confusion and delays in implementing the guidance in their financial statements.