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FASB Makes Improvements to Disclosure Requirements for Insurance Companies

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May 28th 2015
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New disclosure requirements issued by the Financial Accounting Standards Board (FASB) on May 21 will require insurance companies that issue short-duration contracts to provide financial statement users with more information about claim-related liabilities.

Examples of short-duration insurance contracts – which typically last one year or less – include auto, homeowners, renters, and catastrophe insurance. The amendments in Accounting Standards Update (ASU) No. 2015-09, Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts, apply only to insurance companies that issue short-duration contracts.

The standard focuses on providing additional information about insurance liabilities to help financial statement users understand the nature, amount, timing, and uncertainty of future cash flows related to insurance liabilities, as well as the effect those cash flows will have on the statement of comprehensive income.

The update to the disclosure requirements includes the following five main provisions.

  1. An insurance company will now provide tables illustrating the amount of insurance claims that have been incurred, as well as the amounts the insurance company has paid out on these claims. These claims-development tables, presented on a disaggregated basis, will show how the insurance company’s liabilities change over time.
  2. An insurance company will now reconcile the claims-development tables to the amount of the liability presented on the balance sheet.
  3. For each accident year presented in the claims-development tables, an insurance company will now disclose the total of incurred claims that have yet to be reported to it, plus its estimate of whether reported claim amounts will increase. This disclosure will include the company’s methodologies for determining these amounts.
  4. An insurance company also will provide disaggregated information about the frequency of reported claims, unless obtaining this information is impracticable.
  5. For all claims other than health insurance claims, an insurance company also will provide a disaggregated history of claims duration, presented as the average annual percentage payout of incurred claims by age. This data will show, on average, the percentage of claims that are paid in the first year after a claim is incurred, the percentage of claims that are paid in the second year after a claim is incurred, and so on.

Disaggregated disclosures are presented 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, according to the FASB.

“Stakeholders said that additional disclosures about unpaid claims and claim-adjustment expenses for short-duration contracts would provide transparency and additional insight into an insurance company’s ability to underwrite,” FASB Chairman Russell Golden said in a written statement. “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.”

The ASU will take effect for public companies for annual periods beginning after Dec. 15, 2015, and interim periods within annual periods beginning after Dec. 15, 2016. For private companies, the ASU will take effect for annual periods beginning after Dec. 15, 2016, and interim periods within annual periods beginning after Dec. 15, 2017.

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