FASB issued new disclosure requirements for insurance companies Thursday that are designed to provide more information about liabilities related to short-duration contracts.
Short-duration insurance contracts typically last one year or less. Examples include auto, homeowners, renters, and catastrophe insurance. The amendments apply only to insurance companies that issue short-duration insurance contracts.
Accounting Standards Update (ASU) No. 2015-09, Financial Services—Insurance (Topic 944): Disclosures About Short-Duration Contracts, requires insurance companies to provide additional information 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 of those cash flows on the statement of comprehensive income.
The five main provisions of the ASU require an insurance company to:
- Provide tables on a disaggregated basis illustrating the amount of insurance claims that have been incurred, as well as the amounts the insurance company has paid out on these claims.
- Reconcile the claims development tables to the amount of the liability presented on the balance sheet.
- Disclose, for each accident year presented in the claims development tables, the total of incurred claims that have yet to be reported, plus the company’s estimate of whether reported claim amounts will increase.
- Provide disaggregated information about the frequency of reported claims, unless obtaining this information is impracticable.
- Provide a disaggregated history of claims duration, presented as the average annual percentage payout of incurred claims by age.
“Stakeholders said that additional disclosures about unpaid claims and claim adjustment expenses for short-duration insurance contracts would provide transparency and additional insight into an insurance company’s ability to underwrite,” FASB Chairman Russell Golden said in a news release. “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 amendments will take effect for annual periods beginning after Dec. 15, 2016, and interim periods within annual periods beginning after Dec. 15, 2017.
—Ken Tysiac ( ktysiac@aicpa.org ) is a JofA editorial director.
