New Disclosures for Insurance Contracts

Transcription

1 New Disclosures for Insurance Contracts

2 Table of Contents BACKGROUND... 3 NEW DISCLOSURES... 3 CHANGES IN JUDGMENT... 3 CLAIMS DEVELOPMENT TABLES... 3 HISTORY OF CLAIMS DURATION... 4 FREQUENCY & SEVERITY OF CLAIMS... 4 EFFECTS OF DISCOUNTING... 5 ROLLFORWARD INFORMATION... 5 TRANSITION & EFFECTIVE DATE... 6 CONTRIBUTORS... 6 APPENDIX A CLAIMS DEVELOPMENT... 7 APPENDIX B RECONCILIATION OF THE DISCLOSURE OF INCURRED & PAID CLAIMS DEVELOPMENT TO THE LIABILITY FOR UNPAID CLAIMS & CLAIM ADJUSTMENT EXPENSES... 8 APPENDIX C HISTORICAL CLAIMS DURATION

3 On May 21, 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) , Financial Services Insurance (Topic 944): Disclosures about Short-Duration Contracts, which requires insurers to provide additional disclosures in order to increase transparency of management's significant estimates and improve financial statement comparability. The ASU covers short-duration insurance contracts (typically one year or less) issued only by insurance entities. Common examples include automobile, homeowners and catastrophe policies. The amendments do not apply to policyholders. FASB anticipates the ASU will better enable financial statement users to understand the amount and uncertainty of cash flows arising from insurance liabilities, the nature and extent of risks on short-duration contracts and the timing of cash flows arising for insurance liabilities. The ASU is effective for public business entities for annual reporting periods beginning after December 15, 2015, and interim reporting periods within annual reporting periods beginning after December 15, 2016; all other entities have been granted an additional year for implementation. Early adoption is permitted. Insurers will continue to apply current industry-specific U.S. generally accepted accounting principles (GAAP) for measurement and recognition of short-duration contracts including property and casualty, short-term health, mortgage, financial guarantees and title insurance contracts. Background The insurance project began in August 2007 as a joint effort between FASB and the International Accounting Standards Board (IASB), with the intent to develop a common, converged standard addressing recognition, measurement, presentation and disclosure requirements for all insurance contracts. FASB and IASB issued exposure drafts in June 2013 that converged on most key issues. The FASB proposal was an entirely new model from existing U.S. GAAP. In light of the overwhelmingly negative feedback received, FASB decided to limit changes to targeted improvements to existing U.S. GAAP for long-duration contracts and disclosures for short-duration contracts. Deliberations continue for changes to long-duration contracts, and a final standard is not expected until Health insurance contracts may be short-duration or long-duration depending on whether the contracts are expected to remain in force for an extended period. Entities issuing health insurance contracts will be subject to most of the same disclosure requirements as other insurance entities issuing short-duration contracts, except as noted below. New Disclosures Management judgment will be required when deciding on the level of aggregation or disaggregation appropriate for these new disclosures to make the information useful to financial statement users. The information should not include large amounts of insignificant detail or aggregation of items with significantly different characteristics. Disclosures could be broken out by type of coverage, geography, reportable segment, market or customer type and claim duration. Insurers are prohibited from aggregating amounts from different reportable segments. Insurers issuing short-duration contracts would be required to disclose several types of information in their financial statements, as noted below. Changes in Judgment Insurers would be required to disclose any material changes in assumptions made or methodologies used in calculating the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements for annual reporting periods. Claims Development Tables Insurers must include tables illustrating the amount of incurred insurance claims and the amount paid on those claims (net of reinsurance). These tables will show how the insurer s liabilities change over time and will permit 3

4 financial statement users to analyze an insurer s ability to underwrite and anticipate costs associated with claims. Insurers should present information for the number of years claims typically remain outstanding, not to exceed 10 years, including the most recent reporting period presented. (See example in Appendix A.) For each accident year presented in the claims development table, insurers should disclose the amount of incurred but not reported liabilities (IBNR) and expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. The methodologies used for determining the amounts disclosed and any significant changes to those methodologies also would be disclosed. By including IBNR with expected claims development, FASB has adopted the insurance industry s generally understood definition of IBNR. The reporting aligns the IBNR definition in GAAP with statutory reporting. For annual reporting periods, insurers should reconcile the claims development disclosure to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses recognized in the financials; ceded reinsurance should be presented in the same way the insurer aggregates or disaggregates its claims development disclosure. (See Appendix B.) U.S. GAAP does not require disclosure about incurred and paid claims. The Securities and Exchange Commission (SEC) requires a loss reserve development table for the 10 most recent calendar years of the consolidated entity. The National Association of Insurance Commissioners (NAIC) requires property and casualty insurance entities to prepare an annual statement that contains exhibits of incurred and paid losses for the 10 most recent accident years for each line of business, by legal entity only for entities domiciled in the U.S. History of Claims Duration For all claims other than health insurance claims, insurers must disclose as supplementary information the average annual percentage payout of claims for each year presented in the claims development table, up to the end of the most recent year presented in the statement of financial position. This information will show, on average, the percentage of claims paid in the first year after a claim in incurred, the percentage of claims paid in the second year after a claim in incurred and so on. (See Appendix C.) The ASU has a separate requirement for health insurance claims due to the very short duration of these claims. Health insurers are required to separately disclose total IBNR liabilities plus expected development on reported claims included in the liability for unpaid claims in both interim and annual reporting periods. This could be a separate disclosure or a component of the rollforward of the liability for unpaid claims and claim adjustment expenses. In general, audit firms need to be independent for all years presented in the financial statement footnotes. Material in the financial statements and related footnotes is subject to specific U.S. generally accepted accounting standards (GAAS). For entities that have changed auditors or undergone a business combination, presenting up to 10 years of data could significantly increase costs due to reaudit the historic data to obtain an unqualified opinion. In order to address these concerns, the ASU designates the years in the claims development table that precede the current reporting period and the related disclosure about the history of claims duration as required supplementary information (RSI). Under GAAS, RSI is not considered part of the basis financial statements and is not covered by the auditor s opinion. However, certain more limited procedures are required. RSI may be presented as a supplementary schedule outside the audited notes or within financial statement notes if it is clearly highlighted that the information is unaudited. Frequency & Severity of Claims Insurers are required to disclose disaggregated information about the frequency of reported claims. No specific claim count methodology is prescribed, and no frequency information is required in situations in which it would be 4

5 impracticable to do so, e.g., with reinsurance or residual market pools. If impracticable, an entity should disclose that fact and explain why the disclosure is impracticable. Insurers must disclose the methodology for calculating claim frequency as well as whether frequency is measured by claim event or individual claimant and how the insurer considered claims that do not result in a liability. This information, combined with the claims development table, will allow financial statement users to calculate the average severity of reported claims. Neither U.S. GAAP nor the SEC currently require disclosure about the frequency or severity of claims. The SEC requires a loss reserve development table for the 10 most recent calendar years of the consolidated entity. The NAIC s annual statements require exhibits including the number of claims reported and outstanding for direct, ceded and assumed business for the 10 most recent accident years. Effects of Discounting Insurers are required to disclose in their annual financial statements the effects discounting liabilities of unpaid claims and claim adjustment expenses presented at present value in the financial statements, including: For each period presented in the balance sheet, the carrying amount of such liabilities and the range of interest rates used to discount those liabilities Aggregate amount of discount deducted from the liability for unpaid claims and claim adjustment expenses For each period presented in the income statement, the amount of interest recognized during the period and the line item(s) in which the interest accretion is classified There is no requirement to discount the liability for unpaid claims and claim adjustment expenses in existing U.S. GAAP. SEC interpretive guidance permits a registrant to discount liabilities for unpaid claims and claim adjustment expenses or liabilities for settled claims in certain circumstances. SEC Regulation S-X requires property and casualty insurance underwriters to provide supplemental information about insurance operations, including the discount deducted from the liability for unpaid claims and claim adjustment expenses and the rate used to compute the discount. There is no requirement to disclose the interest accretion recognized. Rollforward Information Subtopic , Financial Services Insurance Claim Costs and Liabilities for Future Policy Benefits, requires annual disclosure about the liability for unpaid claims and claim adjustment expenses. The ASU would expand these requirements to all interim periods as well. All of the following information would be required for interim and annual financial statements: Balance of the liability for unpaid claims and claim adjustment expenses at the beginning and end of each period presented in the income statement, along with the related amount of reinsurance recoverable Year-to-date incurred claims and claim adjustment expenses, with separate disclosure of the provision for insured events of the current period and of increases or decreases in the provision for insured events of prior periods Year-to-date payments of claims and claim adjustment expenses, with separate disclosure of payments of claims and claim adjustment expenses attributable to insured events of the current period and insured events of prior periods Reasons for the change in incurred claims and claim adjustment expenses in the income statement attributable to insured events of prior periods; the statement also should indicate whether additional premiums or return premiums have been accrued as a result of prior-period effects 5

6 Transition & Effective Date The ASU will be effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016, for public companies. For private companies, the ASU will be effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, Early adoption is permitted. Upon initial application of these disclosure requirements, an insurer would provide comparative disclosures for each prior period presented (retrospective application), except for the requirements applying only to the current period, which should be applied prospectively: Disclosure of incurred and paid claims development tables Disclosure of the details about material changes in judgments made in calculating the liability for unpaid claims and claim adjustment expenses Insurers would not be required to disclose information about claims development that occurred more than five years before the end of the first financial reporting year in which the guidance is first applied. An additional year would be added to the disclosure in each subsequent year until up to 10 years are presented. Because the ASU relates only to disclosures, insurers would not be required to apply the transition disclosure guidance in Subtopic on accounting changes and error corrections. For more information on how the new standard could affect your organization, contact your BKD advisor. Contributors Anne Coughlan Director Natalia Votaw Senior Manager

7 Appendix A Claims Development FASB provided the following example illustrating the information an insurer with one major short-duration product line (homeowners insurance) would disclose to meet claims development requirements. Homeowners Insurance (in thousands) Incurred Claims & Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31 Accident Year 20X7 20X8 20X9 20Y0 20Y1 20Y2 20Y3 20Y4 20Y5 20Y6 As of December 31, 20Y6 Total of Incurred but Not Reported Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims 20X7 $10,000 $9,900 $9,700 $9,800 $9,750 $9,750 $9,600 $9,650 $9,575 $9,550 $ X8 10,950 11,000 10,500 10,750 10,850 10,600 10,250 10,150 10, X9 12,000 11,750 11,500 10,900 10,900 10,850 10,750 10, Y0 12,250 12,500 12,550 12,400 12,200 12,150 12, Y1 12,300 12,500 12,650 12,750 12,800 12, Y2 12,800 12,900 12,750 12,700 12,700 1, Y3 13,000 13,250 13,100 13,150 1, Y4 13,150 13,250 13,300 2, Y5 13,500 13,250 3, Y6 13,750 5, Total $121,300 Homeowners Insurance (in thousands) Cumulative Paid Claims & Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31 Accident Year 20X7 20X8 20X9 20Y0 20Y1 20Y2 20Y3 20Y4 20Y5 20Y6 20X7 $3,000 $5,000 $5,500 $6,000 $6,800 $7,500 $8,500 $9,000 $9,050 $9,075 20X8 3,500 5,750 6,500 7,500 7,750 8,250 8,500 9,000 9,500 20X9 3,750 6,000 6,500 7,500 7,900 8,250 8,950 9,700 20Y0 3,750 6,250 7,250 7,750 8,900 9,700 9,950 20Y1 4,250 5,500 6,750 8,000 8,950 9,250 20Y2 4,125 5,250 7,000 8,000 9,000 20Y3 4,500 5,750 7,250 7,750 20Y4 4,600 6,000 6,950 20Y5 4,750 6,125 20Y6 4,850 Total $82,150 All outstanding liabilities before 20X7, net of reinsurance 1,400 Liabilities for claims and claim adjustment expenses, net of reinsurance $40,550 Source: Financial Accounting Standards Board 7

8 Appendix B Reconciliation of the Disclosure of Incurred & Paid Claims Development to the Liability for Unpaid Claims & Claim Adjustment Expenses December 31, 20Y6 Net outstanding liabilities Homeowners insurance $ 40,550 Other short-duration insurance lines 1,976 Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance 42,526 Reinsurance recoverable on unpaid claims Homeowners insurance 13,880 Other short-duration insurance lines 283 Total reinsurance recoverable on unpaid claims 14,163 Insurance lines other than short-duration 3,315 Unallocated claim adjustment expenses 2,420 Other 10 5,745 Total gross liability for unpaid claims and claim adjustment expense $ 62,434 Source: Financial Accounting Standards Board Appendix C Historical Claims Duration FASB provided the following illustrative example of the supplementary information an insurer would disclose to meet the historical claims duration requirements. Note X Liability for Unpaid Claims & Claim Adjustment Expenses The following is supplementary information about average historical claims duration as of December 31, 20X6. Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance Years Homeowners insurance 33.8% 14.9% 8.5% 7.2% 6.6% 4.9% 5.4% 5.7% 2.7% 0.3% Source: Financial Accounting Standards Board 8