Accounting Update: ASU Charles Lenz, Perr & Knight Sean Nakamura, Accuity LLP Gordon Tom, KMH LLP

Transcription

1 Accounting Update: ASU Charles Lenz, Perr & Knight Sean Nakamura, Accuity LLP Gordon Tom, KMH LLP

2 Agenda Introduction Existing Guidance What s Changing Applicability & Effective Date Examples Implementation Issues & Challenges Questions/Discussion 2

3 Disclaimer Introduction This presentation is intended to provide only a general update of accounting standards and other topics that may impact property and casualty captive insurance companies, and is not intended and should not be used as comprehensive update of all new accounting and reporting guidance. Application of accounting guidance and conclusions should be made only after a review of the authoritative literature and consideration and evaluation of the specific facts and circumstances 3

4 Learning Objectives Summarize the existing disclosure guidance for loss & loss adjustment expense reserves Provide an overview of the presentation & disclosure requirements applicable under ASU Provide an overview of potential accounting & auditing challenges that insurance companies may face upon adoption and implementation of ASU

5 Summary of Existing Guidance Disclosure of information about loss reserves is required for annual periods by ASU : Beginning and ending balances Incurred loss & LAE, separated by current and prior years claims in total (aggregated amounts) Paid loss & LAE, separated by current and prior years claims in total (aggregated amounts) Reasons for the change in prior years incurred loss & LAE expense and if additional premiums or return premiums have been accrued 5

6 Summary of Existing Guidance Disclosure of management s policies & methodologies for estimating loss & LAE reserves for difficult-to-estimate liabilities such as environmental remediation, toxic waste & asbestos-related illnesses Disclose carrying amount of discounted loss & LAE reserves and range of interest rates used Disclose methods and assumptions used to estimate liabilities for future policy benefits Disclosure encouraged for average rate of assumed investment yields 6

7 Why Is It Changing? Initial FASB insurance project scope covered all insurance contracts and tried to converge accounting & reporting with IASB in a new measurement model applicable to all insurance contracts Extensive feedback was received which indicated the existing short-duration accounting model works well, but users want additional information and transparency about reserves and the company s ability to underwrite and anticipate costs related to claims 7

8 What s Changing? Major changes in disclosure requirements for incurred and paid losses to provide additional information to users of the financial statements: to understand the amount, timing and uncertainty of cash flows arising from liabilities. to increase transparency of significant estimates made in measuring those liabilities. to provide additional insight into an insurance entity s ability to underwrite and anticipate costs associated with claims. Management will need to exercise significant judgment in to determine the level of aggregation or disaggregation of information to be presented; may not necessarily be the same as the presentation requirements for statutory financial statements Additional qualitative disclosures are required 8

9 What s Changing? Tabular disclosure of undiscounted incurred and paid claims and allocated claim adjustment expenses by accident year, net of reinsurance, for up to 10 years Five years of data is allowed during initial transition, if obtaining & presenting additional prior year data is not deemed practical. Similar to Schedule P, Parts 2 & 3 Sum of IBNR and expected case development on reported claims included in the development tables, for each accident year, for the most recent reporting period presented and a description of, and changes in the related estimation methodologies used 9

10 What s Changing? Cumulative claim frequency information for each accident year as of the current reporting period and description of the method and any significant change in methods used to measure frequency Reconciliation of the claims development tables to the claims liabilities, with separate disclosure of ceded reinsurance balances, for the most recent reporting period Existing rollforward disclosure is now required in interim periods 10

11 What s Changing? Historical average annual percentage payout of incurred claims based on the information in the paid claims development tables, net of reinsurance Only the most recent reporting period s development information is a required part of the basic financial statements. All periods preceding and historical claims payout disclosure is considered supplementary information 11

12 What s Changing? Information about material changes in judgments made in calculating the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effect on the financial statements Guidance does not explicitly state if disclosure is qualitative or quantitative Disclosure also applies to interim periods, if significant Effects of discounting on comparative annual financial statements, including aggregate amount of discount, amount of interest recognized during the period and where interest accretion is classified, all on a disaggregated basis Disaggregation may not necessarily be the same as development tables 12

13 Aggregate or Disaggregate? ASC H: An insurance entity shall disclose the information required by paragraphs B through 50-4G and in a manner that allows users to understand the amount, timing, and uncertainty of cash flows arising from the liabilities. An insurance entity shall aggregate or disaggregate the disclosures in paragraphs B through 50-4G and 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 ASC B: When selecting the type of category to use to aggregate or disaggregate disclosures, an insurance entity should consider how information about the insurance entity s liability for unpaid claims and claim adjustment expenses has been presented for other purposes, including all of the following: (a) Disclosures presented outside the financial statements (for example, in earnings releases, annual reports, statutory filings, or investor presentations); (b) Information regularly viewed by the chief operating decision maker for evaluating financial performance; (c) Other information that is similar to the types of information identified in (a) and (b) and that is used by the insurance entity or users of the insurance entity s financial statements to evaluate the insurance entity s financial performance or make resource allocation decisions. 13

14 Aggregate or Disaggregate? ASC C: Examples of categories that might be appropriate include any of the following: a. Type of coverage (for example, major product line) b. Geography (for example, country or region) c. Reportable segment as defined in Topic 280 on segment reporting d. Market or type of customer (for example, personal or commercial lines of business) e. Claim duration (for example, claims that have short settlement periods or claims that have long settlement periods). Give consideration to existing processes to determine deferred acquisition costs and if a premium deficiency exists 14

15 Disaggregation of Disclosures ASU suggests basing the disaggregation on how loss reserves are presented for other purposes, e.g., earnings releases, annual reports, statutory filings, investor presentations Which Disclosures are Disaggregated? Incurred & Paid Claim Development Yes Reconciliation Yes Cumulative Claim Frequency Information Yes Total IBNR Liabilities Yes Average Annual % in Payout of Incurred Claims - Yes Significant Changes in Methodologies & Assumptions No Information About Amounts Reported at Present Value Yes Claims and Claim Adjustment Expense Rollforward No, Except for Health Insurance Claims 15

16 Claims Development Tables Incurred Development Table/Reserves & Frequency Workers' Compensation Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Total of Incurred-but- Not-Reported For the Years Ended December 31, Liabilities Plus (000s Omitted) Expected Cumulative Development Number of Accident on Reported Reported Year Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited 2016 Claims Claims 2007 $3,988 $3,882 $3,941 $4,001 $4,062 $4,123 $4,186 $4,250 $4,204 $4,267 $ ,693 3,749 3,807 3,865 3,923 4,359 4,426 4,493 4, ,432 6,530 6,630 4,735 4,808 4,881 4,955 5, ,210 6,304 6,400 6,498 6,597 6,697 6,799 1, ,863 7,983 8,104 8,228 8,353 8,480 1, ,220 8,346 8,473 8,602 8,733 2, ,594 7,710 7,827 7,947 2, ,398 7,511 7,625 3, ,422 8,550 4, ,600 6, $70,592 $23,981 As Of December 31,

17 Claims Development Tables Paid Development Table Workers' Compensation Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, (000s Omitted) Accident Year Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited $844 $1,949 $2,524 $2,928 $3,223 $3,396 $3,527 $3,641 $3,727 $3, ,084 2,698 3,131 3,445 3,630 3,771 3,893 3, ,298 2,976 3,453 3,799 4,004 4,158 4, ,344 3,106 4,022 4,666 5,135 5,411 5, ,522 3,873 5,016 5,820 6,405 6, ,621 3,989 5,165 5,993 6, ,571 3,630 4,700 5, ,508 3,483 4, ,690 3, ,700 Total $46,612 All outstanding liabilities before 2007, net of reinsurance $3,500 Liabilities for claims and claim adjustment expenses, net of reinsurance $27,481 17

18 Claims Development Tables Incurred Development Table Special Case Workers' Compensation Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance As Of December 31, 2016 Acquisition of an entity, including the liability for open and unreported Workers's Compensation claims prior to 12/31/13 Total of Incurred-but- Not-Reported For the Years Ended December 31, Liabilities Plus (000s Omitted) Expected Cumulative Development Number of Accident on Reported Reported Year Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited 2016 Claims Claims 2007 $3,988 $2,305 $2,340 $2,376 $2,412 $2,449 $2,486 $4,250 $4,204 $4,267 $ ,193 2,227 2,261 2,295 2,330 2,589 4,426 4,493 4, ,820 3,878 3,937 2,812 2,855 4,881 4,955 5, ,427 2,464 2,502 2,540 6,597 6,697 6,799 1, ,951 4,012 4,073 8,228 8,353 8,480 1, ,381 4,448 8,473 8,602 8,733 2, ,739 7,710 7,827 7,947 2, ,398 7,511 7,625 3, ,422 8,550 4, ,600 6, $70,592 18

19 Claims Development Tables Comments Development Tables/Reserves & Frequency Net of Reinsurance Disaggregation will likely follow existing segmentation of business for financial/actuarial analysis Insignificant Segments excluded, but not defined Excluded segments are included in reconciliation Data should be readily available from current and prior actuarial analyses Incurred includes paid losses and all loss and allocated loss adjustment expense reserves, i.e., ultimate loss and ALAE 19

20 Claims Development Tables Comments (Cont.) Development Tables/Reserves & Frequency Total of IBNR+Case Development, i.e., total reserve Frequency can count claims or claimants Frequency can include or exclude CNOPs disclose Don t need to show 10 years for short-tailed lines Can show more than 10 years for very long tailed lines If 10 years are shown and liabilities exist for prior years, then prior year amounts must be disclosed 20

21 Workers' Compensation Claims Duration Disclosure Calculated Incremental Payments (% of Incurred Losss and Allocated Claim Adjustment Expense) For the Years Ended December 31, Accident Year % 50.2% 64.0% 73.2% 79.3% 82.4% 84.3% 85.7% 88.6% 89.1% % 55.6% 70.9% 81.0% 87.8% 83.3% 85.2% 86.6% 87.3% % 35.2% 44.9% 72.9% 79.0% 82.0% 83.9% 85.3% % 49.3% 62.8% 71.8% 77.8% 80.8% 82.7% % 48.5% 61.9% 70.7% 76.7% 79.6% % 47.8% 61.0% 69.7% 75.5% % 47.1% 60.0% 68.6% 2014 Average = 19.8% 20.4% 46.4% 59.1% % 45.7% % Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance Years % 25.9% 13.5% 9.5% 6.9% 4.1% 3.1% 2.7% 2.0% 1.7% 21

22 Reconciliation Of Claims Development Information to Consolidated Statement of Financial Condition Reconciliation of the Disclosure of Incurred and Paid Claims Development to the Liability for Unpaid Claims and Claim Adjustment Expenses (000s Omitted) Net outstanding liabilities December 31, 2016 Workers' Compensation $ 27,481 General Liability 14,225 Other short-duration insurance lines 2,149 Liabilities for unpdaid claims and claim adjustment expenses, net of reinsurance 43,855 Reinsurance recoverable on unpaid claims Workers' Compensation 4,947 General Liability 3,983 Other short-duration insurance lines 50 Total reinsurance recoverable on unpaid claims 8,980 Insurance lines other than short-duration 0 Unallocated claims adjustment expenses 3,170 Impact of discounting 4,824 Total gross liability for npaid claims and claim adjustment expense $ 60,828 22

23 Significant Changes in Methodologies and Assumptions ASU: For annual reporting periods, an insurance entity shall disclose information about significant changes in methodologies and assumptions used in calculating the liability for unpaid claims and claims adjustment expenses, including reasons for the change and the effects on the fiinancial statements for the most recent reporting period presented. Enhancement of existing GAAP disclosure requirements Not included in the sections that require disaggregation 23

24 Significant Changes in Methodologies and Assumptions (Cont.) Discretion required Possible disclosures 1. Weightings given to specific methods 2. New method(s) 3. Loss development factors selected from history 4. Change in industry loss development 5. Change in tail development factor 6. Change in Expected Loss Ratio 7. Change in exposure base 8. Change in trend factors 24

25 NAIC / FASB Comparison Claim Development Table Basis NAIC Line of business by entity as defined in NAIC instructions for Schedule P FASB Aggregated or disaggregated based on management s judgment Organized By Accident year Accident year Annual Payout Percentage Not required Annual requirement Narrative Disclosures Limited disclosure Increased transparency Claim Liability Rollforward Annually Interim & annual periods Reinsurance Net of reinsurance Net of reinsurance 25

26 Who Does This Affect? Applies to all entities that issue shortduration contracts as defined in ASC 944 ASU does not apply to the policyholder Applies to most P&C contracts, and certain A&H contracts. Financial guarantee contracts are excluded Application is based on the accounting classification as short-duration, regardless of settlement period tail of claim liability 26

27 When Is It Effective? Public business entities: Annual periods beginning after 12/15/15 (2016 calendar year entities) Interim periods within annual periods after 12/15/16 (2017 interim periods for calendar year entities) All other entities: Annual periods beginning after 12/15/16 (2017 calendar year entities) Interim periods within annual periods after 12/15/17 (2018 interim periods for calendar year entities) Retrospective application is required and early adoption permitted 27

28 Challenges & Issues Timeframe to adoption is relatively short Significant judgment involved in determining level of disaggregation for reporting loss triangles Data used to determine claim frequency may not be the same as claim count 28

29 Challenges & Issues Presentation of audited/unaudited data in the notes vs. as required supplementary information (supplemental schedules) Disaggregated data may not be readily available, depending on the captive program and level of actuarial involvement No guidance on how to address business changes for commutations, combinations & disposals, retroactive agreements, etc. 29

30 Challenges & Issues Foreign currency translation and methodology considerations Underwriting year vs. accident year data availability Collecting data on assumed risks / business 30

31 Implementation Considerations Determine the level of aggregation or disaggregation Determine frequency vs. claim count Consult with the actuaries and auditors now to determine availability of data and impact to the audit procedures 31

32 Implementation Considerations Consider reinsurance data availability Determine presentation of audited data vs. required supplementary information Omitting required supplementary information & impact to the auditor s report Regulatory and examination considerations 32

33 Questions? 33

34 Thank You! 34