IASA Texas Chapter. Summer Conference Insurance Accounting Update July 29, 2016

Transcription

1 IASA Texas Chapter Summer Conference 2016 Insurance Accounting Update July 29, 2016

2 Introduction Plante Moran s Insurance Services Team 1 Andrew L. Rouse, CPA, Senior Manager Andrew.Rouse@plantemoran.com (direct dial)

3 Today s Agenda 2 New GAAP Accounting Standards New Statutory or Proposed Statutory Accounting Standards Questions and Discussion Analytical and Peer Group Results

4 GAAP Update

5 New GAAP Accounting Standards Issued 4 ASU # Topic Title Effective (nonpublic) Subtopic Income Statement Extraordinary and Unusual Items Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items December 31, 2016 year-ends Subtopic Intangibles Customers Accounting for Fees Paid in a Cloud Computing Arrangement December 31, 2016 year-ends Topic Fair Value Measurements Disclosures for Investments in Entities that Calculate Net Asset Value Per Share December 31, 2017 year-ends; early adoption is permitted

6 New GAAP Accounting Standards Issued 5 ASU # Topic Title Effective (nonpublic) Topic Financial Services Insurance Topic Revenue from Contracts with Customers (ASU No , Revenue from Contracts with Customers) Disclosures about Short- Duration Contracts December 31, 2017 year-ends; early adoption is permitted Deferral of Effective Date December 31, 2018 year-ends; early adoption permitted only for annual reporting periods beginning after December 15, Topic Income Taxes Balance Sheet Classification of Deferred Taxes December 31, 2018 year-ends; early adoption is permitted

7 New GAAP Accounting Standards Issued 6 ASU # Topic Title Effective (non-public) Subtopic Financial Instruments Overall Recognition and Measurement of Financial Assets and Financial Liabilities December 31, 2019 year-ends; early adoption permitted for the year beginning after December 15, Topic 842 Leases December 31, 2020 year-ends; early adoption is permitted Topic 323 Investments Equity Method and Joint Ventures Simplifying the Transition to the Equity Method of Accounting Periods beginning after December 15, 2017; early adoption permitted Topic 326 Credit losses Measurement of credit losses on financial instruments Periods beginning after December 15, 2020; early adoption permitted

8 Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share No Impacts companies that hold investments in alternative investments, limited partnerships and investments that measure fair value using net asset value per share (NAV) Why? To eliminate diversity in practice in reporting these investments in the fair value hierarchy Current practice: Investments were classified in fair value hierarchy typically as Level 3 depending on redeemable provisions of investments New requirements: Remove requirement to categorize these type investments in fair value hierarchy Does not change valuation; no impact on balances reported Does not change required disclosures of information on these investments to allow users an understanding of nature and risks of investments Effective Non-public entities for annual reporting periods beginning after December 15, 2016 early application is permitted This will impact insurance organizations with diversified investment portfolios that include alternative investments

9 Short Duration Insurance Contracts No Impacts all insurance organizations that issue short-duration insurance contracts Why? Increase decision usefulness of the information about insurance liabilities Including nature, amount, timing and uncertainty of cash flows Improve comparability between insurance organizations Additional disclosures to improve transparency of significant estimates made in measuring claim liabilities No change in measurement models (was originally proposed and removed)

10 Short Duration Insurance Contracts (Continued) No Enhanced disclosures to include: 1. Claims Development Table All years in the claims development table that precede the current reporting period, not to exceed 10-years Can be reported as supplementary information 2. Reconciliation of Claims Liability Activity Paid claims development information (consistent to current disclosures) Separate disclosure of reinsurance recoverable on unpaid claims

11 Short Duration Insurance Contracts (Continued) No Incurred-But-Not-Reported (IBNR) Liabilities For each accident year presented in the claims development table, entities should disclose the amount of IBNR liabilities plus expected development on reported claims Provide an explanation of reserving methodologies and changes to these methodologies (will require a better description of methods) 4. Incurred Claims Development For each year presented, quantitative information on claim frequency Qualitative description of methodologies used for determining claim frequency information 5. Average annual percent payout of incurred claims by age

12 Short Duration Insurance Contracts (Continued) No Other Key Provisions: Must use judgement to provide information that is meaningful Disclose information related to significant changes in methodologies and assumptions used to calculate the liability For Insurance Claims: Rollforward of liability for unpaid claims and claims adjustment expenses Total IBNR plus expected development on reported claims If discounting is used, various other disclosures are required

13 Short Duration Insurance Contracts (Continued) No Effective Non-public entities for periods beginning after December 15, 2016 (2017 calendar year-ends) with early adoption permitted

14 Recognition and Measurement of Financial Assets and Financial Liabilities No Changes the current GAAP model that primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements of financial instruments Why? Enhanced reporting model for financial instruments to provide users of financial statements with more decision-useful information Current Practice: Equity securities classified into trading or available for sale" categories Changes in fair market value reported as other comprehensive income in the equity statement Note: This standard provides guidance on financial liabilities measured at fair value, guidance on equity instruments without readily available fair values including revisions to the impairment model. May impact those investments in partnerships, joint ventures, etc. that are not accounted for on equity method or consolidated.

15 Recognition and Measurement of Financial Assets and Financial Liabilities (Continued) No New Requirements: Equity securities no longer classified as trading or available for sale Changes in fair value for equity securities reported through the income statements and reflected in ending net income Eliminate disclosure of fair value for investments measured at amortized cost No change in accounting for investments under equity method of accounting Some change in accounting for equity investments without readily available fair values Unrealized gains and losses for debt securities are still reflected in other comprehensive income Enhanced disclosures Effective Non-public entities for periods beginning after December 31, 2018 (2019 calendar year-ends); early adoption permitted for the year beginning after December 15, 2017 Amounts previously recorded in OCI will be reclassified to equity at date of adoption

16 Leases No Impacts those entities that enters into a lease Why? Increase transparency and comparability amongst organizations by recognizing leased assets and related liabilities on the balance sheet and disclosing key information on leasing arrangements Current Practice: Leases were identified as either operating leases or capital leases Operating leases (those not meeting capital lease requirements) were not reflected in the balance sheet. Operating leases were expensed as paid and disclosed if material.

17 Leases (Continued) No New Requirements: All leases (with some exceptions) will require recognition of asset and related liability Balance sheet recognition o Liability Representing lease payments required o Asset Right-of-use asset representing the right to use the asset Requires analysis of right to extend leases or purchase assets to be included in balance sheet determination (Reasonably certain) For leases <12 months, election can be made to recognize lease expense (no balance sheet impact), and should recognize this expense on straight line methodology Enhanced disclosures

18 Leases (Continued) No Lease Accounting Requirements Types include finance leases and operating leases Determination of type similar to old capital leases and operating leases definitions (capital leases = finance leases) Both types now require recognition of an asset and liability on balance sheet

19 Leases (Continued) No Type of Lease Balance Sheet Income Statement Cash Flow Statement Finance Lease Right of use asset and lease liability Amortization expense and interest expense Cash paid for principal and interest payments Operating Lease Right of use asset and lease liability Lease expense on straight line basis Cash paid for lease payments

20 Leases (Continued) No Other Topics Included in Guidance Changes accounting for related party leases Will be based on legally-enforceable terms versus economic substance Sale and leaseback transactions Must determine if transaction meets definition of sale under new revenue recognition guidance Effective Non-public entities for periods beginning after December 15, 2019 (2020 calendar year-ends), and requires modified retrospective application approach. All existing leases at adoption date must be transitioned to the new rules

21 Leases (Continued) No Action Plans to Consider: 1. Obtain understanding of new guidance 2. Take inventory of current leases in place 3. Changes to internal controls and communication processes 4. Other impacts on business (financial metrics, covenants, RBC, etc.) 5. Lease versus buy considerations for future leases off balance sheet financing has been eliminated with new guidance

22 Financial Instruments - Credit Losses No Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect it's current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down This Accounting Standards Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendements affect loans, debt securities, trade receiveables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash

23 Not-For-Profit Financial Statements Current FASB Project 22 Background of Project: Current model based on business entities, in place for 20-years Bring consistency to all not-for-profit organizations For business orientated not-for-profit organizations would require moving away from reporting characteristics of similar for-profit organizations and in closer alignment with other not-for-profit requirements Five Main Changes in Proposal 1. Two classifications of net assets (equity) Restricted and Unrestricted 2. Uniform operating measure in statement of operations/activities 3. Direct method for presentation of statement of cash flows 4. All not-for-profits will report expenses by both natural classification and functional classifications 5. Increased disclosures related to cash availability and other information

24 Not-For-Profit Financial Statements Current FASB Project 23 Status 1 st proposal working its way through the exposure draft procedures, comments received and currently being analyzed Anticipated Effective Date This will take some time to get through system

25 Statutory Update

26 Significant Statutory Accounting Standards Adopted Through June 9, Ref # Title Recommendation Short Sales These revisions provide explicit statutory accounting guidance for short sales and are effective on a prospective basis for transactions occurring on or after January 1, Principles Based Reserving SSAP Adopted revisions to SSAP No. 51 to reference the Valuation Manual as part of PBR implementation Collateral Received Add disclosure to capture the aggregate total of collateral assets reported as assets on the insurer's financial statement and the corresponding liability

27 Significant Statutory Accounting Standards Adopted Through June 9, Ref # Title Recommendation Section 9010 Assessment 2017 Moratorium Accounting guidance for reporting years Quarterly Reporting of Restricted Assets For quarterly reporting If significant changes in restricted assets, full annual disclosure is required during interim reporting Holders of Surplus Notes Revisions to clarify the accounting for holders of surplus notes

28 Section 9010 Assessment 2017 Moratorium No No Section 9010 Fee Payable in 2017 January 1, 2016 Regular accrual of amounts due in 2016 for 2015 datayear written premiums No liability at January 1, 2017 since no payment is due. No segregation of surplus for December 31, 2016 Existing statutory requirements resume for payment expected in 2018 based on 2017 data-year written premium

29 High Priority Exposed Statutory Accounting Standards to Watch Active Listing as of June 27, Ref # Title Recommendation Financial Instruments Comments on whether elements of ASU should be considered for statutory accounting Clarification of Permitted Practice Disclosure Clarify disclosure requirements for prescribed or permitted practices Leases Request for comments on different statutory options for lease accounting

30 Leases 29 The FASB issued ASU Leases in February At the Spring National Meeting, the SAP WG exposed for comments three proposed options for accounting of operating and financing leases under SAP: Maintain existing statutory guidance with potential new disclosure guidance on the lease asset and lease liability required under GAAP Recognize the lease asset and lease liability, but require nonadmittance of the lease asset as the right of use asset is not available for policyholder obligations Adopt ASU with some modifications to recognize lease assets and lease liabilities for a lessee s operating and financing leases, which would allow the lease asset to be admitted for statutory purposes

31 Other NAIC Projects Insurance Data Security Model Law DRAFT FORM 30 Purpose To establish exclusive standards for data security and investigation and notification of breach of security applicable to licensees in state of domicile Must maintain a comprehensive written information security program that maintains administrative, technical and physical safeguards for protection of personal information Use Framework for Improving Critical Infrastructure Cybersecurity issued by National Institute of Standards and Technology as guide for security program Oversight by board required with annual reporting Has penalties build into Model Law for noncompliance Effective Date One year interval between date of state enactment Analytical and Peer

32 Other NAIC Projects Insurance Data Security Model Law DRAFT FORM 31 Draft Model Law exposed March 2, 2016 Many concerns from industry and consumer groups More than 25 comment letters from trade associations, market participants and regulators. Two day public meeting held May in Washington DC to allow more in depth comments without the time constraints imposed by a national meeting The Task Force allowed follow-up comments to this draft of the Model Law to be submitted by June 3 Goal of the task force is to complete the model law by the end of 2016 Analytical and Peer

33 Questions?

34 Thank you IASA Texas Chapter Insurance Services Team Andrew Rouse