The Financial Accounting Standards Board has released an accounting standards update that makes targeted improvements in the disclosure requirements for insurance companies that issue short-duration contracts of typically one year or less.

Examples of short-duration insurance contracts subject to FASB’s enhanced disclosure requirements include auto, homeowners, renters, and catastrophe insurance.

FASB ASU No. 2015-09, "Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts," focuses on providing extra information about insurance liabilities to help users understand the nature, amount, timing and uncertainty of future cash flows related to insurance liabilities, along with the impact of those cash flows on the statement of comprehensive income.

“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,” said FASB chairman Russell G. Golden in a 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 accounting standards update includes five main provisions that 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; and provide a disaggregated history of claims duration, presented as the average annual percentage payout of incurred claims by age.

The amendments apply only to insurance companies that issue short-duration insurance contracts.
For public companies, the standards update will be effective for annual periods beginning after Dec. 15, 2015, and interim periods within annual periods beginning after Dec. 15, 2016. For private companies, it will be effective for annual periods beginning after Dec. 15, 2016, and interim periods within annual periods beginning after Dec. 15, 2017.

More information on the standard, including a FASB In Focus summary, is available on FASB’s Web site.

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