1) May 21, 2015
Understanding Costs and Benefits
ASU: Financial Services—Insurance (Topic 944)
Summary
This document summarizes how
the Financial Accounting Standards Board (FASB) assessed the
expected costs and benefits of
its new Accounting Standards
Update (ASU) No. 2015-09,
Financial Services—Insurance
(Topic 944): Disclosures about ShortDuration Contracts. The document
also outlines the process that led
the FASB to conclude that the
expected benefits of the amendments in the ASU justify the
anticipated costs.1
The FASB issues new financial
accounting and reporting standards only when the benefits of
a standard—improvements in
the relevance and reliability of
reported financial information—
justify the net costs it imposes on
financial statement preparers (to
implement the new standard),
and on financial statement users
(to consider and interpret the
new information).
T
he FASB concluded that the
expected benefits of the
amendments in this ASU justify the
anticipated costs.
The FASB determined that the
application of the ASU will provide more meaningful information to users by:
„„
Increasing the transparency
of management’s estimates in
determining claim liabilities
for short-duration insurance
contracts
„„
Providing additional insight
into an insurance company’s
ability to underwrite and
anticipate costs associated with
claims
„„
Enhancing comparability
among insurance companies
by requiring consistent
disclosure of information.
The FASB also understands that
insurance companies that issue
short-duration contracts may incur
additional costs as a result of the
amendments in the ASU. Such
costs include:
„„
Information Technology
(IT) costs for new systems,
processes, and controls used
to aggregate data
„„
Personnel costs to modify
processes, develop internal
controls, comply with
requirements, and prepare
disclosures
„„
Incremental auditor costs to
audit new financial statement
disclosures and enhanced
internal controls
The Board notes that a significant amount of the data needed
to prepare these disclosures
should be readily available to
insurance companies because
of statutory reporting requirements, which mitigates the costs
of implementing the guidance in
this ASU.
As a result, the FASB concluded
that the expected benefits of the
amendments in this ASU justify
the anticipated costs.
Background
The FASB, with the International
Accounting Standards Board
(IASB), undertook a project
intended to comprehensively
improve the accounting for insurance contracts, both long-duration (life insurance and annuities)
and short-duration (auto and
home insurance), for all public
and private companies.
In June 2013, the FASB issued
proposed ASU, Insurance Contracts (Topic 834), which introduced new accounting models
and qualitative and quantitative
disclosures to help users of financial statements understand the
amount, timing, and uncertainty
of future insurance contract cash
flows.
The IASB at the same time issued a proposal for insurance
contracts that also introduced
new accounting models and
2) Page 2
qualitative and quantitative
disclosures. Although the objective of the joint project was to
develop common guidance, the
amendments proposed by the
FASB and the IASB differed in
several important aspects.
S
takeholders said that the existing accounting model for shortduration contracts works well and
should continue to apply only to
insurance companies. They said
changes to the guidance should be
limited to improvements to
required disclosures.
The feedback received from stakeholders on the FASB’s proposal
overwhelmingly supported retaining current recognition and
measurement guidance for shortduration contracts under Generally Accepted Accounting Principles
(GAAP). Stakeholders said that
the existing accounting model for
short-duration contracts works
well and should continue to apply only to insurance companies.
They said changes to the guidance
should be limited to improvements to required disclosures.
The FASB considered this feedback and determined it would
develop and issue an ASU that
Understanding Costs and Benefits
makes targeted improvements
to enhance disclosures for shortduration insurance contracts,
because the benefits of a new
comprehensive accounting model
did not justify the costs.
The FASB also decided to more
comprehensively address accounting and disclosures for
long-duration insurance contracts
for insurance companies by making targeted improvements. The
Board decided to separate that
work into a separate project.
The FASB considered the feedback from those stakeholders
during its redeliberations at
seven public Board meetings
held during 2014 and 2015. The
amendments in the ASU are a
result of those Board meetings
and redeliberations.
Stakeholder Concerns
Outreach with Stakeholders
after issuance of 2013
Proposed Update
Feedback received from users,
preparers, and practitioners on
the 2013 proposed Update overwhelmingly supported retaining
the existing accounting and reporting guidance for short-duration insurance contracts in GAAP
for insurance companies.
The FASB received significant
input from stakeholders on the
operability and usefulness of the
proposed guidance. This input
included 214 comment letters in
response to the 2013 proposed
Update, a number of which specifically addressed the proposed
disclosure requirements.
Stakeholders noted that the existing accounting model for shortduration insurance contracts is
operational and well understood,
and that changes to the accounting model would provide trivial
benefits relative to the significant
costs required to implement a
new accounting model.
Since the 2013 proposed Update
was issued, 61 outreach meetings
were held with stakeholders operating within the insurance industry
—specifically, preparers, practitioners, industry groups, regulators,
and users of financial statements.
To address the following stakeholder concerns, the Board
decided that the final ASU
should focus on making targeted
improvements to enhance existing disclosure requirements for
short-duration contracts.
„„
Liability for unpaid claims
and claim adjustment
expenses. Current GAAP
contains limited disclosures
for short-duration insurance
contracts about the liability
for unpaid claims and
claim adjustment expenses.
Certain companies have
been increasing disclosures
about the liability for
unpaid claims and claim
adjustment expenses in both
3) Page 3
management’s discussion
and analysis (MD&A) and
financial statement footnotes.
However, those disclosures
typically do not provide
enough detail to be useful and
are not presented consistently
across companies.
Financial statement users also
indicated that they obtain
information about the liability
for unpaid claims and claim
adjustment expenses from the
regulatory insurance filings,
which insurance companies
provide to the state insurance
regulators that grant licenses
to issue contracts in those
states.
Understanding Costs and Benefits
T
he Board decided that the final
ASU should focus on making
targeted improvements to enhance
existing disclosure requirements
for short-duration contracts.
The FASB considered these
concerns along with the
views from users about the
location of the information
and decided that the ASU
would specify that all years
presented in the claims
development tables that
precede the most recent
reporting period should be
considered supplementary
information, which addresses
the auditor independence
issue. That approach would be
less costly to preparers while
still providing the relevant
information to users.
However, the regulatory
framework often results in
complicated organizational
structures for insurance
companies and the creation of
numerous legal entities. That,
in turn, can result in data that
is incomplete and inconsistent
from company to company,
because the data is required
and available only for legal
entities located in the U.S.
Practitioners and preparers
also expressed concern that
the requirement to disclose
claims development tables
(which would span many
years) in the audited financial
statement footnotes may
be operationally difficult
in the event a change in
auditor occurred or was
contemplated during the
years for which the tables
are presented.
To address this concern,
the proposed requirement
to disclose claim counts was
replaced with a disclosure
objective of providing
information about claim
frequency along with a
description of methodologies
for determining claim
frequency, unless it is
impracticable to do so.
To issue an audit report on the
financial statements (which
include the footnotes), an
auditor must be independent
of the information for all years
presented.
„„
Disclosure about claim counts
(cumulative number of claims
incurred). Stakeholders
explained that claim count
information may not always
be relevant or useful for users,
and for certain product types,
this information may not be
available.
„„
Disclosure about incurredbut-not-reported (IBNR)
liabilities. Stakeholders noted
that insurance companies
generally do not make
separate estimates for IBNR
and, therefore, the disclosure
of IBNR on its own would
require new processes in order
to estimate the amount. These
new processes could be both
operationally challenging and
costly.
In response to this concern,
the FASB decided to require
insurance companies to
disclose the amount of the
total of IBNR liabilities plus
expected development on
reported claims for each
accident year presented in the
claims development table. This
results in a reported amount
which is well understood
by users and preparers,
avoids costs associated with
introducing a new IBNR
metric, and more closely aligns
the IBNR disclosures with
statutory reporting.
4) Page 4
Understanding Costs and Benefits
Costs: Applying the New ASU
The FASB understands that
insurance companies that issue
short-duration contracts may incur additional costs as a result of
the amendments in the ASU.
The magnitude of the costs will
vary based on the extent of an insurance company’s international
operations and the diversity of its
product offerings. For example,
an insurance company that only
issues automobile insurance in
the U.S. will incur far fewer costs
than an insurance company that
issues a wide variety of short-duration insurance contracts both in
the U.S. and in other countries.
Insurance companies are expected to incur the following costs to
apply the new ASU:
„„
„„
Information technology
transition costs to change
existing systems or develop
new systems to obtain the
disclosure information.
These costs may include
software and hardware
acquisition costs, as well as
internal personnel or external
consulting costs to configure,
install, and maintain these
new systems
Personnel costs at transition
to develop processes for
compiling and synthesizing
the information required
for disclosure, as well as
ongoing costs to prepare the
disclosures on a periodic
basis
„„
Incremental auditor costs
to audit the new financial
statement disclosures and
related internal control
enhancements
However, the FASB understands
that insurance companies will
be able to leverage existing
processes and data currently
used for statutory reporting to
prepare the financial statement
footnote disclosures required
by this ASU, which mitigates
the costs of applying the new
guidance.
Benefits: Applying the New ASU
The FASB observed that the
targeted improvements from the
new ASU will benefit users of
financial statements by providing
more relevant, useful, and comparable information.
The liability for unpaid claims
and claim adjustment expenses
represents an insurance company’s estimate of the ultimate
cost of settling claims. However,
under current GAAP, there are
limited disclosure requirements
related to this liability.
The ASU will require all insurance companies that issue shortduration insurance contracts to
disclose incurred and paid claims
development tables that include
information for the number of
years for which incurred claims
typically remain outstanding, but
the disclosure need not go back
beyond 10 years, including the
most recent reporting period
presented.
Financial statement users have
indicated that today, the information they receive is incomplete
and requires significant effort to
compile from regulatory filings to
render it useful.
The introduction of these tables
will increase the transparency of
the liability for unpaid claims and
claim adjustment expenses by
facilitating an analysis of initial
liability estimates and subsequent
adjustments to those estimates.
Overall, the new ASU increases
the transparency of liabilities
that arise from short-duration
insurance contracts by providing
enhanced disclosure of:
„„
Incurred and paid claims
development information by
accident year
„„
Reconciliation of incurred
and paid claims development
information to the aggregate
amount of the liability for
unpaid claims and claim
adjustment expenses displayed
on the balance sheet
„„
Total of IBNR liabilities plus
expected development on
reported claims included
in the liability for unpaid
claims and claim adjustment
expenses for each accident
year presented, accompanied
by a description of reserving
methodologies (as well
5) Page 5
Understanding Costs and Benefits
as any changes to those
methodologies)
„„
„„
„„
Quantitative information
about claim frequency (unless
it is impracticable to do so)
accompanied by a qualitative
description of methodologies
used for determining claim
frequency information
(as well as any changes
to these methodologies)
for each accident year of
incurred claims development
information presented
Average annual percentage
payout of incurred claims by
age (that is, history of claims
duration) for all claims except
health insurance claims
Rollforward of the liability
for unpaid claims and claim
adjustment expenses for
annual and interim periods
These disclosures will provide a
more transparent view of management’s significant estimates by:
„„
„„
Including information for the
entire company, not only U.S.
legal entities.
Providing users with
consistent and comparable
information by year so
that they can analyze an
insurance company’s ability
to underwrite and anticipate
costs associated with claims.
„„
„„
Providing disclosures of
incurred and paid claims
development information
by accident year that are
consistent with management’s
analysis of information
regarding the liability for
unpaid claims and claim
adjustment expenses.
Enabling users to calculate
average severity of reported
claims based on the claim
frequency information and
the claims development
information.
As a whole, the amendments
in the ASU will result in more
meaningful financial reporting
for users of the financial statements by providing financial
information that better explains
the financial position and performance of the reporting organization and a better basis for assessing the prospects for the nature,
amount, and timing of future
cash flows.
© Copyright 2015 by Financial Accounting Foundation, Norwalk, CT. Reproduction of these
materials, in whole or part, shall only be as permitted by Financial Accounting Foundation.
This Copyright Notice must be prominently displayed on any such reproduction.
The views expressed in this document do not necessarily reflect the views of the FASB. Official
positions of the FASB are arrived at only after extensive due process and deliberation.
Conclusion
The Board’s assessment of the
costs and benefits of issuing the
ASU is unavoidably more qualitative than quantitative because
there is no identified method
to objectively quantify all of the
costs and benefits of implementing new guidance.
Overall, the Board concluded
that the expected benefits of the
amendments in the ASU justify
the perceived costs.
More information on the ASU,
including a press release and a
FASB In Focus, can be found on
the FASB website.
More information on how the
FASB conducts its cost-benefit
analysis can be found here.
For a detailed explanation of the FASB’s
consideration of costs and benefits refer
to the basis for conclusions in ASU
2015-09.
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