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ASC 944 requires specific disclosures for short-duration insurance contracts. Insurance entities subject to SEC Regulation S-X Article 7 may be required to make additional disclosures based on the requirements of Regulation S-X Rule 7-03 through Regulation S-X Rule 7-05.

10.6.1 Annual and interim rollforward disclosure requirements

A rollforward is required for insurance contracts that have an unpaid claims liability, including long-duration and short-duration contracts. However, as discussed in IG 5.2.3.3, subsequent to the adoption of ASU 2018-12, the “present value of estimated future benefits to be paid to or on behalf of policyholders and certain related expenses” referred to in ASC 944-40-25-8 represents all payments under the contract, including future expected claims and claims for which the disability, morbidity, or other insurance event has occurred, but for which claims have not yet been paid. This eliminates the need for a separate claim liability measurement.
ASC 944-40-50-4A requires incurred and paid claims information to be disclosed separately, with further detail regarding the claim activity relating to the current accident year (year-to-date amounts) and development relating to prior accident years. Any reinsurance recoverable is presented as a reconciling item to the beginning and ending balances.

ASC 944-40-50-3

For annual and interim reporting periods, all of the following information about the liability for unpaid claims and claim adjustment expenses shall be presented in a tabular rollforward:
a. The balance in the liability for unpaid claims and claim adjustment expenses at the beginning of each fiscal year presented in the statement of income, and the related amount of reinsurance recoverable on unpaid claims
b. Year-to-date incurred claims and claim adjustment expenses with separate disclosure of the provision for insured events of the current fiscal year and of increases or decreases in the provision for insured events of prior fiscal years
c. 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 fiscal year and to insured events of prior fiscal years
cc. The ending balance in the liability for unpaid claims and claim adjustment expenses and the related amount of reinsurance recoverable.
...
In addition, an insurance entity shall disclose the reasons for the change in incurred claims and claim adjustment expenses recognized in the income statement attributable to insured events of prior fiscal years and indicate whether additional premiums or return premiums have been accrued as a result of the prior-year effects.

Figure IG 10-11 provides an example table of a rollforward of liabilities for unpaid claims and claim adjustment expenses from ASC 944-40-55-7.
Figure IG 10-11
Rollforward of liabilities for unpaid claims and claim adjustment expenses
Required by
20X2
20X1
Balance at January 1
$7,030
$6,687
Less reinsurance recoverables
1,234
987
Net balance at January 1
5,796
5,700
Incurred related to:
Current year
2,700
2,600
Prior years
(171)
96
Total incurred
2,529
2,696
Paid related to:
Current year
781
800
Prior years
2,000
1,800
Total paid
2,781
2,600
Net balance at December 31
5,544
5,796
Plus reinsurance recoverables
1,255
1,234
Balance at December 31
$6,799
$7,030

10.6.2 Claims development table and related information

ASC 944-40-50-4B requires disclosure of up to ten years of claims development information. The claims development information for all periods preceding the most recent reporting period and the historical claims payout percentage disclosure is considered required supplementary information (RSI).
The claims development table is required to be presented:
  • Annually, as of the date of latest statement of financial position
  • On a disaggregated basis (as a result, multiple tables will usually be required)
  • On an undiscounted basis
  • By accident year for the number of years for which claims are typically outstanding (but need not exceed 10 years)
  • Net of reinsurance
  • With tabular amounts of incurred claims and allocated claim adjustment expenses separate from paid claims and claim adjustment expenses.
Figure IG 10-12 provides an example that illustrates the information an insurance entity with one major short-duration product line (Homeowners’ insurance) would disclose in its financial statements to meet the requirements in ASC 944-40-50-4B through ASC 944-40-50-4D for incurred and paid claims and the reconciliation to the balance sheet.
Figure IG 10-12
Claims development table disclosures and reconciliation to balance sheet
Homeowners' insurance
                              Incurred claims and allocated adjustment expenses, net of reinsurance
As of December 31, 20Y6
Total of incurred but not reported liabilities plus expected development on reported claims
For the years ended December 31
Accident year
20X7*
20X8*
20X9*
20Y0*
20Y1*
20Y2*
20Y3*
20Y4*
20Y5*
20Y6
Cumulative number of reported claims
20X7
$10,000
$9,900
$9,700
$9,800
$9,750
$9,750
$9,600
$9,650
$9,575
$9,500
$5
39
20X8
10,950
11,000
10,500
10,750
10,850
10,600
10,250
10,150
10,250
30
37
20X9
12,000
11,750
11,500
10,900
10,900
10,850
10,750
10,500
90
38
20Y0
12,250
12,500
12,550
12,400
12,200
12,150
12,000
300
36
20Y1
12,300
12,500
12,650
12,750
12,800
12,850
900
35
20Y2
12,800
12,900
12,750
12,700
12,700
1,100
34
20Y3
13,000
13,250
13,100
13,150
1,500
31
20Y4
13,150
13,250
13,300
2,100
29
20Y5
13,500
13,250
3,100
26
20Y6
13,750
5,000
22
*unaudited
Total
$121,300
                              Cumulative paid claims and 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
*unaudited
Liabilities for claims and claim adjustment expenses, net reinsurance
$40,550
The net incurred and paid claims development tables for the liability for future policy benefits are required to be reconciled to the balance sheet in ASC 944-40-50-4C.
December 31, 20Y6
Net outstanding liabilities
Homeowners’ insurance
$40,550
Other short-duration insurances 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 insurance lines
283
Total reinsurance recoverable on unpaid claims
14,163
Insurance lines other than short-duration
3,315
Unallocated claims adjustment expenses
2,420
Other
10
5,745
Total gross liability for unpaid claims and claim adjustment expense
$62,434

10.6.2.1 Level of aggregation of claims development tables

The disclosures should provide financial statements users information to understand the amount, timing, and uncertainty of cash flows arising from the liabilities. ASC 944-40-50-4A requires an entity to aggregate or disaggregate the information “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.” Insurers should not aggregate amounts from different reportable segments.
In determining the level of disaggregation at which to present the required claims development information, insurers should consider how their liabilities for unpaid claims and claim adjustment expenses have been presented for other purposes, including outside of the financial statements (e.g., MD&A in Annual Reports on Form 10-K, earnings releases, annual or statutory reports, supplementary disclosures of global loss triangles) and information reviewed by chief operating decision makers. Insurers should disaggregate their claims development information into categories, such as type of coverage, geography, reportable segment, market or type of customer, and claim duration.
Insurers need not disclose claims development for insignificant categories of liabilities, but if omitted, these categories would be included in the claims development reconciliation. Judgment is needed to assess what is insignificant in the context of the financial statements.

10.6.2.2 Incurred but not reported claims and claim frequency disclosures

For each accident year presented in the claims development tables, for the most recent reporting period presented, the insurer is required to disclose the following information as an accompanying disclosure to the annual claims development tables:
  • The sum of IBNR plus expected development on reported claims (referred to as “IBNR+”)
  • Cumulative claim frequency information, unless impracticable to do so
Because insurers have various methodologies for determining the IBNR+ and claim frequency information, potentially even within the same entity for different categories of claims development tables, a description of the methodologies used for determining these amounts is required for each table. An explanation of significant changes in the methodologies used for determining both the IBNR+ amounts and claim frequency amounts is also required.
As differences may exist in how claim frequency is measured, the required disclosures include whether claim frequency is measured by claim event or individual claimant, and how the insurer considers claims that do not result in a liability (e.g., those below a deductible). For example, a car accident with three claimants could be considered one loss event (i.e., a single claim count) or three (one for each claimant). Separately, an aggregate high deductible policy will have a large number of losses payable by the insured prior to reaching the insurer’s attachment point. In such cases, some insurers may consider claims under the deductible to be reported claims, since they may develop into the insured layer over time, while other insurers may only consider claims in the insured layer as reported claims.
Where impracticable to disclose claim frequency information, an insurer is required to disclose this fact and the reason why the disclosure is impracticable. Impracticable means that after making every reasonable effort to do so, an entity is unable to apply the requirement. For example, impracticable situations may include assumed reinsurance or participation in residual market pools, where an entity does not have access to claim frequency information.
Claim frequency disclosures should be disaggregated at the same level as the claims development table disclosures, which could prove challenging in certain situations. An entity chooses to disaggregate at a product level could define claim frequency. However, if a category is based on geographical location, which may include both direct and assumed business, and various product lines, an entity may determine that obtaining the quantitative claim frequency information is impracticable.
While the FASB’s objective was to provide information to allow users to calculate average severity of reported claims and to compare that information between insurers, this goal may not be achieved in practice. The IBNR+ amount will typically be derived by subtracting “known case reserves” from total incurred claim liabilities. However, “known case reserves” is not a defined accounting term in US GAAP and thus insurers may measure them differently. For example, claims adjusters may establish claims in dispute at a small dollar amount based on litigation concerns or to incentivize claim adjudication behavior. In other instances, claim adjusters may set known case reserves based on expected modes, probable minimums, or probable maximums. In addition, because the disclosure was changed from including claim count to claim frequency, the amount disclosed might be a percentage (e.g., number of claims per insured vehicle). Therefore, it may not be possible to calculate severity from the disclosed information.

10.6.2.3 Other disclosure considerations

The guidance does not specifically address how the impact of business modifications (e.g., acquisitions, disposals, commutations, spin-offs, retroactive reinsurance agreements, other means to enter or exit business) or foreign currency translation should be reflected in the development table information. The AICPA Insurance Expert Panel explored the appropriate acceptable alternatives and received feedback from the SEC and FASB staff as to which alternatives to business modifications and foreign currency would be acceptable.
Required supplementary information
The claims development information for all periods preceding the most recent reporting period and the historical claims payout percentage disclosure will be considered required supplementary information (RSI).
The guidance does not prescribe a particular location for RSI, which may be presented as a supplementary schedule outside of the basic financial statements, with only the current period information included in the notes to the financial statements. Alternatively, RSI may be presented within the notes to the financial statements, accompanied by a clear distinction of what is required supplementary information, such as labeling the RSI as unaudited.
Business modifications
Business modifications can distort claims development for a user. For example, in a business combination, including the acquired business by accident year in subsequent years' tables but not prior years' could make it appear that there is adverse development if the acquired business is material. Similarly, in a disposition, if the table is not restated to remove amounts relating to disposals, the table could be distortive in subsequent post-disposal periods given that cumulative amounts relating to the disposed business would be static, thus inappropriately tempering any development on the remaining business.
For business combinations, the SEC staff noted that a retrospective approach would best achieve the disclosure objectives of the guidance by presenting the acquiree's historical incurred and paid accident year claim information in its claims development tables for all periods presented and related disclosures. In applying this approach, it would be appropriate to either present the incurred and paid claim information of the acquiree separately or combined with the claims development information of the acquirer using the disaggregation principles as required by the guidance. The SEC staff noted that a prospective approach, where the incurred and paid accident year claim information of the acquiree is presented separately from the acquirer as of the acquisition date and in subsequent periods in a separate table or tables as appropriate, could meet the disclosure objectives of the guidance. Under this method, the acquired liabilities as of the acquisition date would be presented in the fiscal year that includes the acquisition date by individual accident year in the incurred section of a table, with subsequent activity presented separately in the incurred and paid sections of that table.
For dispositions, the SEC staff noted that a retrospective approach would be consistent with the disclosure objectives of the guidance. In this approach, an entity would exclude incurred and paid claims information for the disposed business from the claims development tables for all years presented (i.e., exclude the disposed business from prior and current periods' rows and columns). In addition, the SEC noted it would be inappropriate to present a reduction in the unpaid claim liabilities relating to dispositions as a net reduction to amounts in the incurred activity or alternatively a net increase in the amounts in the paid claims activity in the year of disposition column.
Foreign currency translation
Foreign currency should be presented to result in an “apples to apples” comparison for each accident year in order to have a useful year by year comparison of claims development information. The SEC staff noted that an approach which uses current year-end balance sheet rate to translate all amounts in the table for all periods presented would be consistent with the disclosure objectives of ASC 944, as it would eliminate the effects of changes in foreign currency translation rates from the incurred and paid claims information in the claims development tables. They noted that another approach that includes separate claims development tables for each functional currency would also be consistent with the objectives of the standard. Finally, the SEC staff noted that a presentation that did not use the same exchange rate for all of the data in the table, that is for all accident years and for both incurred and paid, would be inconsistent with the requirements of the standard.

10.6.3 Historical average annual percentage claims payout

ASC 944-40-55-9F requires presentation of the historical average annual percentage payout of claims as of the end of the most recent reporting period at the same level of disaggregation as presented in the claims development tables. The historical average payout should be calculated on an accident year basis for each development year.
As the calculation of the historical average is based on the historical paid claim information from the claims development tables, it is similarly considered RSI. If there were multiple significant categories and thus multiple claims development tables, a corresponding payout pattern table for each claim development table would be required. Due to the very short duration of health insurance claim settlement period, health insurance claims are exempt from this requirement. Refer to ASC 944-40-55-9F for an example of the average annual percentage payout of incurred claims disclosure.
The guidance illustrates how an entity can calculate the payout percentages based on the information in the claims development tables. If, for example, an entity was calculating the percentage in year 3, it would divide the claims paid in year 3 for each accident year (derived by subtracting the cumulative paid amounts in year 2 from the cumulative paid amounts in year 3 from the claims development table), by the most recently re-estimated incurred claims for each accident year, also taken from the claims development table. It would then average these percentages of claims paid for the third year of each accident year to arrive at the percentage included in the disclosure.

10.6.4 Discounting unpaid claims and claim adjustment expenses

If a reporting entity discounts the liability for unpaid claims and claim adjustment expenses, ASC 944-40-50-5 requires disclosure of the carrying amounts of the discounted liability for unpaid claims and claim adjustment expenses and the range of interest rates used to discount the liability. An entity is also required to disclose the effects of discounting on the comparative annual financial statements, including the aggregate amount of discount deducted from the claim liability, the amount of interest recognized during the period, and the line item in which interest accretion is classified.
The disclosures are required to be presented on a disaggregated basis as discussed in IG 10.6.2.1. We believe there may be circumstances where the disaggregation categories used for the discounting disclosure may differ from those used for the claims development tables. For example, if workers’ compensation liabilities are discounted, this might be an appropriate level of disaggregation for the discounting disclosure, even if workers’ compensation claims are presented at a different grouping level for purposes of the claims development table.

10.6.5 Changes in methodologies and assumptions

Several analytical techniques are typically utilized in estimating the liability for unpaid claims. One or more techniques may be used for a liability grouping, and techniques may be changed over time based on new information.
For the most recent annual reporting period, entities are required to disclose information about significant changes in methodologies and assumptions used in calculating the liability for unpaid claims and claim adjustment expenses. This includes the reasons for the change and the effects on the financial statements. The guidance is not explicit as to whether the effects of the change need to be disclosed quantitatively or qualitatively. Some discussion at the disaggregated level would be appropriate when there is significant change in methodologies and assumptions during the years.
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