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2.3 Short-duration insurance – classification and measurement
Publication date: 30 Nov 2021
us Insurance guide
A short-duration contract provides insurance coverage for a fixed period of short duration. The contract may have a specified term, such as one year. Alternatively, the term may not be specified, but may enable the insurer at the end of a specified period to cancel the contract or adjust the provisions of the contract, such as the amount of premiums or coverage provided, for future insured events. Typically, short-duration contracts would not have a duration of more than 3 to 5 years.
Under the short-duration insurance accounting model:
- Premiums are recognized as revenue over the coverage period in proportion to the amount of insurance protection provided, which in many cases is on a straight-line basis.
- Losses are recognized when insured events occur, based on the estimated ultimate cost to settle the claims, and are adjusted to reflect changes in estimates during the life of the contract.
- Eligible deferred acquisition costs are capitalized and amortized in proportion to premium revenue recognized.
- Cash flows from premiums and claims are included in cash flow from operations.
Short-duration contracts may contain embedded derivatives, which could require bifurcation under ASC 815, as described more fully in DH 4.6.2.
Most property and liability insurance contracts are short-duration contracts. Examples include homeowners, automobile, commercial property, workers’ compensation, general liability, professional liability, and accident and health insurance. Life insurers may write certain types of coverages that are classified as short duration, such as group life, group long-term disability, and group short-term disability products.
See IG 4 for further information on the short-duration insurance contract accounting model.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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