The Financial Accounting Standards Board (FASB) has issued enhanced disclosure requirements for property and casualty insurance contracts that are already well known to insurance companies. These disclosures provide investors with a clearer picture of an insurance company’s claim-related liabilities on the balance sheet. Although new in Generally Accepted Accounting Principles (GAAP), insurance companies have always provided these disclosures in their financial statements prepared in accordance with Statutory Accounting Principles (SAP). Insurance companies are required to file financial statements prepared in accordance with SAP annually to the insurance commissioner in each state the company operates.

On May 21, 2015, the FASB issued an Accounting Standards Update (ASU) No. 2015-09 Reporting Requirements of ASU 2015-09 “Financial Services – Insurance (Topic 944): Disclosures about Short-Duration Contracts.” The new standard requires the disclosure of additional information about the insurance liabilities to help users understand the nature, amount, timing and uncertainty of future cash flows related to insurance liabilities and the effect of those cash flows on the statement of comprehensive income.

ASU No. 2015-09 will require an insurance company to provide tables in their disclosures illustrating claims that have been incurred and the amounts the insurance company has paid out on these claims. These tables will show how the insurance company’s liabilities change over time. The insurance companies will now disclose the total of incurred claims that have yet to be reported to them and their estimates of whether reported claim amounts will increase.

SAP are a set of accounting rules for insurance companies set forth by the National Association of Insurance Commissioners (NAIC). SAP are designed to assist the state insurance departments in the regulation of the solvency of insurance companies. The ultimate objective is to ensure that policyholder claims and other legal obligations are met when they come due and that insurance companies maintain capital and surplus at all times and in such forms as required by statute to provide a cushion against insolvency. With that objective of solvency regulation, SAP focuses on the balance sheet, rather than the income statement, and emphasizes insurers’ liquidity.

The GAAP and SAP accounting standards have distinct differences. Financial statements prepared in accordance with SAP helps investors to see whether insurers are in a position to pay insurance claims. It allows investors to assess the total worth of an insurance company in case the company cease its operations. In contrast, an entity is considered as a going concern under GAAP. With financial statements prepared in accordance with GAAP, investors can measure the profitability of a business. It allows investors to assess the value of a company and compare its future and present value.

In 2001, there was a project called the “Codification of Statutory Accounting” to bring GAAP and SAP standards more closely together. ASU 2015-09 furthers this alignment of GAAP and SAP with new GAAP disclosure requirements. These disclosures will provide investors with the same information that insurance commissioners have utilized for years.

Source: Bloomberg BNA – By Gery Brownholtz