3. Introduction and Overview
• Speakers and purpose of presentation
• Requirements for Disclosures about Short-Duration
Contracts
• Work with accountants to determine what is
impracticable and what are insignificant categories
• Ultimately do the disclosures provide meaningful decision
useful information to financial statement users?
3
4. Best Practices for Collaborating with
Accountants
• Actuaries and accountants are trusted advisors who
succeed together through demonstrating trust,
cooperation, and respect
• Express gratitude and appreciation
• Be patient and kind when accountants don’t know what
you know. Consider that you don’t know what they know
either. Working together is a terrific opportunity to
broaden everyone’s perspective and understanding.
• Familiarize yourself with technical accounting
policies especially for product classification
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5. Importance of Documentation
• Documentation is not an afterthought, busywork, or
only nice to have if there’s time. Documentation is
an essential component of the work.
• “Stands on its own”: Can another actuary follow your
documentation alone, reperform your work, and
reach the same conclusions and recommendations?
Can an auditor?
• “If you didn’t document, you didn’t do it!”
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6. And beyond…
• Targeted Improvements to the Accounting for Long-
Duration Contracts
• Review Tentative Board Decisions to Date as of March 23,
2016
• Exposure draft expected in the fall
• Actuaries can provide critically important input for
comment letters on both the technical and operational
aspects of the proposed accounting.
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9. FASB Short-Duration Contracts
• The Board issued ASU 2015-09, Disclosures about Short-Duration
Contracts, to improve financial reporting for short-duration insurance
contracts by providing financial statement users with disclosures about
significant estimates of claim liabilities
• Expanded Disclosure Requirements Include:
• Incurred and paid loss development tables
• Information about the frequency of claims and incurred but not reported claims
• Discounted claim reserves
• Estimation and changes in methodologies and assumptions
• Claim duration information
• Rollforwards of claims liabilities
• Health insurance contracts
• American Academy of Actuaries (AAA) White Paper on Challenges and
Issues Implementing the FASB Short-Duration Contract Disclosures
• Exposure Draft, final coming later this year
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10. Applicability
• Disclosure requirements, EXCEPT the reserve roll-
forward, apply only to contracts that are classified as
short-duration under GAAP
• Some health products may be classified as short-duration
in some cases and long-duration in others, even by the
same carrier:
• Group long-term disability (GLTD) and Group life
• Medicare Supplement
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11. Aggregation
• Aggregate or disaggregate information so that useful information is
not obscured by either the inclusion of large amount of
insignificant detail or the aggregation of items that have different
characteristics
• The aggregation or disaggregation determination is facts and
circumstances based and considers other presentation of the claim
liabilities, including:
• Disclosures outside the financial statements
• Information regularly viewed for evaluating financial performance by the chief
operating decision maker
• Other similar information used by the entity or financial statement users to
evaluate financial performance or make resource allocation decisions
• The aggregation or disaggregation may differ from how information
is currently aggregated, which may cause reconsideration of
systems, financial reporting processes, and internal controls
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12. Aggregation (continued)
• Need to consider:
• Coverage type
• Geography
• Reportable segment
• Market
• Claim duration
• May not aggregate among different reporting
segments
• F/X and merger activity may also influence
• May result in many segments
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13. Aggregation(continued)
• ASC 944-40-55-9C implies that the minimum
disaggregation is the segment level
• Disaggregation by reportable segment is a minimum
requirement for companies with reportable segments
• Not a safe harbor
• Medical and GLTD claim reserves may have
“significantly different characteristics” and may
warrant disaggregation even though they are In
the same reporting segment
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14. Aggregation(continued)
• Consider the types of disclosures already made
within statutory filings
• Business in a reported segment may be spread across
many statutory entities
• Underwriting and Investment Exhibit Part 2C of the NAIC
Health Blank provides reserve development for several
defined lines of business:
• Hospital & medical
• Medicare Supplement
• Dental only
• Vision only
• Federal Employees Health Benefits Program
• Medicare
• Medicaid
• Other health, including GLTD, long-term care (LTC), and stop loss
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15. Claims Development Information
• Disaggregated net incurred and paid claim and allocated claim
adjustment expense development must be disclosed by accident
year
• Information for period of time claims typically remain outstanding
• Period of time does not need to exceed 10 years—for medical coverage
will be much shorter
• Net outstanding amount for all accident years not separately presented
must be disclosed
• Accident year may be a challenge for stop loss coverage
• A reconciliation of the total net amount for all tables presented to
the amounts in each statement of financial position presented is
required with disclosure of disaggregated reinsurance balances
• Aggregate amounts for other reconciling items such as unallocated claim
adjustment expense must be presented
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16. Presentation as Supplementary
Information
• Claims development information, including claims duration
information, for the current reporting period must be presented in
the notes to the financial statements
• Disclosure of all years that proceed the current reporting period
will be presented as supplementary information
• Board members have previously stated they expect to see all
periods presented together within the financial statements
• As the supplementary information is required by the accounting
standard, the information is considered by the auditing standards
to be required supplementary information
• Auditing standards require specific procedures to be performed
with respect to required supplementary information and the
auditor to report on the performance of the specific procedures
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17. Claim Frequency Information
• Disclosure providing information about claim frequency,
unless it is impracticable to do so, is required and should
include:
• Quantitative claim frequency information (i.e., number of reported
claims that effect incurred claims and allocated claims adjustment
expenses)
• Explanation of the methodologies used to determine claim frequency
as there is no prescribed format as information may be tracked
differently by organizations or type of business within an organization
(e.g., by insured event, by separate claimant by insured event)
• If it is impracticable to disclose claim frequency information,
such as in some reinsurance arrangements or participation in
residual market pools, disclosure shall describe why it is
impracticable
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18. Claim Frequency Information
(continued)
• Several issues around claim counts disclosure noted in
AAA paper (some may be specific to P& issues)
• Different definitions of what constitutes a claim, even
within a company
• Inhibits comparability
• Reinsurance issues
• How to deal with claims ceded 100%
• Lack of data on some assumed claims
• Changes in ceded reinsurance over time
• Changes in portfolio over time
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19. Claim Frequency Information
(continued)
• For seriatim claim reserves, such as GLTC or GLTC
this should be straightforward
• For claim reserves not set on a seriatim basis, such
as medical insurance, this may be less meaningful
and challenging to assemble
• Aggregation criteria apply to the claims frequency
information
• May influence aggregation choice if different claim
frequency information is used
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20. Discounted Claim Reserves
• When the liability for unpaid claims and claim
adjustment expenses is discounted, disclose the effects
of discounting on the financial statements including:
• Aggregate amount of the discount deducted from the liability
for unpaid claims and claims adjustment expenses
• Interest accretion recognized during the period
• Line item(s) in which the interest accretion is classified
• Medical claim reserves not discounted
• Would only apply to seriatim reserves (GLTD, GLTC)
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21. Estimation and Changes in Methods
and Assumptions
• Disclosure, in both interim and annual financial statements,
the incurred-but-not reported liabilities combined with the
reserve for expected development on reported claims,
included in the liability for unpaid claims and claim
adjustment expenses
• Presented as a combined single amount for each accident year in the
development of reported claims
• Either as a separate disclosure or as a component of the rollforward
of the liabilities for unpaid claims and claim adjustment expenses
• Description of the reserving methodology used to determine
the amount disclosed
• Need to disclose changes
• Experience studies may need to be disclosed for tabular reserve
assumption changes—GLTD, GLTC
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22. Estimation and Changes in Methods
and Assumptions (continued)
• “Expected development on reported claims” is not a familiar
concept to health actuaries
• Medical coverage:
• Determine the IBNP (incurred but not paid) liability in total, with the
following components:
• IBNR (Incurred but not reported)
• ICOS (In course of settlement) reported but not yet adjudicated
• D&U (Due & Unpaid) reported and adjudicated but not yet paid
• Challenging to allocate to each “bucket” as they are not calculated
separately
• Use approximations
• Other health coverage:
• Claim reserves calculated on seriatim basis
• Still no concept of “expected development on reported claims”
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23. Quarterly Reserve Rollforward
• The rollforward of the liability for unpaid claims and
claim adjustment expenses required in paragraph 944-
40-50-3 will be required for interim periods as well as for
the annual reporting periods
• For calendar year-end public companies this would be effective
first quarter 2017
• For health insurance the rollforward is to be aggregated
or disaggregated so that useful information is not
obscured by either the inclusion of a large amount of
insignificant detail or the aggregation of times that have
different characteristics
• Only health requires disaggregation of the rollforward
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24. Claim Duration Information
• Disclose the average annual percentage paid claims by age
based on the information in the paid claims development
table
• Cover the same number of accident years presented in the
claims and claim expense development tables
• Disaggregate consistent with the claims and claim expense
development tables
• Disclosure is not required for health insurance claims
• Claims related to the cost of medical treatments
• GLTD and GLTC may not qualify
• The ASU’s implementation guidance includes example claims
duration calculations and disclosure
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25. Transition & Effective Date
• Comparative disclosures for each prior period presented except:
• Incurred and paid development tables
• Material changes in judgment
• Loss development tables need not exceed 5 years in the year of
transition, growing to a period of time that does not need to
exceed 10 years
• Application of transition disclosure guidance in Subtopic 250-10 on
accounting changes and error corrections is not required
• Effective for public business entities for annual reporting periods
beginning after December 15, 2015 and interim reporting periods
within annual reporting periods beginning after December 15,
2015
• Once year deferral for other entities
• Early adoption is allowed
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27. Agenda
• Short-Duration Contracts Disclosures
• Short-duration contracts issues for life contracts
• Some issues from the AAA draft white paper
• And Beyond
• Brief overview of FASB long-duration contracts project
• FASB financial instruments issues
29. Short-Duration Contracts Issues for
Life Actuaries
• Many group insurance contracts
• Many credit insurance contracts
• Some term insurance
• Certain contracts in countries outside the US
• Life companies that own a health or P&C subsidiary
30. Claim development tables
• May not be an issue for life insurance contracts
• Enough of the claim may be paid in first year to avoid
needing a claim development table
• Even if a table is needed it may be able to be truncated
to less than 10 years
• May be an issue for disability insurance and other
long tailed claims
• E.g., group long term care
31. Disclosure of undiscounted claims
• If the claim reserve in the financial statements is discounted,
there is a requirement to disclose the undiscounted claim
amounts (i.e., impact of discounting)
• Likely an issue for long-tailed claim coverages such as disability
• Presumably not a huge burden but may require some effort to
prepare
• E.g., calculate reserve using a valuation rate of 0%
• Additional information required includes:
• Range of discount rates used
• Amount of interest accretion recognized each period
• Where in the income statement the interest accretion is reported
32. Quarterly Claim Reserve Rollforward
• The way the new rules were written one provision impacts both
short and long-duration contracts
• Currently, the claim reserve rollforward is only disclosed
annually in the 10-K
• Under the new rules, the claim reserve rollforward will have to
be provided quarterly on a year-to-date basis
• New language explicitly requires a “tabular rollforward”
• Presumably systems are already in place to provide this
disclosure since it is already required annually
• May need some reformatting if not already presented in tabular form
33. Quarterly Claim Reserve Rollforward
• Beginning liability for claims & claim expenses
+ Claims & claim expenses incurred
- Claims paid
- Claim expenses paid
= Ending liability for claims & claim expenses
• Disclose reason for changes in incurred claims & claim
expenses related to prior years
• Disclosure of policies and methodologies for
determining difficult-to-estimate liabilities (e.g.,
asbestos, toxic waste clean-up) remains annual
35. Mergers/acquisitions/divestitures
• No explicit guidance for addressing mergers or
divestitures in claim rollforward table
• The paper suggests several possible approaches:
• Restate history
• Simply add the acquired business from the acquisition date
• Or treat a divestiture as a paid loss as of the divestiture date
• Use a separate triangle for the acquired business
• Deem acquired business as insignificant
• If insignificant
36. Foreign exchange
• No explicit guidance for how to deal with movements in
F/X rates over time
• Several approaches are suggested in the paper:
• Convert all history to USD using the current year’s F/X rates
• Report all triangles in original currency and treat F/X as a
reconciling item
• Lock in F/X rates for each accident year
• Use F/X rates consistent with financial statements, i.e., paid
values converted at F/X rate on date of payment; outstanding
values use balance sheet F/X rate
• Use a separate line to record a “Foreign Exchange Paid Loss”
for each accident year, reflecting the impact of F/X movement
38. Long-duration insurance project
• FASB has been engaged in providing targeted
improvements to accounting for long-duration
insurance contracts
• Exposure draft of proposed guidance expected in late
August/early September
• Five areas of focus
• Assumption updates for traditional contracts, including
limited-payment and participating contracts
• DAC amortization
• Market risk benefits
• Disclosures
• Transition
39. Traditional contracts
• Unlock cash flow assumptions annually in a
consistent quarter
• Net premium ratio is retrospectively unlocked when
assumptions change
• Similar to UL-type DAC amortization
• Net premium ratio capped at 100%
• No provision for adverse deviation (PAD)
• No loss recognition testing or profits followed by
losses testing
40. Traditional contracts
• Discount rate updated each reporting period
• Current market rate consistent with “high-quality
fixed-income” assets
• Change in discount rate reported in OCI
41. Participating contracts
• Traditional methodology applied to participating
contracts
• No more explicit distinction between FAS 60 contracts and FAS
120 contracts
• Methodology doesn’t really fit the floating rate nature
of participating contracts
• Discount rate not necessarily aligned with dividend credited
rate
• OCI calculation for discount rate changes does not account for
“floating” nature of credited rate
• Distinct treatment for change in discount rates change versus
the related change in dividend cash flows
42. DAC & SOP 03-1
• DAC amortized in proportion to amount inforce, or
straight line for contracts in force
• No interest on DAC
• Exception for investment contracts which use effective
yield approach to amortization
• No DAC recoverability test
• SOP 03-1 reserves can be initiated on in force
contracts
• Replaces loss recognition & profits followed by losses
testing on UL-type contracts
43. Market risk benefits
• Guarantees with more than insignificant capital
market risk on variable (and some other) contracts
• E.g., variable annuity GMxBs, VUL no-lapse guarantees
• Market risk benefits reported at fair value
• Change in fair value reported in net income
• Except change related to change in “own credit”
reported in OCI
44. Disclosures
• Lots of new disclosures, including:
• Disaggregated rollforwards of reserve and DAC balances,
reconciled to balance sheet amounts
• Information about assumptions
• In some cases including weighted averages and ranges
• Discussion of judgments used and their impact
• Information about risk management and hedging
• Cash surrender values and net amounts at risk
45. Disclosures
• Also:
• For account balance products
• Tabular disclosure of crediting rates and guaranteed rates
• Weighted average earned & credited rate
• Information about situations where an SOP 03-1 is established on in
force contracts
• For traditional contracts
• Undiscounted net premiums and benefits
• Information about reinsurance receivables and gross premiums
• Information about situations where net premium exceeds gross
premium
• For market risk benefits
• Fees collected
• Rollforward split between in-the-money and out-of-the-money
benefits
47. FASB Financial Instruments Project
• FASB has completed two projects on accounting for
financial instruments:
• Recognition and measurement (ASU 2016-01) effective in
2018 for public entities
• Financial instruments credit losses (ASU 2016-13)
effective in 2020 for public entities
• Also working on simplifying hedge accounting
requirements
48. Recognition and measurement
• Two provisions may be particularly important to
actuaries
• Equity securities no longer eligible for OCI
• Change in value of equity investments reported in net income
• Some practical expedients
• Exception if investment is consolidated or accounted for using
the equity approach
• For liabilities that elect fair value option the impact of
changes in own credit reported in OCI
49. Credit losses
• Different impairment models used for assets held at
amortized cost versus for assets at FV-OCI
• Reinsurance receivables will need to calculate an
impairment allowance using the approach used for
amortized cost assets
• Current expected credit loss (CECL) model
• Estimates present value of all future projected credit
losses on the reinsurance
• Does not impact losses due to disputed claims
