The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) separately released proposals recently that represent a transformational change to measurement and reporting for insurance contracts to be finalized in 2014.
Executive SummaryPwC's Donald Doran, Marc Oberholtzer and Angus Toon outline how FASB's recently issued exposure draft on accounting for insurance contracts will impact P/C carriers reporting under U.S. GAAP as well as how the FASB proposal differs from an earlier proposal from the IASB. Separate loss reserve discounting calculations for balance sheet liabilities and income statement incurred losses will change key operating metrics and increase demands on carrier systems.
The proposals intend to improve the usefulness and consistency of financial reporting and provide investors with more decision-useful information. While the outcome of the IASB project is a comprehensive International Financial Reporting Standard (IFRS) for insurance, the FASB project’s ultimate result is less certain. The FASB could decide to make only some of the proposed changes rather than adopting an entirely new model.
The Proposed FASB Model
The FASB proposal describes two models: a building block approach (BBA) and a premium allocation approach (PAA).
The PAA would apply to short-duration contracts with coverage periods of one year or less or that otherwise meet certain criteria, and should apply to most property/casualty products. The PAA is similar to today’s unearned premium approach but would require discounting of incurred losses and unpaid claims with limited exceptions.
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