In a Credit Outlook report published earlier this week, an analyst from Moody’s Investors Service described an updated accounting standard related to property/casualty insurance loss reserves as a positive development for credit analysis.

“We believe these enhancements will aid credit analysis by providing comparability through consistent disclosure, transparency through the disaggregation of losses by product and geography, and insight into key assumptions and methodologies,” David Chan, a vice president and senior accounting analyst, wrote in an article published Monday. “The disclosures will assist the assessment of a company’s ability to underwrite and estimate costs associated with claims,” he said.

The Accounting Standards Update to which Chan referred is FASB ASU No. 2015-09, Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts.According to FASB, the ASU aims to introduce “targeted improvements to disclosure requirements for insurance companies that issue short-duration contracts”—contracts such as auto, homeowners, renters and catastrophe insurance policies providing coverage for a fixed period of short duration (typically one year or less).

FASB said the five main provisions of the ASU require an insurance company to:

  1. Provide tables on a disaggregated basis illustrating the amount of insurance claims that have been incurred, as well as the amounts the insurance company has paid out on these claims.
  2. Reconcile the claims development tables to the amount of the liability presented on the balance sheet.
  3. Disclose, for each accident year presented in the claims development tables, the total of incurred claims that have yet to be reported, plus the company’s estimate of whether reported claim amounts will increase.
  4. Provide disaggregated information about the frequency of reported claims, unless obtaining this information is impracticable
  5. Provide a disaggregated history of claims duration, presented as the average annual percentage payout of incurred claims by age.

In his report, Chan explained the first provision—for disaggregated tables of incurred and paid losses—as simply referring to disclosure of incurred and paid loss development tables (triangles), similar to what is disclosed in U.S. statutory annual statements at a legal entity level, by lines of business. Guidance in the ASU provides examples of disaggregation categories that include major product line, geography, or reportable segment (the way the company’s management looks at the business), among others.

The ASU illustrates several of the items listed above (1, 3 and 4) for the homeowners line, with an example displaying incurred and paid loss triangles (including allocated expense and net of reinsurance) for 10 accident years and 10 development periods. Next to the incurred loss triangle is a column showing “total incurred-but-not-reported liabilities plus expected development on reported claims” by accident year, and another column showing the “cumulative number of reported claims.)

Chan’s write-up notes that the ASU requires disclosure of the methodologies for determining IBNR in addition to the estimates.

The ASU, and the Moody’s discussion, also highlight differences between the FASB update and International Financial Reporting Standards.

According to Chan, for example, IFRS requires disclosure of consolidated loss development tables with no disaggregation. “Consolidated information, although helpful in understanding a company’s total volume and development of paid and incurred losses, provides little insight into the company’s underwriting performance. All lines of business are aggregated, obscuring results and providing companies the ability to offset poor performing products with those that are doing better,” he wrote.

“The material differences between the IFRS exposure draft and current U.S. GAAP will be an impediment to investors and creditors who attempt to analyze and compare companies reporting under these different accounting regimes,” he said.

The ASU will be effective for annual periods beginning after Dec. 15, 2015, and interim periods within annual periods beginning after Dec. 15, 2016, for public companies.

For private companies, the ASU will be effective for annual periods beginning after Dec. 15, 2016, and interim periods within annual periods beginning after Dec. 15, 2017. More information on the standard, is available on the FASB website and in a summary article in FASB’s publication FASB In Focus.