# ASC 720-20-05: Other Expenses — Insurance Costs — 05 Overview and Background Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/720/20/#05-overview-and-background) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:07:20.723Z to 2026-09-10T01:07:20.723Z Record version: sha256:ba7f18a3047d63ec71e9fb0dcb664d4604e9b6853d370fbd65fbed76be750a1b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 720-20-05: 05 Overview and Background [Read section](https://asc.understandingaccounting.org/asc/720/20/#05-overview-and-background) SEC content: no ##### [720-20-05-1](https://asc.understandingaccounting.org/asc/720/20/#720-20-05-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:20.723Z to 2026-09-10T01:07:20.723Z Record version: sha256:c3c39e33ff8cae5a2b83b268dae1f9f60c475d312cbc68001b6401c24937f34a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic provides guidance on three types of insurance contracts. The guidance for each is presented in the following Subsections: 1. a Retroactive contracts 2. b Claims-made contracts 3. c Multiple-year retrospectively rated contracts. ##### [720-20-05-2](https://asc.understandingaccounting.org/asc/720/20/#720-20-05-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:20.723Z to 2026-09-10T01:07:20.723Z Record version: sha256:2ab80a83aef1f197ce3912b92186fa45da7ee2b4cedabee0b620f80d9abfcb78 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In addition, guidance on deposit accounting resulting from contracts that do not transfer insurance risk is contained in the General Subsections of this Subtopic and in Subtopic 340-30. Operations in certain industries may be subject to such high risks that insurance is unavailable or is available only at what is considered to be a prohibitively high cost. Some entities in those industries have pooled their risks by forming mutual insurance entities in which they retain an equity interest and to which they pay insurance premiums. For example, some electric utility entities have formed such a mutual insurance entity to insure risks related to nuclear power plants, and some oil entities have formed an entity to insure against risks associated with petroleum exploration and production. Whether the premium paid represents a payment for the transfer of risk or whether it represents merely a deposit will depend on the circumstances surrounding each entity's interest in and insurance arrangement with the mutual insurance entity. An analysis of the contract is required to determine whether risk has been transferred and to what extent. ### Retroactive Contracts ##### [720-20-05-3](https://asc.understandingaccounting.org/asc/720/20/#720-20-05-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:20.723Z to 2026-09-10T01:07:20.723Z Record version: sha256:3bae801406e6e6ab95294d3bb2b4cda2cd49fe9cdd56d6a02474c6dfb5d383ae Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The Retroactive Contracts Subsections provide guidance on how an insured entity, including an insurance entity purchasing insurance unrelated to its core insurance operations (for example, manufacturers, retailers, service entities, and financial institutions), should account for a purchased retroactive insurance policy and whether the transaction results in gain recognition (excluding [reinsurance](https://asc.understandingaccounting.org/glossary/r/#reinsurance "A transaction in which a reinsurer (assuming entity), for a consideration (premium), assumes all or part of a risk undertaken originally by another insurer (ceding entity). For indemnity reinsurance, the legal rights of the insured are not affected by the reinsurance transaction and the insurance entity issuing the insurance contract remains liable to the insured for payment of policy benefits. Assumption or novation reinsurance contracts that are legal replacements of one insurer by another extinguish the ceding entity's liability to the policyholder.") transactions). For example, an entity records a liability of $100 million incurred as a result of a past event in accordance with Subtopic 450-20. The entity then buys an insurance policy for $60 million to cover that liability. ### Claims-Made Contracts ##### [720-20-05-4](https://asc.understandingaccounting.org/asc/720/20/#720-20-05-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:20.723Z to 2026-09-10T01:07:20.723Z Record version: sha256:3365f1ecdb2192b767248358b01fc5b3479a3ebcd9c1fd7cf3a41569a3ffdce8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Many entities use claims-made policies to satisfy their insurance needs for such coverage as product, directors and officers, and malpractice liabilities. However, entities have been purchasing coverage for a variety of other exposures using a claims-made format. Under a claims-made insurance policy, an entity is insured for any claims reported during the term of the policy, in many cases including those that occurred prior to the policy effective date but after the specified retroactive date. ##### [720-20-05-5](https://asc.understandingaccounting.org/asc/720/20/#720-20-05-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:20.723Z to 2026-09-10T01:07:20.723Z Record version: sha256:a2743596df59f822750b39902b4469bd80b4c2f61e1085f454cd3ff1497b28d2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Generally, entities purchasing a claims-made policy will renew the policy each year. The amount of coverage purchased may change over time to meet current needs (for example, changing risk within the entity) or to respond to the overall environment (for example, the expected settlement costs of the same claim today may cost more than in prior years). When operations cease, the entity generally purchases [tail coverage](https://asc.understandingaccounting.org/glossary/t/#tail-coverage "Insurance designed to cover malpractice claims incurred before, but reported after, cancellation or expiration of a claims-made insurance policy.") to insure itself against any previously unasserted claims. ##### [720-20-05-6](https://asc.understandingaccounting.org/asc/720/20/#720-20-05-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:20.723Z to 2026-09-10T01:07:20.723Z Record version: sha256:91f83dd4ddecc2c82ccb548d2899b7b2451984936b5fe1be9e8917be42ba9312 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Presuming the entity can renew the claims-made policy each year and can obtain tail coverage when desired, such a strategy effectively converts the claims-made policy into an occurrence-based policy covering the entity for any claims made against it. ##### [720-20-05-7](https://asc.understandingaccounting.org/asc/720/20/#720-20-05-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:20.723Z to 2026-09-10T01:07:20.723Z Record version: sha256:c910907d5b5143186816f7affbb10d404f27e0043d0709a52fba0bfed88e3422 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entities generally use claims-made coverage because it is the only form of insurance available for certain exposures, particularly exposures for which the occurrence dates may be difficult to determine or for which the occurrence may span a long period of time. Therefore, a claims-made policy mitigates potential coverage disputes because the occurrence date generally is not relevant to the determination of coverage. ##### [720-20-05-8](https://asc.understandingaccounting.org/asc/720/20/#720-20-05-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:20.723Z to 2026-09-10T01:07:20.723Z Record version: sha256:9f562e7ea0d9fe10e0512449ec9789396441908ebedd0638f5375aa753bd8621 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Also, there may be reduced insurance costs in the first several years of a claims-made policy as compared to an occurrence-based policy. Many entities that purchase claims-made insurance policies have no knowledge of unasserted outstanding claims or, because their liabilities have not met the recognition criteria contained in paragraph [450-20-25-2](https://asc.understandingaccounting.org/asc/450/20/#450-20-25-2) or in other applicable U.S. generally accepted accounting principles (GAAP), have no recognized liability for claims, including [incurred but not reported](https://asc.understandingaccounting.org/glossary/i/#incurred-but-not-reported "Losses incurred by the insured entity that have not yet been reported to the insurance entity.") claims. In other situations, however, entities that purchase claims-made insurance policies are aware of potential claims based on a specific incident or incidents or historical experience. In those situations, unasserted claims can be either specifically excluded from or specifically included in the coverage. ### Multiple-Year Retrospectively Rated Contracts ##### [720-20-05-9](https://asc.understandingaccounting.org/asc/720/20/#720-20-05-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:20.723Z to 2026-09-10T01:07:20.723Z Record version: sha256:9a1387fd8b1da809c00f94d4d1eaaf82252428ca4101741a17df3272ebd6b25f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity (for example, a manufacturer, a retailer, a service entity, or a financial entity) may enter into a multiple-year retrospectively rated contract with an insurance entity. These contracts may cover various types of exposures such as product and environmental liability risks. A critical feature of these contracts is that part or all of the retrospective rating provision is obligatory such that the retrospective rating provision creates for each party to the contract future rights and obligations as a result of past events. ##### [720-20-05-10](https://asc.understandingaccounting.org/asc/720/20/#720-20-05-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:20.723Z to 2026-09-10T01:07:20.723Z Record version: sha256:be692a0677c725b48ec5c22442ff3100ade6bdeadc779e9281455c0904d4b49d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Such contracts include a retrospective rating provision that provides for any of the following based on contract experience: 1. a Changes in the amount or timing of future contractual cash flows, including premium adjustments, settlement adjustments, or refunds to the noninsurance entity 2. b Changes in the contract's future coverage.