# ASC 720-20-55: Other Expenses — Insurance Costs — 55 Implementation Guidance and Illustrations Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/720/20/#55-implementation-guidance-and-illustrations) 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): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:a974c1e17cad033094c7a62de59c80fb620ce00212430334fedbab3296c8e86e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 720-20-55: 55 Implementation Guidance and Illustrations [Read section](https://asc.understandingaccounting.org/asc/720/20/#55-implementation-guidance-and-illustrations) SEC content: no ### Claims-Made Contracts #### Illustrations ##### [720-20-55-1](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:c73e5eefe308baed7da72a74e255d342aa4fe0faef82be86a529019cff39a4d6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Examples 1-3 (see paragraphs [720-20-55-2 through 55-12](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-2) ) provide illustrations for applying the guidance contained in paragraphs [720-20-25-6 through 25-13](https://asc.understandingaccounting.org/asc/720/20/#720-20-25-6) . ##### [720-20-55-2](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:e8d25a778cf9df954ca9f2df3ff7438dff7b8d2db5f8de3461dac6ca7d8a45dd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates how to assess whether an insurance policy for directors and officers liability contains a retroactive provision. The Example contains the following two Cases: 1. a A policy without a retroactive provision (Case A) 2. b A policy with a retroactive provision (Case B). ##### [720-20-55-3](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:bd4a373271b5b13a5dd7f5d1d0801885c934a3e947732af453af81c2a13ffb12 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A is a manufacturer that purchases directors and officers insurance under a claims-made insurance policy each year. Entity A immediately reports any asserted claims or incidents that could result in an asserted claim to its insurance carrier. Entity A currently has no knowledge of any unasserted claims against it and is unaware of any event that would result in any claims. Entity A considers the use of a claims-made insurance policy to be the most efficient and least costly method available to manage its insurance risk related to suits against its directors and officers. Entity A pays BrokerCo to handle its insurance needs. BrokerCo supplies Entity A with binding quotes from several insurance carriers and a comparison to binding quotes for other similar entities. Entity A believes that its premiums are comparable to those of other similar entities that have similar insurance risk profiles and no knowledge of any events or circumstances that might result in a claim. Entity A has an option to purchase tail coverage, which would effectively convert its claims-made policies into occurrence-based policies at any time. On January 1, 20X3, Entity A pays its annual premium of $5 million for its policy. The policy has a retroactive date to January 1, 20X0, which is the year that Entity A first started using the claims-made insurance approach with its insurance carrier. Entity A is unable to bifurcate its policy premium into its retroactive and prospective provisions. ##### [720-20-55-4](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:20c51ac521eb6e3fe1ba4d231df2212b1675af3a46818b1bd7d9d39db53fe16a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In June 20X3, there is a precipitous drop in the stock price of Entity A, and a lawsuit is brought against the directors. Entity A notifies its insurer about the asserted claim, and the insurer agrees that those claims are covered by its claims-made policy in effect for 20X3. ##### [720-20-55-5](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:54229a3abeacd54d517fc7adc41536748fa045c46b946adbcbea39b1044f30ff Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Based on an evaluation of the circumstances, Entity A determined in 20X0 that its claims-made insurance policy is a prospective contract that does not contain any retroactive provisions. Essentially, Entity A was unaware of any known events or circumstances that might result in a claim and viewed the premiums paid for its directors and officers insurance as providing coverage against claims that might occur during the policy period. In making its determination that the claims-made insurance policy did not contain a retroactive provision, Entity A also considered the following: 1. a Entity A typically uses a claims-made policy to manage its insurance risk and plans to continue purchasing a claims-made insurance policy annually. 2. b Tail coverage is readily available. 3. c The premium charged for the claims-made policy is not significantly in excess of premiums charged to other similar entities with similar insurance profiles. 4. d The claims-made policy contains an unambiguous contract trigger to determine when claims are covered. 5. e Because Entity A has no knowledge of any asserted claims or events that would result in a claim, the claims-made policy is primarily expected to cover insurance risk related to future claims. ##### [720-20-55-6](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:c2e6dabf3118b74cc0709fe042bfe492d02893bd9a62ceabbe6b51acb9330202 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case makes the same assumptions as Case A, except that the precipitous drop in the stock price of Entity A occurred in 19X9, prior to the inception of its claims-made insurance program with its insurance carrier. During the negotiation of the contract premium, Entity A discussed its concerns with its insurance carrier, and the two agreed that the retroactive date would include any claims related to the drop in the stock price. As a result, the premium was $50 million. ##### [720-20-55-7](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:0810e5b5b636e33d1d4a75baae6a6136684c25f79048b927e4127a8c7f24a1c3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Based on an evaluation of the circumstances, Entity A determined in 20X0 that its claims-made insurance policy contains a retroactive provision. Entity A knows that the $50 million premium charged represents the expected costs of settling any claims related to the drop in its stock price, an event that was fully known at the inception of the contract. Entity A disclosed this fact to its insurer, and the two agreed that it might result in a claim and negotiated a premium based on that premise. In making its determination that its directors and officers policy contains a retroactive provision, Entity A also considered the following: 1. a The claims-made policy was taken out in part in response to a known incident that was reported to the insurer. 2. b The premium charged by the insurer includes an estimate of the expected settlement costs for the unasserted claim. 3. c The premium charged primarily represents a financing of the unasserted claim. ##### [720-20-55-8](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:9c456d2d207355058b5bda682b7b8e350456977ec97281f53489f5836ae173bf Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Prior to accounting for the entire contract retroactively, Entity A should, if practicable, bifurcate the contract into its retroactive and prospective provisions and account for each separately. ##### [720-20-55-9](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:224e20d0c1212c101e45ff9e95132973e72e29e2be829acfa3ff9903695c85ef Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. On February 20, 20X2, Entity A determined that it needed to recognize a $100 million liability for environmental contamination as a result of an accident at one of its manufacturing plants. Entity A initially believed that it would manage the cleanup and any lawsuits arising from the accident through an internal self-insurance program. Subsequently, Entity A decided to purchase a claims-made insurance policy that would include all claims arising from the incident. Entity A decided that it should purchase the policy because it would be more efficient to transfer the risk associated with the development and timing of claims to a third party and representing that the risk associated with all claims had been transferred to a third party would reduce the risk profile of Entity A to its shareholders and other potential investors. On April 1, 20X2, Entity A pays InsurerCo $60 million for a claims-made insurance policy. Entity A and InsurerCo expect the claims related to the incident to be settled over a 10-year period after the purchase of the policy. ##### [720-20-55-10](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:74f2bd169c247ffb6fd21fbd44e225c189116da262d8c31183e11dfdb54f0734 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Based on an evaluation of the indicators, Entity A determines that its claims-made insurance policy contains a retroactive provision. In making that determination, Entity A specifically considered the following: 1. a The claims-made policy was purchased specifically to cover known claims for which a liability had been recognized. 2. b The claims-made policy effectively represented a financing of the liability previously recognized by Entity A. 3. c The premium charged was primarily based on expected payouts for an event that had already occurred. ##### [720-20-55-11](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:7fb2c475d93dd8dc0be2e694b216c7b47874b856f40372f012abb9a3aeee99a0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. HealthCo is a health care provider that purchases medical malpractice insurance in order to manage its insurance risks. HealthCo purchases a claims-made insurance policy each year from its insurance carrier. HealthCo would be able to purchase tail coverage from its insurance carrier if it chose to do so. Although HealthCo has no knowledge of any asserted or unasserted claims against it, HealthCo estimates and recognizes a liability for claims [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.") of $25 million at December 31, 20X2, based on actuarial reviews of its historical claims reporting and payment patterns. HealthCo engages an insurance brokerage entity to ensure that its insurance premiums are consistent with those offered to similar entities with similar insurance risks. During 20X2, HealthCo paid out $95 million of malpractice claims that were fully covered by its insurance program. On January 1, 20X3, HealthCo pays its annual premium of $100 million for its claims-made policy. HealthCo expects that it will require a liability of $29 million on December 31, 20X3. The policy does not cover incidents occurring prior to the inception of the claims-made insurance program with that insurance carrier. In negotiating its policy with InsurerCo, HealthCo asserts to InsurerCo that it is unaware of any specific, current claims (asserted or unasserted) against it. ##### [720-20-55-12](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:488b80f12e480dae68b9fd53504eda504699e0ea6aaf53fa64f674bd88a40a2d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Based on an evaluation of the indicators, HealthCo determines that its claims-made insurance policy is a prospective contract that does not contain any retroactive provisions. In making that determination, HealthCo specifically considered the following: 1. a There are no known asserted or unasserted claims that are expected to be covered by the policy. The liability recognized for incurred but not reported claims would not preclude HealthCo from concluding that its claims-made insurance policy is prospective as HealthCo represented that it did not know of any asserted claims. 2. b Tail coverage is readily available. 3. c The premium charged for the claims-made policy is not significantly in excess of premiums charged for similar policies with no retroactive dates. 4. d There is a clear and unambiguous contract coverage trigger. ##### [720-20-55-13](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:b25e956465b0d8c4955338680fa51ccbfce78ce1914d56d3b2f7c122d1a28d4b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example provides illustrations for applying the guidance contained in paragraphs [720-20-35-3 through 35-7](https://asc.understandingaccounting.org/asc/720/20/#720-20-35-3) . This Example contains the following Cases: 1. a Calculations are made using assumed facts (Case A). 2. b The entity revises its incurred but not reported estimate (Case B). 3. c The entity discovers a defect in the manufacturing process (Case C). ##### [720-20-55-14](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-14) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:661c10bd41e5e07c4195c0a33e6d9d3eb19e249fbca88aa37a22c3d09fc176cb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Cases A, B, and C illustrate how to calculate various required amounts (for example, the expected annual insurance expense, the expected quarterly insurance expense, the incurred but not reported liability, the known claims liability and the prepaid insurance) under each Case's different circumstances. Cases A, B, and C share all of the following assumptions. 1. a Entity A purchases claims-made policies every year for its insurable risk. The insurance arrangement meets the criteria for prospective treatment as described in paragraphs [720-20-25-7 through 25-8](https://asc.understandingaccounting.org/asc/720/20/#720-20-25-7) . The policy has a $500,000 per incident deductible and a $2 million per incident maximum with a policy limit of $15 million. When calculating the insurance recoverable related to incurred but not reported incidents, Entity A assumes that approximately 50 percent of the gross claim value will be recovered because of the deductible. Entity A does not anticipate incurring any losses in excess of the policy's maximums. 2. b Accrued incurred but not reported liability at 12/31/X0: $2 million. 3. c Receivable for insurance recoverable at 12/31/X0: $1 million. 4. d Estimated incurred but not reported liability at 12/31/X1: $2.2 million. 5. e Estimated receivable for insurance recoverable at 12/31/X1: $1.1 million. 6. f Premium for claims-made policy for year ending 12/31/X1, payable 1/1/X1: $1.6 million. 7. g Value of claim for an incident reported during the second quarter (the claim is covered by the insurance policy subject to a $500,000 deductible and was both paid to the claimant and recovered from the carrier during the third quarter): $750,000. - ![](https://asc.understandingaccounting.org/asc-img/GUID-E1A2AB68-D413-4AC6-862D-15F8A90EF01D-low.gif) Computations (in thousands): Expected annual expense = annual premium + expected increase in IBNR liability - expected increase in insurance recoverable = "$1,600 + ($2,200 - $2,000) - ($1,100 - $1,000)" = "$1,600 + $200 - $100" = "$1,700 " Expected quarterly expense = "$1,700 ÷ 4 = $425" IBNR: Incurred but not reported ##### [720-20-55-15](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-15) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:d21ec0e7fd3c67241a10a20d9c11ef5132beef83041c0f977ed605d8eaba2eed Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following table illustrates computation of quarterly insurance expense. - ![](https://asc.understandingaccounting.org/asc-img/GUID-F5991464-DAF7-49A6-BDAB-29AF4C846622-low.gif) INBR liability (a) (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 "Balance, beginning of quarter" " $(2,000)" " $(2,050)" " $(2,100)" " $(2,150)" Add: accrual (b) -50 -50 -50 -50 "Balance, end of quarter" " $(2,050)" " $(2,100)" " $(2,150)" " $(2,200)" Known claims liability (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 "Balance, beginning of quarter" $- $- $(750) $- Add: claims made - (750) - - Less: claims paid - - 750 - "Balance, end of quarter" $- $(750) $- $- Prepaid insurance (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 "Balance, beginning of quarter" $- " $1,200 " $800 $400 Add: premium payments made " 1,600 " - - - Less: amortization (c) (400) (400) (400) (400) "Balance, end of quarter" " $1,200 " $800 $400 $- Insurance recoverable (d) (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 "Balance, beginning of quarter" " $1,000 " " $1,025 " " $1,300 " " $1,075 " Add: Expected recoveries 25 275 25 25 Less: Recoveries received - - (250) - "Balance, end of quarter" " $1,025 " " $1,300 " " $1,075 " " $1,100 " Quarterly expense (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 Amortization of prepaid insurance $400 $400 $400 $400 Accrual of IBNR liability 50 50 50 50 Accrued claims reported - 750 - - Accrued insurance recoveries (25) (275) (25) (25) Total expense $425 $925 $425 $425 IBNR: Incurred but not reported (a) "Paragraph 210-20-45-1 provides additional guidance on when the legal right to setoff exists and should be used to determine whether prepaid insurance (or insurance recoverable) and a recognized incurred but not reported liability (or the claim liability incurred as a result of a reported event) may be offset. Such offsetting would not be appropriate unless the conditions of that paragraph are met. For income statement purposes, however, the expenses related to claims reported and the income related to insurance recoverables may be offset." (b) Straight-line accrual of the incurred but not reported liability is assumed for purposes of simplicity but would only be appropriate if management expects that the underlying incurred but not reported claims covered by the insurance arrangement would occur evenly throughout the year. See paragraphs 720-20-35-3 through 720-20-35-7. (c) Straight-line amortization of the prepaid insurance premium is assumed for purposes of simplicity only. See paragraph 720-20-35-5. (d) Paragraphs 410-30-35-8 through 410-30-35-11 provide further guidance on the recognition of a receivable for expected insurance recoveries. ##### [720-20-55-16](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-16) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:9ca4c0183a877ab440ad5e34c2409a31efe1a044648d236a4c75455bb84a0ae2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case Entity A revises its estimated year-end incurred but not reported liability from $2.2 million to $2.6 million in the second quarter due to overall increases in settling claims, which is considered a routine adjustment by management, and Entity A determines that a reasonable matching of the additional cost to the periods benefited results in recognizing one-half of the adjustment in the second quarter and the remainder of the adjustment over the remaining interim periods on a pro rata basis. ##### [720-20-55-17](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-17) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:9bd2e19cdd131446124dd56b7d2c2140b95aebc81fdabe5bb133ebe5481d6a13 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following table illustrates computation of quarterly insurance expense. - ![](https://asc.understandingaccounting.org/asc-img/GUID-4AA0FA58-9BF8-4A14-B668-65B87AB25E0A-low.gif) IBNR liability (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 "Balance, beginning of quarter" " $(2,000)" " $(2,050)" " $(2,300)" " $(2,450)" Add: accrual (50) (250) (150) (150) "Balance, end of quarter" " $(2,050)" " $(2,300)" " $(2,450)" " $(2,600)" Known claims liability (in thousands): Same as Example 5. Prepaid insurance (in thousands): Same as Example 5. Insurance recoverable (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 "Balance, beginning of quarter" " $1,000 " " $1,025 " " $1,400 " " $1,225 " Add: Expected recoveries 25 375 75 75 Less: Recoveries received - - (250) - "Balance, end of quarter" " $1,025 " " $1,400 " " $1,225 " " $1,300 " Quarterly expense (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 Amortization of prepaid insurance $400 $400 $400 $400 Accrual of IBNR liability 50 250 150 150 Accrued claims reported - 750 - - Accrued insurance recoveries (25) (375) (75) (75) Total expense $425 " $1,025 " $475 $475 IBNR: Incurred but not reported ##### [720-20-55-18](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-18) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:c7af91617db3ea439c0ca48ba3636cea08b9aefdd0c52eb44b777aea85d99899 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case Entity A discovers a defect in the manufacturing process in the third quarter and corrects it. Entity A evaluates whether its incurred but not reported liability warrants adjustment and concludes that an additional $2.1 million liability is needed for claims that are expected to be reported after year-end. Entity A considers the discovery of the defect to be an unusual event and determines that a reasonable matching of the additional cost to the periods benefited results in the entire adjustment being recognized in the third quarter. ##### [720-20-55-19](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-19) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:31078c7d02a6cb95a8477fe1e0bc490bd4f8978f5cdce9f95b0d654a2518be2e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following table illustrates computation of quarterly insurance expense. - ![](https://asc.understandingaccounting.org/asc-img/GUID-97F03D22-524B-4CBB-83AA-520C4F511E5F-low.gif) IBNR liability (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 "Balance, beginning of quarter" " $(2,000)" " $(2,050)" " $(2,300)" " $(2,450)" Add: accrual (50) (250) (150) (150) "Balance, end of quarter" " $(2,050)" " $(2,300)" " $(2,450)" " $(2,600)" Known claims liability (in thousands): Same as Example 5. Prepaid insurance (in thousands): Same as Example 5. Insurance recoverable (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 "Balance, beginning of quarter" " $1,000 " " $1,025 " " $1,400 " " $1,225 " Add: Expected recoveries 25 375 75 75 Less: Recoveries received - - (250) - "Balance, end of quarter" " $1,025 " " $1,400 " " $1,225 " " $1,300 " Quarterly expense (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 Amortization of prepaid insurance $400 $400 $400 $400 Accrual of IBNR liability 50 250 150 150 Accrued claims reported - 750 - - Accrued insurance recoveries (25) (375) (75) (75) Total expense $425 " $1,025 " $475 $475 IBNR: Incurred but not reported ##### [720-20-55-20](https://asc.understandingaccounting.org/asc/720/20/#720-20-55-20) Pending content: no Source downloaded (UTC): 2026-09-10T01:07:42.295Z to 2026-09-10T01:07:42.295Z Record version: sha256:309f28e4ebc4be3a3a81e4ac21d1ed94226d75eb7f534f9a7260a4a21319453a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example provides an illustration for applying the guidance contained in paragraphs [720-20-35-8 through 35-12](https://asc.understandingaccounting.org/asc/720/20/#720-20-35-8) . This Example has the following assumptions: 1. a Entity A purchases claims-made policies every year for its insurable risk. The insurance arrangement meets the criteria for prospective treatment as described in paragraphs [720-20-25-7 through 25-8](https://asc.understandingaccounting.org/asc/720/20/#720-20-25-7) . The policy has a $500,000 per incident deductible and a $2 million per incident maximum with a policy limit of $15 million. When calculating the insurance recoverable related to incurred but not reported incidents, Entity A assumes that approximately 50 percent of the gross claim value will be recovered because of the deductible. Entity A does not anticipate incurring any losses in excess of the policy's maximums. 2. b The policy period runs from May 1 to April 30, and uses a December 31 year-end for financial reporting purposes. 3. c Accrued incurred but not reported liability at 12/31/X0: $2 million. 4. d Receivable for insurance recoverable at 12/31/X0: $1 million. 5. e Estimated incurred but not reported liability at 12/31/X1: $2.2 million. 6. f Estimated receivable for insurance recoverable at 12/31/X1: $1.1 million. 7. g Premium for one year claims-made policy expiring 4/30/X1: $1.2 million. 8. h Estimated premium for one-year claims-made policy commencing 5/1/X1: $1.8 million. 9. i Value of claim for an incident reported during the second quarter (the claim is covered by the insurance policy subject to a $500,000 deductible and was both paid to the claimant and recovered from the carrier during the third quarter): $750,000. - ![](https://asc.understandingaccounting.org/asc-img/GUID-2548C0DC-D98E-4181-B680-E37BBA159B13-low.gif) Computations (in thousands): Expected annual expense = premium costs + expected increase in IBNR liability - expected increase in insurance recoverable = " {\[$1,200 × (4/12)\] + \[$1,800 × (8/12)\]} + ($2,200 - $2,000) - (1,100 - 1,000) " = " ($400 + 1,200) + $200 - $100 " = "$1,700 " Expected quarterly expense = " $1,700 ÷ 4 = $425 " IBNR: Incurred but not reported - ![](https://asc.understandingaccounting.org/asc-img/GUID-8957FB30-351E-4E55-89DD-09B477E704B6-low.gif) INBR liability (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 "Balance, beginning of quarter" " $(2,000)" " $(2,050)" " $(2,100)" " $(2,150)" Add: accrual (50) (50) (50) (50) "Balance, end of quarter" " $(2,050)" " $(2,100)" " $(2,150)" " $(2,200)" Known claims liability (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 "Balance, beginning of quarter" $- $- $(750) $- Add: claims made - (750) - - Less: claims paid - - 750 - "Balance, end of quarter" $- $(750) $- $- Prepaid insurance (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 "Balance, beginning of quarter" $- " $1,200 " " $1,400 " $400 Add: premium payments made " 1,600 " - - - Less: amortization (400) (400) (400) (400) "Balance, end of quarter" " $1,200 " $800 $400 $- Insurance recoverable (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 "Balance, beginning of quarter" " $1,000 " " $1,025 " " $1,300 " " $1,075 " Add: Expected recoveries 25 275 25 25 Less: Recoveries received - - (250) - "Balance, end of quarter" " $1,025 " " $1,300 " " $1,075 " " $1,100 " Quarterly expense (in thousands): Qtr 1 Qtr 2 Qtr 3 Qtr 4 Amortization of prepaid insurance $400 $400 $400 $400 Accrual of IBNR liability 50 50 50 50 Accrued claims reported - 750 - - Accrued insurance recoveries (25) (725) (25) (25) Total expense $425 $925 $425 $425 IBNR: Incurred but not reported