The following is the text of SAB Topic 5.N, Discounting by Property-Casualty Insurance Companies.
Facts: A registrant which is an insurance company discounts certain unpaid claims liabilities related to short-duration FN9 insurance contracts for purposes of reporting to state regulatory authorities, using discount rates permitted or prescribed by those authorities (\"statutory rates\") which approximate 3 1/2 percent. The registrant follows the same practice in preparing its financial statements in accordance with GAAP. It proposes to change for GAAP purposes, to using a discount rate related to the historical yield on its investment portfolio (\"investment related rate\") which is represented to approximate 7 percent, and to account for the change as a change in accounting estimate, applying the investment related rate to claims settled in the current and subsequent years while the statutory rate would continue to be applied to claims settled in all prior years.
FN9 The term \"short-duration\" refers to the period of coverage (see FASB ASC paragraph 944-20-15-7 (Financial Services—Insurance Topic), not the period that the liabilities are expected to be outstanding.
Question 1: What is the staff's position with respect to discounting claims liabilities related to short-duration insurance contracts?
Interpretive Response: The staff is aware of efforts by the accounting profession to assess the circumstances under which discounting may be appropriate in financial statements. Pending authoritative guidance resulting from those efforts however, the staff will raise no objection if a registrant follows a policy for GAAP reporting purposes of:
Discounting liabilities for unpaid claims and claim adjustment expenses at the same rates that it uses for reporting to state regulatory authorities with respect to the same claims liabilities, or
Discounting liabilities with respect to settled claims under the following circumstances:
(1) The payment pattern and ultimate cost are fixed and determinable on an individual claim basis, and
(2) The discount rate used is reasonable on the facts and circumstances applicable to the registrant at the time the claims are settled.
Question 2: Does the staff agree with the registrant's proposal that the change from a statutory rate to an investment related rate be accounted for as a change in accounting estimate?
Interpretive Response: No. The staff believes that such a change involves a change in the method of applying an accounting principle, i.e., the method of selecting the discount rate was changed. The staff therefore believes that the registrant should reflect the cumulative effect of the change in accounting by applying the new selection method retroactively to liabilities for claims settled in all prior years, in accordance with the requirements of FASB ASC Topic 250, Accounting Changes and Error Corrections. Initial adoption of discounting for GAAP purposes would be treated similarly. In either case, in addition to the disclosures required by FASB ASC Topic 250 concerning the change in accounting principle, a preferability letter from the registrant's independent accountant is required.