ASC

ASC 944-60

Premium Deficiency and Loss Recognition

944 Financial Services—Insurance

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In brief

AdvancedIndustry-specificImpairmentSubsequent measurementDisclosure

ASC 944-60 tells insurance entities when and how to recognize a premium deficiency (loss recognition) on insurance contracts, with separate guidance for short-duration and long-duration contracts. For short-duration contracts, a deficiency exists when expected claim costs and claim adjustment expenses, expected policyholder dividends, unamortized acquisition costs, and maintenance costs exceed related unearned premiums; it is recognized first by writing off unamortized acquisition costs and then by accruing a liability for any excess (944-60-25-4 through 25-6). For long-duration contracts, if actual experience shows existing contract liabilities plus the present value of future gross premiums will not cover future benefits and settlement costs and recover unamortized present value of future profits, the deficiency is charged to income by reducing the present value of future profits or increasing the liability for future policy benefits (944-60-25-7 through 25-8).

Key points (7)
  • Contracts must be grouped consistent with the entity's manner of acquiring, servicing, and measuring the profitability of its insurance contracts to determine whether a premium deficiency exists (944-60-25-3).
  • A premium deficiency on short-duration contracts is recognized when expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs, and maintenance costs exceed related unearned premiums (944-60-25-4).
  • The deficiency is recognized first by charging unamortized acquisition costs to expense, and only if the deficiency exceeds those costs is a liability accrued for the excess (944-60-25-5 through 25-6).
  • For long-duration contracts, revised assumptions based on actual and anticipated experience are used to remeasure the liability as the PV of future benefits and settlement costs minus the PV of future gross premiums; the deficiency is that amount minus the existing liability reduced by unamortized present value of future profits (944-60-30-1 through 30-2).
  • Once a deficiency occurs, future changes in the liability are based on the revised assumptions, and no loss may be reported currently if it results in creating future income (944-60-35-5).
  • A deficiency must at a minimum be recognized when an entire line of business is deficient in the aggregate; if profits would be recognized in early years and losses in later years, the liability is increased to offset the later-year losses (944-60-25-9).
  • Disclosures include whether anticipated investment income was considered in short-duration premium deficiency testing (944-60-50-1) and, for long-duration loss recognition, the liability amount and factors causing it, the methodology used, and the anticipated investment income assumption (944-60-50-2); loss recognition is not permitted for investment contracts (944-60-35-6).

For students. Premium deficiency testing is the insurance analog of a loss contract accrual: it is done at the contract-grouping (often line-of-business) level, not contract by contract. A common misunderstanding is jumping straight to a liability — for short-duration contracts you must first write off unamortized acquisition costs, and note that long-duration traditional and limited-payment contracts under 944-40-25-11 are scoped out of this testing.

premium deficiencyloss recognitionshort-duration contractslong-duration contractsunamortized acquisition costsliability for future policy benefitspresent value of future profitsanticipated investment income

Machine-generated study aid for ASC 944-60. Check the source paragraphs below.

944-60-00Status

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944-60-05Overview and Background

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944-60-05-1
This Subtopic provides guidance to insurance entities on accounting for and financial reporting of a premium deficiency on insurance contracts. The guidance in this Subtopic is presented in the following three Subsections:
  1. a
    General
  2. b
    Short-Duration Contracts
  3. c
    Long-Duration Contracts.

Short-Duration Contracts

944-60-05-2
The Short-Duration Contracts Subsections of this Subtopic provide guidance to insurance entities on accounting for and financial reporting of a premium deficiency on short-duration insurance contracts.

Long-Duration Contracts

944-60-05-3
The Long-Duration Contracts Subsections of this Subtopic provide guidance to insurance entities on accounting for and financial reporting of a premium deficiency on long-duration insurance contracts.

944-60-15Scope and Scope Exceptions

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Overall Guidance

944-60-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 944-10-15.

Short-Duration Contracts

944-60-15-2
The Short-Duration Contracts Subsections follow the same Scope and Scope Exceptions as outlined in the General Subsection of this Section, with specific instrument qualifications noted below.

Instruments

944-60-15-3
The guidance in the Short-Duration Contracts Subsections of this Subtopic applies only to short-duration contracts. See the Short-Duration Contracts Subsection of Section 944-20-15 for a discussion of what constitutes a short-duration contract.

Long-Duration Contracts

Overall Guidance

944-60-15-4
The Long-Duration Contracts Subsections follow the same Scope and Scope Exceptions as outlined in the General Subsection of this Section, with specific instrument qualifications noted below.

Instruments

944-60-15-5
The guidance in the Long-Duration Contracts Subsections of this Subtopic applies to long-duration contracts, except for the liability for future policy benefits for traditional and limited-payment contracts subject to the guidance in paragraph 944-40-25-11. Paragraph 944-30-35-63 specifies that the present value of future profits relating to insurance (including traditional and limited-payment) and reinsurance contracts acquired is subject to premium deficiency testing in accordance with the provisions of this Subtopic (see paragraph 944-805-35-3). See the Long-Duration Contracts Subsection of Section 944-20-15 for a discussion of what constitutes a long-duration contract.

944-60-25Recognition

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944-60-25-1
Paragraph 450-20-55-17A states that Subtopic 450-20 does not prohibit (and, in fact, requires) accrual of a net loss (that is, a loss in excess of deferred premiums) that probably will be incurred on insurance policies that are in force, provided that the loss can be reasonably estimated.
944-60-25-2
A probable loss on insurance contracts exists if there is a premium deficiency relating to short-duration or long-duration contracts.
944-60-25-3
Insurance contracts shall be grouped consistent with the entity's manner of acquiring, servicing, and measuring the profitability of its insurance contracts to determine if a premium deficiency exists.

Short-Duration Contracts

944-60-25-4
A premium deficiency shall be recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs, and maintenance costs exceeds related unearned premiums.
944-60-25-5
A premium deficiency shall first be recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency.
944-60-25-6
If the premium deficiency is greater than unamortized acquisition costs, a liability shall be accrued for the excess deficiency.

Long-Duration Contracts

944-60-25-7
Original policy benefit assumptions for certain long-duration contracts ordinarily continue to be used during the periods in which the liability for future policy benefits is accrued under Subtopic 944-40. However, actual experience with respect to investment yields, mortality, morbidity, terminations, or expenses may indicate that existing contract liabilities, together with the present value of future gross premiums, will not be sufficient to do both of the following:
  1. a
    Cover the present value of future benefits to be paid to or on behalf of policyholders and settlement costs relating to a block of long-duration contracts
  2. b
    Recover unamortized present value of future profits.
944-60-25-8
The premium deficiency shall be recognized by a charge to income and either of the following:
  1. a
    A reduction of unamortized present value of future profits
  2. b
    An increase in the liability for future policy benefits.
944-60-25-9
A premium deficiency, at a minimum, shall be recognized if the aggregate liability on an entire line of business is deficient. In some instances, the liability on a particular line of business may not be deficient in the aggregate, but circumstances may be such that profits would be recognized in early years and losses in later years. In those situations, the liability shall be increased by an amount necessary to offset losses that would be recognized in later years.

944-60-30Initial Measurement

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Long-Duration Contracts

944-60-30-1
If the conditions in paragraph 944-60-25-7 exist, an entity shall determine the liability for future policy benefits using revised assumptions as the remainder of the present value of future payments for benefits and related settlement costs (determined using revised assumptions based on actual and anticipated experience) minus the present value of future gross premiums (also determined using revised assumptions based on actual and anticipated experience).
944-60-30-2
A premium deficiency shall then be determined as the liability measured in paragraph 944-60-30-1minus the liability for future policy benefits at the valuation date, reduced by the unamortized present value of future profits.

944-60-35Subsequent Measurement

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944-60-35-1
Paragraph 450-20-55-17A states that Subtopic 450-20 does not prohibit (and, in fact, requires) accrual of a net loss (that is, a loss in excess of deferred premiums) that probably will be incurred on insurance policies that are in force, provided that the loss can be reasonably estimated.

Short-Duration Contracts

944-60-35-2
Paragraph 944-60-25-4 states that a premium deficiency shall be recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs, and maintenance costs exceeds related unearned premiums.
944-60-35-3
Paragraph 944-60-25-5 states that a premium deficiency shall first be recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency.
944-60-35-4
Paragraph 944-60-25-6 states that, if the premium deficiency is greater than unamortized acquisition costs, a liability shall be accrued for the excess deficiency.

Long-Duration Contracts

944-60-35-5
If a premium deficiency does occur, future changes in the liability shall be based on the revised assumptions. No loss shall be reported currently if it results in creating future income. The liability for future policy benefits using revised assumptions based on actual and anticipated experience shall be estimated periodically for comparison with the liability for future policy benefits (reduced by the unamortized present value of future profits) at the valuation date.
944-60-35-6
The guidance in this Subsection shall not be applied to investment contracts (see the Investment Contracts Subsections of Subtopic 944-825). Such loss recognition is not permitted.

944-60-50Disclosure

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Short-Duration Contracts

944-60-50-1
An insurance entity shall disclose in its financial statements whether it considers anticipated investment income in determining if a premium deficiency relating to short-duration contracts exists.

Long-Duration Contracts

944-60-50-2
For annual reporting periods, and to the extent required by Topic 270 on interim reporting, an insurance entity shall disclose the following:
  1. a
    The amount of a liability that is established as a result of a premium deficiency and loss recognition testing determined in accordance with paragraphs
    944-60-25-7 through 25-9
    and a description of the factors that led to the establishment of the liability
  2. b
    Information about the methodology used when performing premium deficiency testing in accordance with paragraphs
    944-60-25-7 through 25-9
  3. c
    Whether the entity considered anticipated investment income when performing premium deficiency testing in accordance with paragraphs
    944-60-25-7 through 25-9
    and, if so, what that assumption was.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For interim and annual reporting periods, an insurance entity shall disclose the following:
  1. a
    The amount of a liability that is established as a result of a premium deficiency and loss recognition testing determined in accordance with paragraphs
    944-60-25-7 through 25-9
    and a description of the factors that led to the establishment of the liability
  2. b
    Information about the methodology used when performing premium deficiency testing in accordance with paragraphs
    944-60-25-7 through 25-9
  3. c
    Whether the entity considered anticipated investment income when performing premium deficiency testing in accordance with paragraphs
    944-60-25-7 through 25-9
    and, if so, what that assumption was.

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