premium deficiency

ASC 405-944 tells insurance entities where liability accounting guidance lives and adds one specific rule for reinsurance contracts. Liabilities for claims costs and future policyholder benefits are in Subtopic 944-40, premium deficiencies in 944-60, and policyholder dividends in 944-50. The substantive rule here: a ceding entity that agrees to service the reinsured contracts without reasonable compensation must accrue a liability for estimated excess future servicing costs (405-944-25-1).

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).