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FAS60: Accounting and Reporting by Insurance Enterprises

Issued: June 1982

Superseded by: FAS 163

Summary

Classification of Insurance Contracts

  • Insurance contracts are classified as short-duration or long-duration contracts.
    • Long-duration contracts: insurance contracts that are expected to remain in force for an extended period include contracts, such as:
      • whole-life,
      • guaranteed renewable term life,
      • endowment, annuity, and
      • title insurance contracts.
    • Otherwise, short-duration contracts.
      • most property and liability insurance contracts.

 

Premiums

  • Premiums from short-duration contracts ordinarily are recognized as revenue over the period of the contract in proportion to the amount of insurance protection provided (i.e., earned premium).
  • Premiums from long-duration contracts are recognized as revenue when due from policyholders.

 

Investments

  • Investments are reported as follows:
    • common and nonredeemable preferred stocks at market,
    • bonds and redeemable preferred stocks at amortized cost,
    • mortgage loans at outstanding principal or amortized cost, and
    • real estate at depreciated cost.
  • Realized investment gains and losses are reported in the income statement below operating income and net of applicable income taxes.
  • Unrealized investment gains and losses, net of applicable income taxes, are included in stockholders’ (policyholders’) equity.

Standards of Financial Accounting and Reporting

Definition of Insurance Transactions

Insurance transactions may be characterized generally by the following:

a. The purchaser of an insurance contract makes an initial payment or deposit to the insurance enterprise in advance of the possible occurrence or discovery of an insured event.

b. When the insurance contract is made, the insurance enterprise ordinarily does not know if, how much, or when amounts will be paid under the contract.

Revenue Recognition

  Short-Term Insurance Contracts Long-Term Insurance Contracts
Premiums

Premiums ordinarily are earned and recognized as revenue evenly as insurance protection is provided.

{US-FAS60-7}

Ultimate premium: shall be recognized as revenue over the period of the contract.

{US-FAS60-14}

Premiums are recognized as revenue over the premium-paying periods of the contracts when due from policyholders.

{US-FAS60-9}
Costs
  • Acquisition costs shall be capitalized and charged to expense in proportion to premium revenue recognized.
  • Unpaid claim costs relating to insurance contracts, including estimates of costs relating to incurred but not reported claims, shall be accrued when insured events occur.
  • Others shall be charged to expense as incurred.

{US-FAS60-11}, {US-FAS60-17}
Investments
  • bonds, mortgage loans, and redeemable preferred stocks shall be reported at amortized cost.
    • If HTM, at amortized cost.
    • If a trader in bond, at market. {US-FAS60-45}
  • Common and nonredeemable preferred stocks shall be reported at market, and
    • Preferred stocks intended to be held until redemption shall be reported at amortized cost. {US-FAS60-46}
  • real estate shall be reported at depreciated cost. {US-FAS60-48}

{US-FAS60-12}
Policy Benefits –

The liability = PVFP – PV of Future Net Premium, shall be estimated at the time the insurance contracts are made.

The assumptions shall include provision for the risk of adverse deviation.

{US-FAS60-10}, {US-FAS60-21}
Premium Deficiency

A premium deficiency shall be recognized if [a] > [b]:

[a] the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs, and maintenance costs

[b]related unearned premiums.

{US-FAS60-33}

Reserve for Premium deficiency = – ([a] – [b])+ + DAC

{US-FAS60-34}

Reserve for Premium deficiency = – ([a] – [b])+ + DAC

[a] Present value of future payments for benefits and related settlement and maintenance costs, determined using revised assumptions based on actual and anticipated experience.

[b] the present value of future gross premiums, determined using revised assumptions based on actual and anticipated experience.

{US-FAS60-35}

 
Investment Yields (By cohort) The interest assumption for each block of new insurance contracts shall be consistent with circumstances.

{US-FAS60-22}
Acquisition Costs

Acquisition costs shall be capitalized and charged to expense in proportion to premium revenue recognized, allocated by groupings of insurance contracts.

Unamortized acquisition costs shall be classified as an asset (DAC is an asset).

{US-FAS60-29}

Other liabilities are omitted because they are common items..