14.7.04 Insurance contracts typically have components, that consist of various types and varying degrees of activities (enrollment, claim adjudication, administration and payment, and customer service) embodied in them in order for the insurer to fulfill its insurance obligations. In some instances, especially in commercial lines of business such as general liability, contracts may have high deductibles, but the insurance entity adjudicates all claims, including those below the deductible level. In some cases, an insurance entity may provide high deductible coverage, and the policyholder will obtain claims adjudication and settlement services from a third party unrelated to the insurer.

14.7.05 Insurance entities can also provide services, such as claims adjudication and settlement, to customers without providing insurance coverage.

14.7.06 BC14 of FASB ASU No. 2016-20 states the following:

14.7.07 BC15 of FASB ASU No. 2016-20 states the following:

14.7.08 In accordance with BC15 of FASB ASU No. 2016-20, for contracts that are within the scope of FASB ASC 944, the insurance entity should determine if elements of the contract should be accounted for within FASB ASC 944 or FASB ASC 606. If it is determined that a contract is not entirely within the scope of FASB ASC 944 due to elements of the contract being within the scope of FASB ASC 606, the insurance entity should apply the guidance in FASB ASC 606-10-15-4.

14.7.09 Also as explained in BC15 of FASB ASU No. 2016-20, there could be activities included in the contract, such as insurance risk mitigation or cost containment activities, that should be considered fulfillment activities, not within the scope of FASB ASC 606 but, similar to current practice, considered part of the contract within the scope of FASB ASC 944.

14.7.10 The following are examples of activities performed by an insurance entity, included in contracts within the scope of FASB ASC 944, that FinREC believes generally should be considered fulfillment activities (that either mitigate risks to the insurer or contain costs related to services to fulfill the insurer’s obligation) that are not within the scope of FASB ASC 606, but should be considered part of the contract within the scope of FASB ASC 944:

a.     Claims adjudication and processing: These activities can be included with commercial property casualty insurance contracts, (for example, general liability, property, automobile, workers’ compensation) offered as a high deductible policy, such that the policyholder is "self-insuring" numerous claims below the deductible, that specifies that the adjudication/processing of claims both above and below the deductible amount will be performed by the insurer.

        These claim adjudication and processing activities are performed even if the high deductible is ultimately not reached. Compensation for claims adjudication and processing below and above the deductible is either (1) an explicit or implicit component of the policy premium or (2) separately billed to the policyholder based on a percentage of paid or incurred losses, or as a flat charge per claim and referred to as a claims servicing charge.

        For those claim activities below the deductible, although the activities are partially provided as a service to the customer, they also mitigate the insurer’s risk of loss above the deductible. Generally from the insurer’s perspective, a holistic view is taken in managing claims from the ground up (from below the deductible through the insurer’s limit), whether the insurer performs the claims adjudication or if it is outsourced to a third party. The insurer is integral in developing the strategy and approach for settling a claim below or above the deductible, along with the insured or the third party administrator if one is involved (that is, whether a loss event is ultimately covered within the insurance protection provided or not).

b.     Health insurance contracts within the scope of FASB ASC 944 (for example, medical including high deductible health plans [HDHPs], dental, vision): Additional activities related to the fulfillment of the insurance contract may include enrollment (for group plans), provider network access, routine physicals and screenings, immunizations, preventative care and wellness benefits, transportation to facilities for treatment, and access to durable medical equipment (for example, wheelchairs and crutches), and wellness benefits that include biometric screening, tobacco cessation, personal health assessments and records, health coaching, and disease management provided with health insurance contracts within the scope of FASB ASC 944.

c.     Safety inspections: These activities are sometimes provided with a property and liability insurance contract and such activities can be viewed as mitigating the insurer’s risk.

d.     Roadside assistance provided with an automobile insurance policy: Examples of activities provided are towing cars from an accident location or changing a flat tire, which both help mitigate the risk of a further accident or damage to the car.

e.     Cybersecurity activities: These activities are sometimes provided with a general liability insurance contract and such activities can be viewed as mitigating the insurer’s risk.

f.     A title search provided with a title insurance policy: This activity is part of fulfilling the insurance contract and mitigating the insurer’s risk.

14.7.11 In some situations involving claim adjudication and processing activities, these activities may not be part of the fulfillment activities of an insurance contract. For example, structures may be offered in the marketplace in which a commercial customer will purchase a high-deductible property casualty insurance contract. Under this policy, insurance coverage may be provided only for claims above a specified deductible amount, and the customer may obtain claims adjudication and processing services from a third party administrator (oftentimes a subsidiary of another insurance group) unrelated to the insurer providing the insurance coverage. That third party would be subject to FASB ASC 606 for its provision of claims processing services. In these cases the claims adjudication and processing services are not offered in conjunction with an insurance contract. As explained in BC14 of FASB ASU No. 2016-20, contracts offered by an insurance entity that are not within the scope of FASB ASC 944, such as administrative services only contracts without any insurance element, should be accounted for under FASB ASC 606.

14.7.12 An insurance entity, such as a health insurer, may enter into an administrative services only contract and an insurance contract at the same time with the same party. If either contract’s price was discounted from the insurance entity’s normal pricing practices for either contract, this may suggest a pricing interdependency under which these contracts may need to be treated as one arrangement. That is, although the combination of contracts guidance in FASB ASC 606-10-25-9 is not applicable to contracts outside the scope of FASB ASC 606 (for example, a contract in the scope of FASB ASC 944), FinREC believes that insurance entities should consider the economics and nature of the arrangements (including pricing interdependencies), when assessing whether contracts with the same customer (or related parties of the customer) should be combined for accounting purposes.

14.7.13 If an insurer determines that the contracts should be combined for accounting purposes, FinREC believes that the entity should look to BC15 of FASB ASU No. 2016-20, to determine whether the activities in the combined contract, other than providing insurance coverage, are predominantly performed as part of fulfilling the insurance obligation or mitigating the insurer's insurance risk.

14.7.14 If an insurer determines that the activities are predominantly performed as part of fulfilling the insurance obligation or mitigating the insurer’s insurance risk, FinREC believes that the combined contracts should be accounted for as one contract under FASB ASC 944.

14.7.15 If an insurer determines that certain of the activities of the combined contract are not predominantly performed as part of fulfilling the insurance obligation or mitigating the insurer’s insurance risk, FinREC believes that the guidance in FASB ASC 606 should be applied to determine the allocation of the combined consideration between (a) those noninsurance performance obligations to be accounted for under FASB ASC 606 and (b) insurance coverage (assuming that it meets the criteria to be classified as an insurance contract under FASB ASC 944) to be accounted for under FASB ASC 944.

14.7.16 BC13 of FASB ASU No. 2016-20 also clarifies that FASB ASC 944 includes guidance that is applied to both insurance and investment contracts to determine the revenue recognition for fees. In accordance with BC13 of FASB ASU No. 2016-20, the revenue recognition guidance in FASB ASC 944 should be applied to fees associated with insurance and investment contracts.

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