A city that self-insures its workers compensation, a school district with a large liability retention, and a joint powers authority that pools risk for sixty members all end up in the same place at year end: someone has to put a claims liability in the financial statements and write a note explaining it. The rules for that number do not come from insurance regulators or from the private-sector accounting literature. They come from the Governmental Accounting Standards Board, and the foundational document is GASB Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues.
This explainer is for the finance director, controller, pool administrator, or board member who has to turn the actuarial report into financial statements. For the reserving mechanics behind the number, start with IBNR for public entity pools and JPAs and public entity general liability IBNR.
One caution on sourcing. The descriptions below are drawn from the text of Statement 10 as issued and Statement 30 as issued. GASB’s standards are maintained in a Codification (Georgia’s state accounting policy, for example, cites its sections C50, Claims and Judgments, and Po20, Public Entity Risk Pools), and later statements have amended some provisions. Use this article to understand the framework, and confirm current paragraph-level requirements with your auditor.
What Statement 10 covers and who it applies to
Statement 10 was issued in November 1989. Its summary describes the scope as risk financing and insurance-related activities of state and local governmental entities, including public entity risk pools. The risks it lists include torts, property loss, errors or omissions, job-related injuries to employees, and employee health benefits.
The Statement is built in two halves, and knowing which half applies to you is the first question:
- Public entity risk pools. The glossary defines a pool as a cooperative group of governmental entities joining together to finance an exposure, liability, or risk, which may be a stand-alone entity or part of a larger government that sponsors it.
- Entities other than pools. Every other state or local government, including authorities, utilities, hospitals, colleges, and universities, whether it retains risk, buys insurance, or participates in a pool.
Statement 30, Risk Financing Omnibus, was issued in February 1996 as an amendment of Statement 10, effective for periods beginning after June 15, 1996. Its changes are noted where they apply below.
When the liability is accrued: entities other than pools
For a government that has not transferred the risk to an unrelated third party, Statement 10 requires an estimated loss from a claim to be reported as an expenditure or expense and as a liability when two conditions are both met:
- Information available before the financial statements are issued indicates it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements.
- The amount of the loss can be reasonably estimated.
IBNR is inside the test, not outside it
Finance officers sometimes read “probable and reasonably estimable” as a rule about known claims. Statement 10 closes that door: if an incurred but not reported loss can be reasonably estimated and it is probable that a claim will be asserted, the expenditure or expense and liability should be recognized.
The Statement also defines IBNR broadly. Its footnote says IBNR includes known loss events expected to be presented later as claims, unknown loss events expected to become claims, and expected future development on claims already reported. That is the broad definition most actuaries use, covering both late-reported claims and growth on open ones. Pure IBNR vs. broad IBNR explains why the distinction matters when you read the exhibits.
How the liability is measured
As amended by Statement 30, the measurement paragraph for entities other than pools says claims liabilities, including IBNR, should be based on the estimated ultimate cost of settling the claims, including the effects of inflation and other societal and economic factors, using past experience adjusted for current trends and any other factors that would modify past experience. The estimate may come from a case-by-case review of all claims, the application of historical experience to the outstanding claims, or a combination. Estimates of IBNR losses should be based on historical experience, with claims stratified by amount and type finely enough that the estimate is reasonable.
Estimated recoveries such as salvage and subrogation are deducted from the liability at estimated realizable value, and the fund paragraphs say claims liabilities should be reduced by amounts expected to be recovered through excess insurance. Note that “ultimate cost” is not paid plus case reserves. Case reserves vs. IBNR walks through the arithmetic.
The range rule
Statement 10 carries the range rule private companies know, which its Basis for Conclusions traces to FASB Interpretation No. 14. When the reasonable estimate of the loss is a range, the estimable condition is met and an amount must be accrued. If some amount within the range appears to be a better estimate than any other, that amount is accrued. If no amount is a better estimate than any other, the minimum amount in the range is accrued.
Illustration with hypothetical numbers: a county’s actuary reports a reasonable range of $4.0 million to $5.2 million for unpaid workers compensation claims. If the report names $4.5 million as the central estimate, the county accrues $4.5 million. If the report offers only the range, the rule points to $4.0 million, a liability $500,000 lower for the same set of claims. The fix is to require a stated best estimate. Point estimate vs. range covers how to read the two together.
If no accrual is made, or exposure exists beyond the amount accrued, Statement 10 requires disclosure when there is at least a reasonable possibility that a loss or an additional loss has been incurred.
Claim adjustment expenses: where pools and governments diverge
Pools. Statement 10 says liabilities for claim adjustment expenses should be accrued when the related liability for unpaid claims is accrued, and that claim adjustment expenses include all costs expected to be incurred in connection with the settlement of unpaid claims. It names both kinds: allocated expenses that can be associated directly with specific claims, such as legal and adjusters’ fees, and unallocated expenses such as salaries and other internal costs of the pool’s claims department.
Entities other than pools. Statement 30 added a narrower rule. Claims liabilities should include specific, incremental claim adjustment expenditures or expenses. The footnote explains that incremental costs are those incurred only because of a claim: outside legal assistance on a particular claim may be incremental, while internal legal staff may not be, because their salaries will normally be incurred regardless of the claim. An entity may include other allocated or unallocated claim adjustment costs, and must disclose whether it has.
The practical consequence is that the actuary’s report must say what basis the estimate is on. A report that projects loss and allocated expense combined, with a separate unallocated provision, fits a pool directly. A city using that same report has to decide, and disclose, whether the unallocated piece is in its booked liability.
Discounting: permitted, not required, and always disclosed
Statement 10 uses the same language for pools and for other entities: the practice of presenting claims liabilities at the discounted present value of estimated future cash payments is neither mandated nor prohibited. The one exception runs the other way. Claims liabilities associated with structured settlements should be discounted if they represent contractual obligations to pay on fixed or determinable dates.
If liabilities are discounted, the entity should use a rate determined by giving consideration to such factors as its settlement rate for those liabilities and its investment yield rate.
The Basis for Conclusions explains the neutral position: the Board was concerned that discounting a relatively soft estimate may imply a precision in the undiscounted liability that does not exist.
The choice comes with disclosure. Pools disclose the face amount and carrying amount of liabilities presented at present value and the range of annual interest rates used. Entities other than pools disclose the carrying amount of liabilities presented at present value and the range of discount rates used.
Because the option exists, a discounted GASB liability moves when rates move, which is why interest rate decisions show up in public entity reserve reports. The Wire has tracked that sensitivity in pieces such as the September FOMC decision and long-tail reserve discounts. For how the discounting rules compare across other reporting bases, see captive reserve discounting.
How pools report: the insurance-style model
Statement 10’s summary says it generally requires pools to follow the standards for similar business enterprises, based primarily on FASB Statement No. 60, the insurance enterprise standard of the time. All pools account for their activities in an enterprise fund.
For claims, the pool rule is that a liability for unpaid claims costs, including estimates of costs relating to IBNR claims, should be accrued when insured events occur or, for claims-made coverage, in the period in which the event that triggers coverage occurs. The liability is based on the estimated ultimate cost of settling the claims. Changes in estimates are recognized in results of operations in the period the estimates change, which is why prior-year development runs straight through the pool’s operating statement.
The claims liability reconciliation
Pools must disclose, in the notes, a reconciliation of total claims liabilities for the current and prior fiscal year in a prescribed tabular format. Here is the format with illustrative figures for a hypothetical pool, in thousands:
| Line | Current year | Prior year |
|---|---|---|
| Unpaid claims and claim adjustment expenses, beginning of year | 18,400 | 17,100 |
| Incurred: provision for insured events of the current year | 9,600 | 9,200 |
| Incurred: increase (decrease) in provision for prior years | 700 | 300 |
| Payments: attributable to insured events of the current year | (2,900) | (2,700) |
| Payments: attributable to insured events of prior years | (6,100) | (5,500) |
| Unpaid claims and claim adjustment expenses, end of year | 19,700 | 18,400 |
Check the arithmetic the way your auditor will: 18,400 plus 10,300 incurred less 9,000 paid equals 19,700. The Statement also provides an “other” line, with an explanation required for each material item.
The line that deserves board attention is the prior-year provision. A $700,000 increase means the pool’s estimate of older years rose by that amount during the year. Several consecutive years in the same direction is a pattern worth a hard conversation.
Ten-year claims development information
Pools that issue separate financial reports present revenue and claims development information as required supplementary information immediately after the notes. As amended by Statement 30, the table shows:
- Gross, ceded, and net premium or contribution revenue, with investment revenue, for each of the past ten fiscal years.
- Unallocated claim adjustment expenses and other costs for each of those years.
- Gross incurred claims and allocated claim adjustment expenses, the loss assumed by excess insurers or reinsurers, and the net amount, as originally reported at the end of each of the past ten years.
- Cumulative net paid as of the end of each succeeding year.
- Reestimated loss assumed by excess insurers or reinsurers as of the end of the current year.
- Reestimated net incurred claims and claim adjustment expenses as of the end of each succeeding year.
- The change in net incurred from the original estimate to the latest reestimate.
Statement 30 also settled the basis of presentation: accident year for occurrence-based coverage, report year for claims-made coverage, or policy year, used consistently for all years presented. Alongside the table, the pool presents a reconciliation of claims liabilities by type of contract in the same format as the note reconciliation.
Lines 4 and 6 are in effect a paid triangle and an incurred-estimate triangle, and line 7 is the scorecard. If a hypothetical 2021 accident year was first reported at $8.0 million net and now stands at $9.1 million, the schedule shows an increase of $1.1 million, and a reader can see in one row whether the pool’s opening estimates have tended to hold.
How individual governments report
Fund type
Statement 10 as issued said that if a single fund is used to account for an entity’s risk financing activities, that fund should be either the general fund or an internal service fund. That restriction was later removed. The North Carolina Office of the State Controller’s summary of GASB Statement No. 66 describes it as amending Statement 10 “by removing the provision that limits fund-based reporting of a state and local government’s risk financing activities to the general fund and the internal service fund type.”
Under Statement 10 as issued, the liability is measured the same in either fund. The fund choice affects how costs are charged to departments. With the general fund, the entity may allocate loss expenditures to other funds by any method, but charges above the liability-based amount are reported as transfers. An internal service fund may instead charge on an actuarial method or historical cost information, adjusted over a reasonable period so that revenues and expenses are approximately equal, and may add a reasonable provision for expected future catastrophe losses. A deficit fund balance must be disclosed. The Statement notes that using an internal service fund is risk retention, not risk transfer, because the entity as a whole has kept the risk.
One presentation point surprises new finance officers. Georgia’s State Accounting Office policy on claims and judgments describes how, under the modified accrual basis used in governmental fund statements, claim liabilities are recognized as they mature and come due, with the remainder reported in the government-wide statements on the accrual basis. The actuarial estimate supports the full accrual number.
Note disclosures for a government that retains risk
Statement 10, as amended, requires an entity other than a pool to disclose, where applicable:
- A description of the risks of loss it is exposed to and how they are handled, such as commercial insurance, pool participation, or retention.
- Significant reductions in insurance coverage from the prior year by major category of risk, and whether settlements exceeded insurance coverage in each of the past three fiscal years.
- If it participates in a pool, the nature of the participation and the rights and responsibilities of both parties.
- If it retains risk: the basis for estimating the liabilities for unpaid claims, including the effects of specific, incremental claim adjustment costs, salvage, and subrogation, and whether other claim adjustment costs are included; the carrying amount and discount rate range for any discounted liabilities; liabilities removed from the balance sheet through annuity contracts purchased in claimants’ names; and a two-year reconciliation showing beginning claims liabilities, incurred claims (current-year provision plus any change in prior-year provisions), payments, other items, and ending claims liabilities.
The government’s reconciliation is simpler than the pool’s: it does not split incurred claims or payments between current and prior years. Ask for the split anyway, because it is the only way to see prior-year development.
If you are a pool member
A member of a pool with transfer or pooling of risk reports its premium or required contribution as insurance expenditure or expense. If the pooling agreement allows additional assessments, the member must consider their likelihood and report a liability when an assessment is probable and can be reasonably estimated. That makes the pool’s reserve adequacy the member’s accounting problem as well as the pool’s.
How this differs from ASC 450 for private self-insureds
The accrual test is the same by design. FASB Statement No. 5, the 1975 standard whose test private companies now apply through ASC 450, uses the identical two conditions, and it says the conditions would be met for uninsured losses from injury to others that took place before the financial statement date even if the enterprise is not yet aware of them, when experience allows a reasonable estimate. Statement 10 also carries over the range rule, which comes from FASB Interpretation No. 14, not from Statement 5 itself. Our companion piece on ASC 450 and ASC 944 covers the private-sector side.
The differences are in what GASB adds on top:
- Explicit IBNR language. Statement 10 names IBNR, defines it, and says how to estimate it. Statement 5 reaches the same result through its general conditions.
- A stated position on discounting, with a disclosure attached. The text of Statement 5 does not address present value at all.
- Rules for claim adjustment expenses, different for pools and other entities.
- A prescribed two-year reconciliation of the claims liability.
- A pool model with ten-year development data that exposes how past estimates have held up.
- Fund accounting, which has no private-sector counterpart.
What the actuarial report should give the finance officer
Work backward from the note. Each required disclosure needs a number or a sentence, and the report should supply it without a second request:
- A stated central estimate, not only a range.
- The liability as of your fiscal year end, with IBNR shown separately from case reserves.
- The claim adjustment expense basis in plain words, with any unallocated provision shown separately.
- Recoveries: figures net of excess insurance, and the salvage and subrogation assumed.
- Undiscounted and discounted figures side by side, with the rate and the payout pattern.
- Incurred and paid amounts split between current and prior years, which is what the reconciliation needs.
- For pools, the development schedule inputs, gross, ceded, and net, on a consistent year basis.
How to evaluate an actuary’s report has a fuller scorecard.
Questions to ask your actuary
- Is your central estimate identified as the best estimate within the range, and can I cite it as such to the auditor?
- Does your IBNR include development on known claims as well as unreported claims, consistent with the Statement 10 definition?
- Which claim adjustment expenses are in your number: allocated only, or unallocated too? Can you show the unallocated provision separately?
- Are the figures net of excess insurance, salvage, and subrogation, and what recoveries did you assume?
- If we discount, what rate did you use, how does it relate to our investment yield, and what is the undiscounted figure?
- How much did your estimate for prior years change since the last valuation, by year, and why?
- What happened between the valuation date and our fiscal year end, and how was the liability rolled forward?
Sources
- Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, Governmental Accounting Standards Board, November 1989
- Statement No. 30, Risk Financing Omnibus, an amendment of GASB Statement No. 10, Governmental Accounting Standards Board, February 1996
- Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, Financial Accounting Standards Board, March 1975
- GASB 66 - Technical Corrections 2012, North Carolina Office of the State Controller
- Statewide Accounting Policy: Claims, Judgments, and Accounting for Contingencies, Georgia State Accounting Office, July 1, 2015
Frequently asked questions
Does GASB 10 require governments to record IBNR?
Yes. Statement 10 says that if an incurred but not reported loss can be reasonably estimated and it is probable that a claim will be asserted, the expenditure or expense and the liability should be recognized. For pools, the liability for unpaid claims costs expressly includes estimates of IBNR claims.
Can claim liabilities be discounted under GASB 10?
Statement 10 says discounting is neither mandated nor prohibited, with one exception: liabilities for structured settlements that are contractual obligations payable on fixed or determinable dates should be discounted. An entity that discounts must disclose the carrying amount of the discounted liabilities and the range of discount rates used.
What is the difference between GASB 10 rules for pools and for individual governments?
Pools follow an insurance-style model in an enterprise fund, accrue all claim adjustment expenses, and present ten-year claims development information. Entities other than pools apply the probable and reasonably estimable test, include only specific, incremental claim adjustment costs by default, and disclose a simpler two-year reconciliation of claims liabilities.
What is the ten-year claims development table for public entity risk pools?
It is required supplementary information showing, for each of the past ten years, earned revenue, unallocated claim adjustment and other costs, incurred claims as originally reported, cumulative payments, and the reestimated incurred amounts at each later year end. Statement 30 added gross, ceded, and net presentation and allows an accident-year, report-year, or policy-year basis applied consistently.