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Mortgage guaranty insurance protects a lender against loss of all or a portion of the principal amount of a mortgage loan upon default of the mortgagor.
ASC 944 applies to mortgage insurance entities, however, the Subtopics on premium revenue (ASC 944-605-15-2), claim cost recognition (ASC 944-40-15-2), and acquisition costs (ASC 944-30-15-2) do not apply. Regardless, as there is no explicit guidance, mortgage insurers have generally applied the principles in ASC 944 by analogy in recording premium revenue, claim costs, and deferring acquisition costs, and consider ASC 450 in recording claim costs.

6.1.1 Mortgage insurance premium revenue recognition

Premiums on mortgage insurance policies are either due upfront, monthly, or annually. The mortgage insurer typically does not have the option to cancel or non-renew the policy unless the insured has violated the terms of the policy, such as non-payment of premium. The policy may also be cancelled or non-renewed if the mortgage is modified. In this respect, mortgage guaranty insurance is similar to a long-duration insurance contract, in that it is not subject to unilateral changes in its provisions and requires performance of various functions and services (including insurance protection) for an extended period of time.
There is no authoritative revenue recognition guidance for mortgage insurers. However, in practice, premiums due on a monthly basis are generally recognized as coverage is provided. For premiums due annually, the premium is typically recognized on a monthly, straight-line basis. Premiums written on a single premium basis are recognized as risk expires, which is typically deemed to be the anticipated claim payment pattern. The anticipated claim payment pattern is developed through historical industry experience; however, recent experience may require adjustments to historical loss trend data.
As part of the claims process, a mortgage insurer may rescind a policy if, for example, there has been a violation of the policy term. If a mortgage insurer rescinds a policy, it may be required to return all of the previously collected premium. Mortgage insurers consider future rescissions in their reserving process, and as such, must accrue a liability for premium that may need to be returned.

6.1.2 Mortgage insurance deferred acquisition costs

There is no authoritative guidance for DAC for mortgage insurers. As a result, mortgage insurers analogize to ASC 944 for the definition of what costs are deferrable. For subsequent measurement one acceptable accounting policy that many mortgage insurers adopt is to amortize DAC in proportion to the estimated gross profits expected to be realized over the estimated life of the policies. Under this approach, estimates are updated when necessary to reflect actual experience and changes to assumptions. Typical key assumptions for mortgage insurers include persistency and loss development.

6.1.3 Mortgage insurance claim liabilities

Claim liabilities for mortgage insurers are accounted for under ASC 450-20, Contingencies -- Loss Contingencies, and ASC 944-40, Financial Services — Insurance — Claim Costs and Liabilities. While ASC 944-40-15-2 explicitly excludes mortgage insurers from its scope, mortgage insurers use the underlying principles in ASC 944-40, which are consistent with those in ASC 450-20, to establish claim liabilities. In mortgage insurance, the obligating event is considered to be the mortgage loan default, as defined in the contract. As a result, claim liabilities are established when mortgage insurers receive a notice of default on insured mortgage loans. Mortgage insurers also establish claim liabilities for estimated losses incurred on notices of default not yet reported to the mortgage insurers (i.e., IBNR). While mortgage insurers utilize IBNR, consistent with ASC 450-20, they do not establish liabilities for future claims on insured loans which are not in default at the reporting date.Real estate classified as held for sale that was acquired in settling mortgage guaranty and title insurance claims should be subsequently measured in accordance with ASC 360-10-35. Subsequent reductions in the reported amount of real estate acquired in settling claims should be recognized as an adjustment to claim costs incurred.

6.1.4 Mortgage insurance premium deficiency testing

Mortgage insurers are required to perform a premium deficiency assessment, as noted in ASC 944-10-15-2. Guidance on premium deficiency is found in ASC 944-60-25-1 through ASC 944-60-25-09 and ASC 944-60-35-1 through ASC 944-60-35-6. While mortgage insurers are explicitly exempt from the ASC 944 guidance relating to premium and claims recognition, the recognition of a premium deficiency is required. Although recognizing a premium deficiency for mortgage insurers accelerates the recognition of losses compared to the loss recognition model based on an event of default, it is not dissimilar to recognizing losses through premium deficiencies on other insurance contracts, both long and short duration, or the result of other GAAP impairment models.
To the extent that a mortgage insurer records a premium deficiency, the premium deficiency cannot be reduced in subsequent periods by profits expected from contracts that are written after the original premium deficiency was recognized. The premium deficiency represents an additional liability for the contracts existing at the time of the premium deficiency. Any new premium deficiencies established would in effect create another premium deficiency "layer" that would also be separately analyzed in subsequent periods.
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