Insurance entities may assume existing blocks or lines of business from other insurance entities. In some instances, particularly for life insurance entities, the existing liabilities for the block of business will be assumed, and the assuming entity may then begin writing new business on its own policies for the line of business through the ceding entity’s distribution channel. The reinsurance is often be done on an indemnity basis, whereby an insurer is not relieved of its obligation to policyholders, and policyholders are usually unaware of the reinsurance arrangement. Reinsurance of the existing block may also be done on an assumption basis, whereby the assuming entity contractually agrees to assume the unexpired portion of the risk of the original policyholders on a portfolio of contracts representing a block of business. The ceding entity’s liability to policyholders is legally extinguished in this latter arrangement, as evidenced by assumption certificates signed by policyholders or other evidence as required by applicable statute or regulations (often referred to as a novation).

Transactions in the insurance industry may take various legal forms. It is not uncommon for a transaction to include one or more indemnification or novation reinsurance transactions along with the acquisition of renewal rights, the purchase of certain legal entities, the purchase of assets, or various combinations thereof. In many cases, the acquired items taken as a whole, including the reinsurance components, may meet the definition of a business and, therefore, will be accounted for as a business combination under ASC 805. Factors to consider in making that determination include whether the rights and obligations of the in-force block of insurance and investment contracts have been transferred, and whether various other components of the business have been transferred, such as the employees and staff, the policy administration function, financial reporting functions, or distribution systems. When the transaction is determined to be a combination of a reinsurance transaction and a sale/purchase of a business by the seller/acquirer, the total consideration paid/received should be allocated to the components based on their relative fair values, which in some instances, may differ from the amounts specified in the various agreements that are contemporaneously exercised. This is required to ensure the appropriate valuation and subsequent amortization/recognition of amounts relating to each of the components.

Reinsurance contracts are sometimes written such that they specify an effective date for coverage that is prior to the date on which the agreement has been finalized. Reinsurance contracts assumed (or ceded) should be reflected in the financial statements of the reinsurer (cedant) on the date a legally enforceable contract is finalized. Any amounts exchanged that are characterized in form as assumed (or ceded) premium or assumed (or ceded) losses for periods prior to contract finalization should be viewed as an adjustment to the consideration received or paid that would form part of the cost/price of reinsurance and would not be presented in the income statement as premiums and claims.