Reinsurance is the purchase of insurance coverage from another insurer to mitigate certain risks. In its simplest form, reinsurance provides risk mitigation for the frequency and/or severity of exposure an insurance entity has from its underlying insurance policies. Reinsurance accounting guidance applies if the reinsurance contract transfers significant insurance risk and deposit accounting applies if it does not. Reinsurance accounting can vary depending on whether the underlying insurance contracts are classified as long duration or short duration. This chapter focuses on reinsurance of underlying insurance contracts that are classified as long duration. Long-duration insurance contracts are principally life, annuity, and non-cancelable or guaranteed renewable accident and health (such as long-term-care and disability). The accounting for the insurance risk transferred will offset the income statement impact of insurance risk, similar to hedge accounting. To determine the appropriate accounting, evaluation of all contract terms is essential.

ASC 944-20-20 provides a definition of reinsurance.

This chapter mainly discusses the accounting considerations with respect to indemnity reinsurance of long-duration contracts from both the ceding and assuming entity’s perspectives. See IG 9.10.1 for accounting of assumption or novation reinsurance contracts, which are legal replacements of one insurer by another that extinguish the ceding entity’s liability to the policyholder.