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9.4 Overview of reinsurance accounting for long-duration contracts
Publication date: 31 May 2024
us Insurance guide
ASC 944 requires that the substance, and not the form of the contract drive the accounting treatment. When significant insurance risk is transferred, reinsurance accounting is required. In contrast, contracts that do not transfer significant insurance risk that exists in direct contracts are accounted for as deposits (i.e., financing arrangements). Recognizing a contract as reinsurance will generally enable the financial statements of the ceding entity to match the recognition of benefits received for claims covered by the reinsurance with the recognition of the expense for claims under the underlying contracts both in timing and covered amount. See IG 10.2 for guidance on financial statement presentation for long-duration reinsurance contracts.
Deposit accounting treats the contract more like a financing; cash outflows and inflows increase or decrease the balance and interest is recognized using an effective interest rate approach. Unlike reinsurance accounting, the amounts being paid or received in conjunction with the contract are not presented on the income statement. When direct contracts do not contain significant insurance risk, and are subsequently ceded, these contracts are accounted for as investment contracts.
Figure IG 9-3 compares the ceding entity accounting for when contracts transfer insurance risk (reinsurance accounting) and when sufficient insurance risk is not transferred (deposit accounting).
Figure IG 9-3
Comparison of the ceding entity accounting using reinsurance and deposit accounting models
Comparison of the ceding entity accounting using reinsurance and deposit accounting models
Reinsurance accounting | Deposit accounting |
|---|---|
Premiums paid to the reinsurer are recorded as ceded premiums (a reduction to revenue attributable to direct insurance written) over the coverage period of the reinsurance.
| Net amounts paid to the reinsurer are recorded as a deposit asset with no effect on revenue.
|
Expected reimbursements for losses are recorded as a reduction in losses as the losses are incurred with a corresponding reinsurance recoverable asset.
| Nonrefundable fees paid are recorded as expense over the period benefited, which is typically the settlement period of the deposit.
The asset is accreted using the interest method to the ultimate expected reimbursements.
Reimbursements for losses are recorded as a reduction in the deposit asset when cash is received. Any benefit to the ceding entity is recognized using the effective yield interest method over the settlement period.
|
Cash flows from premiums paid to the reinsurer and reimbursements for losses from the reinsurer are classified as operating cash flows in the statement of cash flows.
| Net amounts paid to the reinsurer and reimbursements for losses from the reinsurer are classified as financing activities, and nonrefundable fees paid are classified as operating activities in the statement of cash flows.
|
Receivables for amounts recoverable under reinsurance contracts are considered financial assets for impairment purposes and should be assessed for credit impairment. See LI 7.8 for further information on the application of the current expected credit losses model to reinsurance receivables.
Reinsurance contracts sometimes 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 (or 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 price/cost of reinsurance and would not be presented in the income statement as premiums and claims.
Assuming reinsurer accounting for deferred acquisition costs, policyholder liabilities, and other related balances is the same as that of direct insurers.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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