Figure IG 1-1 illustrates the contract classification assessment for insurance contracts other than financial guarantee, mortgage insurance, and title insurance.
Figure IG 1-1
Contract classification assessment for insurance contracts

1.2.1 Entities subject to ASC 944

The accounting in ASC 944 is industry-specific guidance, meaning that the guidance is applicable only to insurance entities as defined in ASC 944-10-15. Evidence that an entity is an insurance entity may include that it:
  • Holds an insurance license
  • Is subject to reporting requirements with insurance regulators
  • Reflects its insurance mission in its purpose statements and prospectuses filings
  • Is subject to SEC Regulation S-X: Financial statement requirements: Article 7 – Insurance companies
Entities to which various subsections of ASC 944 apply include:
  • Life and health insurance entities (stock and mutual entities)
  • Property and liability (or “property/casualty”) insurance entities (stock and mutual entities)
  • Title insurance entities
  • Assessment entities
  • Fraternal benefit societies
  • Mortgage guaranty insurance entities
  • Financial guaranty insurance entities
  • Pools other than public-entity risk pools
  • Syndicates
  • Captive insurance entities
  • Reinsurance entities
  • Reciprocal exchanges or inter-insurance exchanges

1.2.2 Contracts subject to ASC 944

The purpose of insurance is to provide indemnification against loss or liability from specified events and circumstances that may occur or be discovered during a specified period. The insurer provides this protection to the policyholder in exchange for a premium.
Contracts qualify as insurance (or reinsurance) for accounting purposes if they transfer significant insurance risk, as described in IG 1.3. Contracts written by insurance entities that do not transfer significant insurance risk are generally accounted for as deposits (sometimes referred to as “investment contracts” in the context of long-duration contracts), as described in IG 1.3.
Contracts that in form are insurance or reinsurance may in substance have characteristics that require them to be accounted for totally or partially under other standards, such as ASC 815, Derivatives and Hedging, or ASC 606, Revenue Recognition.

1.2.3 ASC 944 scope — unit of account

In order to assess whether “a contract” is subject to ASC 944, it is important to use the appropriate unit of account. The unit of account for scoping purposes is generally the individual contract. However, in practice, as a simplification, scoping is done by product type. If done by product type, care should be taken to make sure contracts are similar and do not include contracts both with and without significant insurance risk.
We believe that substance should govern over form in determining “the contract” for accounting purposes. Therefore, separate contracts with the same entity or related parties that are negotiated as a package with a single commercial objective, or when the amount of consideration paid in one contract depends on the price or performance of the other, should be viewed as a single contract for scoping purposes.
For certain measurements, ASC 944 explicitly requires grouping. Examples include:
  • When truing up the net premium ratio for nonparticipating traditional and limited payment contracts, ASC 944 prescribes that a group cannot contain contracts with different issue years, but does not provide any more specific guidance on grouping.
  • When determining whether a premium deficiency should be recognized for contracts other than nonparticipating traditional and limited payment contracts, ASC 944 specifies that for purposes of the premium deficiency test, contracts be grouped consistent with the insurer’s manner of acquiring, servicing, and measuring the profitability of its insurance contracts.
See IG 5.2 for further guidance on liability for policy benefits and determination/true-up of the net premium ratio.

1.2.4 ASC 944 scope — contracts subject to derivative guidance

The derivative accounting guidance in ASC 815-10-15-13 provides a scope exception for certain insurance contracts from derivative accounting in their entirety, and careful consideration is required to assess if a contract meets the scope exception or not. The insurance contracts that have significant insurance risk would generally meet the ASC 815 insurance derivative scope exception. However, they may still contain embedded derivatives.
Certain insurance, deposit and investment contracts issued by insurance entities may also be subject to the provisions of ASC 815, because they contain features that meet the definition of an embedded derivative.
Question IG 1-1 provides an example for equity-indexed annuities where the equity-indexed return portion of the contract is generally required to be separated from the host and accounted for as an embedded derivative.
Question IG 1-1
Is an equity-indexed annuity that provides an interest crediting rate on the account balance based on the performance of an equity index (e.g. S&P 500) with a contractually-specified minimum interest crediting rate a hybrid instrument that contains an embedded derivative?
PwC response
Yes. The host is an investment contract under ASC 944 (i.e., a debt host) with multiple embedded derivatives (a contract holder prepayment option and an equity-return feature). The prepayment option would typically require payment of the contract account balance less a specified non-indexed surrender charge to the contract holder, and thus would generally be clearly and closely related to the debt host, provided it does not contain an embedded interest rate derivative under the guidance in ASC 815-15-25-26. However, the equity option component of an equity-indexed annuity does not meet the definition of a “market risk benefit” under ASC 944-40-25-25C because it represents the crediting rate on the account balance. However, it requires separate accounting under ASC 815-15-25-1.
Under ASC 815, contracts or portions of contracts identified as derivatives or embedded derivatives are required to be recorded at fair value through income. When ASC 815 requires separate fair value measurement of an embedded derivative, the remaining component of the insurance contract (the host) would be evaluated under the scope of ASC 944.
See DH 3.2.5 and DH 4.6.2 for further guidance on the scope exceptions and assessing whether embedded derivatives need to be separated. See IG 5.7 for further guidance on measurement of derivatives and embedded derivatives in insurance and investment contracts.

1.2.5 ASC 944 scope - transactions subject to revenue recognition guidance

Insurance contracts that are in the scope of ASC 944 are exempt from the ASC 606 revenue recognition guidance. Insurance entities may also execute contracts that function entirely as service contracts, with no insurance elements, such as administrative services only (ASO) contracts. Such contracts would be in the scope of ASC 606. In certain instances, a contract may be partially within the scope of  ASC 606 and partially within the scope of ASC 944 or financial instrument guidance, such as a high deductible policy that also contains claims handling services.
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