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This section addresses the accounting considerations for contracts that are not accounted for as long-duration insurance contracts.

2.5.1 Classification of investment contracts

Investment contracts are those contracts written by an insurer that do not subject the insurer to significant mortality or morbidity risk. An example is a guaranteed investment contract (GIC) or similar debt-like instrument under which funds are received from contract holders and accrue interest at a stated rate, which can be fixed or variable.
Certain annuities may qualify as investment contracts. Some annuities have a deferral (or “accumulation”) phase and a payout phase. The accumulation phase is the period in which deposits are received from contract holders and an account balance is credited with interest until maturity or a payout annuity is elected with the right to surrender the contract at any time for cash. If there are no death or other insurance benefit riders, and thus no insurance risk, the contract is classified as an investment contract (e.g., fixed annuities and fixed (equity) indexed annuities in the accumulation phases).
In contrast, the payout or “annuitization” phase of an annuity (i.e., the period during which the contract holder is receiving periodic payments or the account value is extinguished for contracts with a guaranteed withdrawal benefit) is a separate contract for accounting purposes, as noted in ASC 944-20-15-17 and ASC 944-40-35-16.

ASC 944-20-15-17

A contract provision that allows the holder of a long-duration contract to purchase an annuity at a guaranteed price on settlement of the contract does not entail a mortality risk until the right to purchase is executed. If purchased, the annuity is a new contract to be evaluated on its own terms.

ASC 944-40-35-16

On the date of annuitization or extinguishment of the account balance, the additional liability related to the cumulative excess benefits will be derecognized and the amount deducted will be used in the calculation of the liability for the payout annuity.

At the annuitization date, the payout annuity is classified as an investment contract if the periodic payments are for a “period certain” rather than life contingent.
Certain reinsurance contracts that reinsure directly written investment contracts or that reinsure directly written insurance contracts but fail to pass significant insurance risk to the reinsurer would also be classified as investment contracts, as further described in IG 2.5.1.
Under the investment contract accounting model:
  • Payments received are reported as liabilities and accounted for in a manner consistent with the accounting for interest-bearing or other financial instruments.
  • Eligible deferred acquisition costs are capitalized and amortized to expense on a straight-line basis over the expected term of the related contracts if specified criteria are met, otherwise using a constant effective yield method.
  • Deposits received and withdrawal payments are classified as financing cash flows in the statement of cash flows.
These contracts may contain embedded derivatives or MRBs that require separation under ASC 815 or ASC 944, as described more fully in IG 1.2.4 and IG 2.4.5. If all death and insurance benefit features within a contract are classified as market risk benefits or embedded derivatives, and thus there is no remaining insurance risk in the contract, the remaining host contract would be considered an investment contract.
See IG 5.5 for further information on investment contracts.

2.5.2 Classification of assumed or written reinsurance contracts

Reinsurance is a transaction in which an insurer (assuming entity), in exchange for consideration (premium), assumes all or part of a risk undertaken originally by another insurer (ceding entity or cedant). Regardless of its form, any transaction that indemnifies an insurer against loss or liability relating to insurance risk and meets the specified risk transfer criteria is subject to reinsurance accounting.
ASC 944 guidance on reinsurance focuses principally on:
  • Determining whether significant risk transfer has passed between the cedant and the assuming company (as described further in IG 8.5 and IG 9.5) and
  • Accounting by the cedant for purchased reinsurance that meets the risk transfer criteria.
No specific guidance is provided in ASC 944 for the accounting by the assuming entity since the assuming entity is in substance providing insurance protection to the ceding company. Reinsurance contracts assumed follow the applicable guidance for direct insurance contracts, including short duration and long duration classifications.
See IG 8 for further guidance on the short-duration reinsurance model and IG 9 for further guidance on the long-duration reinsurance model.
Reinsurance of other types of coverage, such as financial guarantee, is not explicitly covered in ASC 944. In practice, such transactions are accounted for by analogy to the reinsurance guidance in ASC 944.
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