Insurance contracts meet the definition of a derivative in ASC 815. However, ASC 815-10-15-52 includes an insurance scope exception for certain insurance contracts. Generally, traditional insurance contracts that are within the scope of ASC 944 would qualify for the scope exception, including traditional property and casualty contracts. A contract is eligible for this scope exception if the holder is only compensated as a result of an identifiable insurable event (e.g., damage to insured property). ASC 815-10-15-52 provides guidance for assessing whether an insurance contract meets this scope exception.

An example of an insurance contract that would not meet the insurance scope exclusion is hurricane catastrophe coverage that provides for payment based solely on industry loss experience and not on specific losses incurred by the policyholder.

A property and casualty contract that compensates the holder as a result of both an identifiable insurable event and changes in a variable (e.g., a dual-trigger property and casualty insurance contracts) is in its entirety exempt from the requirements of ASC 815, provided that all of the following conditions in ASC 815-10-15-55 are met:

Under a dual-trigger policy, the payment of a claim is triggered by the occurrence of two events (an insurable event and changes in a separate pre-identified variable). Because the likelihood of both events occurring is less than the likelihood of only one of the events occurring, the dual-trigger policy premiums are lower than traditional policies that insure only one of the risks. One common example of a dual-trigger that often meets the criteria for exemption is hurricane catastrophe coverage that insures a policyholder against actual losses incurred by the policyholder due to a hurricane, but establishes a limit on the loss amount based on the dollar amount of hurricane losses incurred by others in a particular region.ASC 815-10-55-40 provides additional examples.

With regard to the requirement not to involve essentially assured amounts of cash flows, if a contract includes an actuarially-determined minimum amount of expected claim payments from insurable events that are highly probable of occurring under the contract and the minimum claim payment amounts are both (1) indexed to or altered by changes in a non-insurance variable (e.g., changes in an equity index) and (2) expected to be paid each policy year (or on another predictable basis), that “portion” of the contract does not qualify for the insurance exception. Effectively, the minimum claim amount is the contract’s minimum notional amount in determining the embedded derivative under ASC 815-15-25.

Features that meet the definition of an embedded derivative are required to be accounted for at fair value. See PwC's Guide to Derivatives and Hedging, for further information on the accounting and reporting of derivative instruments under ASC 815.