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Insurance entities may assume existing blocks or lines of business from other insurance entities. In some instances, particularly for life insurance entities, the existing liabilities for the block of business will be assumed, and the assuming entity may then begin writing new business on its own policies for the line of business through the ceding entity’s distribution channel. The reinsurance is often be done on an indemnity basis, whereby an insurer is not relieved of its obligation to policyholders, and policyholders are usually unaware of the reinsurance arrangement. Reinsurance of the existing block may also be done on an assumption basis, whereby the assuming entity contractually agrees to assume the unexpired portion of the risk of the original policyholders on a portfolio of contracts representing a block of business. The ceding entity’s liability to policyholders is legally extinguished in this latter arrangement, as evidenced by assumption certificates signed by policyholders or other evidence as required by applicable statute or regulations (often referred to as a novation).
Transactions in the insurance industry may take various legal forms. It is not uncommon for a transaction to include one or more indemnification or novation reinsurance transactions along with the acquisition of renewal rights, the purchase of certain legal entities, the purchase of assets, or various combinations thereof. In many cases, the acquired items taken as a whole, including the reinsurance components, may meet the definition of a business and, therefore, will be accounted for as a business combination under ASC 805. Factors to consider in making that determination include whether the rights and obligations of the in-force block of insurance and investment contracts have been transferred, and whether various other components of the business have been transferred, such as the employees and staff, the policy administration function, financial reporting functions, or distribution systems. When the transaction is determined to be a combination of a reinsurance transaction and a sale/purchase of a business by the seller/acquirer, the total consideration paid/received should be allocated to the components based on their relative fair values, which in some instances, may differ from the amounts specified in the various agreements that are contemporaneously exercised. This is required to ensure the appropriate valuation and subsequent amortization/recognition of amounts relating to each of the components.
Reinsurance contracts are sometimes written such that they 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 (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 cost/price of reinsurance and would not be presented in the income statement as premiums and claims.

9.10.1 Ceding entity accounting for assumption/novation reinsurance

For the ceding entity, transactions in which the reinsurance contract is a legal replacement of one insurer by another extinguishes the ceding entity’s liability, and, in accordance with the accounting for assumption reinsurance (refer to ASC 944-20-40-3 through ASC 944-20-40-5), a gain or loss would be recognized at the date of the transaction. Although ASC 944-40-25-33 permits immediate recognition by the ceding entity of gains associated with reinsurance contracts to the extent that there is a legal replacement of one insurer by another, it does not provide any guidance to determine when an insurer's liability to policyholders has been entirely extinguished. Such a determination is a legal question, dependent upon an examination of all the facts and circumstances. See ASC 944-20-40-5 and ASC 405-20-40 for guidance on liability extinguishment. Entities should use accounting methods consistent with coinsurance or other forms of reinsurance, as appropriate, pending completion of the assumption transaction (i.e., until the liability has been entirely extinguished).

9.10.2 Assuming entity accounting for reinsurance of existing block of long-duration contracts

For the assuming entity, facts and circumstances regarding the reinsurance contract and any other associated agreements in the transaction will determine whether a reinsurance transaction of an existing block of business is accounted for as a business combination under ASC 805 or as reinsurance. ASC 805-10-65-1 states that a business combination "is a transaction or other event in which an acquirer obtains control of one or more businesses." ASC 805 defines a business as "an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return…" Refer to BCG 1.2 for further information. If the entity acquired an existing block without any other components, the transaction would generally not be viewed as a continuation of the activities of a business.

9.10.2.1 Business combinations including reinsurance transactions

Specific insurance industry considerations can be found in IG 12.

9.10.2.2 Assuming reinsurance not related to a business combination

Cash and/or any investment assets, received or paid, is accounted for at fair value. This fair value is considered the up-front consideration paid for the contract.
In transactions involving in-force blocks of business accounted for as reinsurance, there is no explicit guidance as to whether gross or net income statement presentation is appropriate and, as a result, either approach, applied consistently for similar transactions, is acceptable. If gross income statement presentation is chosen, recognition would be given in the income statement for "change in reserves on reinsurance assumed" and "assumed premium income" in equal amounts at the date of the transaction that would offset to a zero impact on net income. For long-duration reinsurance agreements, any remaining difference after the recording of cash, investments, and policy benefit reserves would generally be accounted for as deferred acquisition costs or, alternatively, recorded as part of the policyholder benefit reserve and amortized over the life of the contracts. This is done in practice despite the fact that unlike DAC on direct contracts, this allocated “payment” is part of the net consideration exchanged between the two parties to the contract rather than a separate acquisition cost paid to third parties to acquire the contract. See IG 3.8.2 for further information on the assuming reinsurer accounting for DAC.
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