Sometimes, reinsurers enter into reinsurance contracts that provide coverage for direct insurance contracts that are issued for a specified period of time subsequent to the inception date of the reinsurance contract. In addition, reinsurers may provide coverage for different types of cedant products in a single legal insurance contract. These situations require consideration of the unit of account for recognition and measurement purposes.
We expect that under the new guidance, entities will typically recognize assumed reinsurance (i.e., include cash flows in the net premium ratio and liability for future policy benefits measurement) as the direct reinsured contracts are issued, as this is most similar to the approach commonly used in practice prior to the new standard.
Under this approach, the assuming entity is effectively “looking through” the legal contract to the reinsured contracts issued by the ceding entity as the contracts for accounting purposes. In accordance with ASC 944-40-30-7
, an entity must then “determine the level of aggregation at which reserves are calculated” (referred to herein as the “cohort”) for its assumed contracts. In accordance with ASC 944-40-30-7
, and consistent with how the ceding entity calculates its liability, the assuming entity “shall not group contracts together from different issue years but shall group contracts into quarterly or annual groups.” In applying this guidance to assumed reinsurance under the “look through” approach, each underlying reinsured contract is the unit of account (i.e., the contract for accounting purposes). Therefore, an assuming entity’s annual grouping limitation should be based on underlying reinsured contract policy issue dates, not the reinsurance contract issue date. When the direct reinsured contracts are the units of account for recognition purposes, the discount rate used to calculate the net premium ratio for a cohort would take into consideration the discount rate in effect at the dates that each reinsured contract is issued.
Although not expected to be common, there may be circumstances when the noncancellable term of a reinsurance contract (after consideration of termination provisions as noted below) is determined to be the unit of account for recognition purposes rather than each of the reinsured contracts. In such cases, the discount rate for interest accretion purposes would be the rate (or curve) at the date the noncancellable term of the reinsurance contract is initially recognized. There continues to be debate as to whether an assuming reinsurer would include all future cash inflows (premiums) and outflows (benefits and expenses) expected for the life of the noncancellable term of the reinsurance contract, including cash flows relating to as yet unwritten direct insurance policies under the reinsurance contract, in measuring the net premium ratio and liability for future policy benefits. If this is determined to be appropriate, gross disclosures of benefits and net premiums would be required to be included in the rollforward, taking into account the amounts relating to all of those future cash flows.
Provisions that allow either party to terminate the reinsurance arrangement for newly-written business for no consideration, such as a reinsurer’s right to cancel the contract for new business without cause with 90 days notice, should be considered in determining the accounting term of the contract and related future cash flows to be included in the measurement. ASC 944-20-15-10
may be helpful in this analysis. When a termination provision shortens the accounting term of the reinsurance contract to annual periods or less, the differences in accounting results between the noncancellable term of the reinsurance contract approach and the look-through approach may not be that significant.
A single reinsurance contract may reinsure multiple coverage types, including whole life, disability, long-term care, and universal life insurance. In practice, different types of business are often separated into smaller units of account for recognition purposes within the larger reinsurance contract. As a result, if there are separate units of account for different products, they would be included in separate cohorts with a separate net premium ratio and liability for future policy benefits calculated for each cohort.