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Figure LI 7-3 illustrates common insurance-related assets and whether they are in the scope of CECL.
Figure LI 7-3
Common insurance-related balances included/excluded from CECL
In CECL scope
Excluded from CECL scope
  • Reinsurance and insurance recoverables billed and unbilled
  • Premiums receivable and other contract holder receivables
  • Funds withheld assets
  • Premium receivable (host contract) in modified coinsurance
  • Financial guarantees purchased
  • Structured settlements purchased
  • Ceded unearned premium (prepaid reinsurance)
  • Policy loans
  • Reinsurance recoverables between entities under common control
  • Market risk benefits (MRB) reinsurance recoverables
  • Prepaid insurance expense
As discussed in LI 7.2, reinsurance recoverables are within the scope of the CECL model. The insurance company estimates a reinsurance receivable, which represents all amounts recoverable from reinsurers for paid and unpaid claims and claim settlement expenses, including estimated amounts receivable for unsettled claims, claims incurred but not reported, and policy benefits.
For reinsurance contracts, an insurance company should consider factors such as the reinsurer’s ability to pay and collateral arrangements in determining its expected losses. For grouping (or pooling) reinsurance receivables for the purposes of estimating credit losses, similar risk characteristics may exist when the reinsurance agreements have standardized terms, similar funds withheld or collateral provisions, involve similar insured risks and underwriting practices, or the reinsurance counterparties have similar credit ratings, financial characteristics, and economic conditions.
Insurance receivables that arise due to subrogation rights should also be evaluated for impairment under CECL. A subrogation right is defined as the right of an insurer to pursue recovery of damages against a third party who is liable for costs relating to an insured event that has been paid by the insurer. As such, it is not a separate financial asset, but instead one of the rights/potential cash inflows within an insurance contract. A subrogation right is a component within the claim liability that considers both estimated claim payments and expected recoveries from an on-going insurance contract. During the life of the insurance contract, multiple claim payments may be made, all of which would be open to the potential for subrogation rights. When the insurer receives payment in satisfaction of this subrogation right (e.g., in the form of cash, financial asset, or some other asset), it would reduce the subrogation right component of the claim liability and account for the newly obtained asset. Assets received that are financial assets subsequently measured at amortized cost are within the scope of CECL upon initial recognition.
Question LI 7-25 addresses whether contractual coverage disputes should be considered when calculating the allowance for credit losses on a reinsurance receivable.
Question LI 7-25
Once an insurance company determines it should book a reinsurance receivable (based on the terms of the contract), should it consider the effect of contractual coverage disputes when calculating its allowance for credit losses?
PwC response
No. Since the process for deciding whether or not to record a reinsurance receivable considers contractual coverage, the allowance for credit losses should not include risks related to contractual coverage disputes. The allowance for credit losses should also not include the consideration of other contract administration risks. Refer to ASC 326-20-55-82 for further information.

Question LI 7-26 discusses the factors to consider in estimating expected credit losses for reinsurance recoverables.
Question LI 7-26
What factors should an entity consider in estimating the expected credit losses of reinsurance recoverables?
PwC response
As required by ASC 326-20-30-7, an entity should consider available information about past events, current conditions, and reasonable and supportable forecasts to assess the collectability of cash flows to develop an estimate of the allowance for credit losses of reinsurance recoverables. Factors to consider include:
  • Expected term of the exposure under the contract, including termination clauses. Reinsurance arrangements may have no stated termination date and remain in force until all claims from the reinsured policies have been paid or the agreement is commuted or terminated by mutual agreement.
  • Historical losses of similar reinsurers
  • Funds withheld, trust accounts, letters of credit (that are not freestanding), and other collateral provisions. The presence of these embedded provisions should be evaluated similar to collateral and credit enhancement provisions as described in ASC 326-20-30-10 and ASC 326-20-30-12, which notes that “an entity shall not expect nonpayment of the amortized cost basis to be zero solely on the basis of the current value of collateral securing the financial asset(s) but, instead, also shall consider the nature of the collateral, potential future changes in collateral values, and historical loss information for financial assets secured with similar collateral."
  • Geographic and coverage type concentration of the reinsurer
  • Credit rating, financial health, and regulatory oversight of the reinsurer
  • Ability and history of government program administrator to fund or assess members to keep program viable and political environment for legislative change
An entity must also decide the appropriate level of aggregation at which to measure the expected credit losses by either grouping reinsurance recoverables on a collective pool basis or assessing on an individual basis. Some of the factors to consider when determining the appropriate level of aggregation include:
  • External credit rating of the reinsurer. This is because reinsurance recoverables from reinsurers with different credit ratings would generally not be considered to have similar counterparty credit risk characteristics.
  • Whether the reinsurer is involved in reinsurance agreements globally or they are contained to a specific geographic region
  • Size of the reinsurer, which may be indicative of its financial strength
  • The types of reinsurance agreements written by the reinsurer

Question LI 7-27 discusses how cancellation provisions for insurance contracts should be considered in estimating expected credit losses for premium receivables.
Question LI 7-27
How should an entity consider cancellation provisions and remaining unearned premium reserves for an insurance contract when estimating the expected credit losses of premiums receivable?
PwC response
The premium receivable asset is required to be evaluated for credit losses in accordance with ASC 326. In certain instances, an insurance entity will record written premiums and a premium receivable from the policyholder as of the effective date of the insurance contract to reflect the entire amount of premium due under the contract for the period of coverage. The insurance entity will also record an unearned premium reserve liability for the portion of the written premium that has not yet been earned. This generally results in no income being recorded as of the effective date of the contract but an equivalent premium receivable asset and unearned premium reserve liability being recorded.
Most insurance policies allow the insurance company to unilaterally cancel the policy if the policyholder fails to pay the contractual premium due. The insurance policy will generally allow for a 30- to 60-day legal grace period for the policyholder to pay the premium before the coverage is cancelled and the insurance entity is no longer under any obligation to perform. If a policy is cancelled, any remaining premium receivable balance and unearned premium lability would be written off, limiting the insurance company’s exposure to the unpaid earned premium that had already been recognized in earnings prior to the cancellation date.
We believe that when measuring expected credit losses related to premium receivables, an insurer should consider the contractual provisions that allow them to cancel the policy following a legal grace period if the policyholder fails to pay the contractual premium. These cancellation provisions can reduce the exposure to credit losses as the write off of any premium balances, including the premium receivable and unearned premium reserve upon cancellation, does not represent a credit loss that needs to be captured in the CECL calculation. If laws and regulations state that coverage must be provided for the remaining term despite a delinquency or default by the policyholder, we believe that an insurer should consider credit losses on the entire premium receivable without consideration of the unearned premium.

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