FASB Insurance-Risk Transfer

Project Updates

Insurance—Risk Transfer

Last Updated: June 20, 2008 (Updated sections are indicated with an asterisk *)

The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Objective
Due Process Documents
*Immediate Plans
*Summary of Decisions Reached to Date
*Board (Other) Public Meetings
Related FASB and Other Articles
Background Information
Contact Information

Project Objective

The project objective is to improve the representational faithfulness of accounting for insurance and reinsurance contracts by clarifying what constitutes transfer of significant insurance risk in insurance and reinsurance contracts. Transfer of significant insurance risk is required for contracts to be considered insurance or reinsurance and to be accounted for as such. The resulting increased transparency in accounting and reporting by insurance contract policyholders, insurers, and reinsurers should help users of financial statements better understand the economic impact of those contracts. The project will address the accounting for both buyers and sellers of insurance and reinsurance contracts.

Due Process Documents

On May 26, 2006, the Board issued an Invitation to Comment, Bifurcation of Insurance and Reinsurance Contracts for Financial Reporting. The Invitation to Comment solicits constituent input on (1) possible approaches for bifurcating insurance and reinsurance contracts into insurance and financing components and related implementation issues and (2) draft definitions of insurance contracts and related terms based on definitions and related guidance in IFRS 4, Insurance Contracts, (Appendices A and B). The comment deadline ended August 24, 2006.

Invitation to Comment (posted 05-26-06)

All comment letters received by the FASB are considered public and are posted to the website. A summary of the comment letters received is also available.

*Immediate Plans

On June 11, 2008, as part of the Board’s review of its technical plan and its process to update the Memorandum of Understanding with the IASB, the Board removed the insurance risk transfer project from its agenda because it plans to consider at a future date whether to address insurance accounting in a joint project with the IASB. No further work is anticipated on this project.

*Summary of Decisions Reached to Date

This project has been removed from the Board’s agenda.

*Board (Other) Public Meetings

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Statement or Interpretation.

The following are links to the minutes for each meeting.

*June 11, 2008 Board Meeting—Project removed from the agenda
July 25, 2007 Board Meeting—Discussion of changes to Statement 113 to clarify the risk transfer conditions, application of Statement 113 to insurance contracts between noninsurance entity policyholders and insurers, and enhanced disclosures.
December 6, 2006 Board Meeting—Discussion of Invitation to Comment and how to proceed with the insurance risk transfer project
December 20, 2005 Board Meeting—Discussion of bifurcation approaches and whether to issue an Invitation to Comment on those approaches
September 14, 2005 Board Meeting—Discussion of definitions of insurance contracts, insurance risk, and related terms based on definitions and supplemental guidance provided in IFRS 4
April 6, 2005 Board Meeting—Discussion of (a) whether to add a project on risk transfer and (b) the approach to the project

Related FASB and Other Articles

Insurance policyholders, including noninsurance enterprises, are subject to FASB Statement No. 5, Accounting for Contingencies, paragraph 44, which requires that an insurance contract indemnify the insured against loss. The guidance in the AICPA Technical Practice Aid, Accounting by Noninsurance Enterprises for Property and Casualty Insurance Arrangements That Limit Insurance Risk, provides additional information to assist noninsurance enterprise policyholders in assessing whether an insurance contract provides such indemnification.

Background Information

A number of issues arose concerning the determination of whether an insurance or reinsurance contract transfers significant insurance (reinsurance) risk. The determination of significant risk transfer is necessary to determine whether the contract is accounted for as an insurance or reinsurance arrangement or whether it is accounted for as a financing arrangement (similar to a loan). Also, certain finite risk or financial insurance and reinsurance contracts contain risk-limiting features that can make the risk transfer analysis difficult. Statement 5, paragraph 44, requires that all insurance and reinsurance contracts indemnify the insured against loss or liability. Statement 113 provides further guidance for determining the transfer of significant insurance risk for reinsurance arrangements. Those contracts that do not transfer significant insurance risk are accounted for as deposits (similar to a financing or loan, with loan repayments taking the form of periodic insurance premium payments).

Regardless of whether a policyholder is a noninsurance or insurance enterprise, only to the extent that an insurance (or reinsurance) contract indemnifies or transfers significant insurance risk from the policyholder to the insurer does it qualify for insurance accounting. This project’s objective is to define an insurance contract and provide further assistance in identifying those contracts that transfer significant insurance risk. In the Invitation to Comment, the Board requested feedback on draft definitions of insurance contract and insurance risk as well as the notion of bifurcation of insurance contracts into risk transfer and financing segments for purposes of establishing the appropriate accounting for those contract segments.

Contact Information

 

Mark Trench
Project Manager
metrench@fasb.org