Project Updates
Insurance—Risk Transfer
Last Updated: December 10, 2007 (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 Tentative Decisions 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
The Board plans to issue an Exposure Draft in the second quarter of 2008 that will (1) clarify the level of insurance risk transfer required for a contract to be accounted for as reinsurance, (2) clarify that noninsurance entity policyholders must evaluate whether contracts they hold transfer significant insurance risk, and (3) improve insurance and reinsurance disclosure requirements.
Summary of Tentative Decisions to Date
The Board reached the following decisions:
- The risk transfer conditions of FASB Statement No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, should be applied to insurance contracts between noninsurance enterprise policyholders and insurers.
- The risk transfer conditions of Statement 113, as amended and discussed at a prior Board meeting, should be amended to include a qualitative screen prior to the quantitative test (paragraph 9(b) of Statement 113) that would allow those insurance and reinsurance contracts that transfer all but a trivial amount of insurance risk to pass risk transfer. Further, if the qualitative screen is failed, a quantitative test pursuant to paragraph 9(b) would be used to determine if it is reasonably possible that a significant loss may be realized.
- FASB Statement No. 5, Accounting for Contingencies, should be amended to incorporate the amended guidance for insurance risk transfer conditions in Statement 113 (modified for insurance contracts).
- Disclosure requirements should be developed to enhance users’ understanding of an entity’s insurance and reinsurance activities and the related accounting.
- The Exposure Draft would provide transition guidance on retrospective application of the amended insurance risk transfer but would include a question requesting commentary on an entity’s ability to apply retrospective transition.
- The Exposure Draft should be effective for financial statements issued for fiscal years beginning after December 15, 2008. Earlier application would not be permitted.
- The exposure period of the Exposure Draft should be either 90 days or 120 days based on its release date coinciding with an entity’s year-end reporting requirements.
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.
| 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
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