FASB and the International Accounting Standards Board (IASB) reached tentative decisions on reinsurance and issues related to policy loans and contract modifications, including riders, in their ongoing, joint convergence project on insurance.
The progress on insurance during last week’s joint board meeting was reported on FASB’s website, where the full text of the decisions is posted. FASB also made decisions last week in its financial instruments project on classification and measurement and impairment.
The boards differed in their tentative decisions on one aspect of reinsurance. FASB tentatively decided that a reinsurer should apply the building block approach rather than the premium allocation approach if either of the following conditions is met at the contract inception date:
- Before a claim is incurred, it is likely that there will be a significant change in the expectations of the net cash flows required to fulfill the contract, or
- Significant judgment is required to allocate the premium to the insurer’s obligation to each reporting period.
FASB tentatively decided that a cedant should account for a
reinsurance contract using the same approach (building block or
premium allocation) that the cedant uses to account for the underlying
direct insurance contracts. Contracts that reinsure insurance
contracts measured using both approaches should be separated on the
basis of the underlying measurement model. Each component should be
accounted for using the same approach used in the underlying direct
insurance contracts.
The IASB tentatively decided that the cedant and reinsurer should evaluate which approach to use in the same manner in which an insurer would evaluate a direct insurance contract. Premium allocation would be permitted if it would produce measurements that are a reasonable proxy to those produced by the building block approach.
The boards will continue their discussions on insurance in May.
—Ken Tysiac (
ktysiac@aicpa.org
) is a JofA senior editor.
