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FASB: Split Risk, Financing Info

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The Financial Accounting Standards Board may require financial reports to show whether insurance contracts are financing vehicles rather than vehicles for transferring insurance risk.

FASB, Norwalk, Conn., has published an invitation for members of the public to comment on the idea of “Bifurcation of Insurance and Reinsurance Contracts for Financial Reporting.”

FASB is looking into “bifurcating,” or splitting, contract reporting because of stories about some companies using “finite reinsurance” arrangements to dress up financial statements without actually transferring ordinary forms of insurable risk, such as the risk of dying or the risk of suffering from a catastrophic illness, FASB says.

FASB says it is looking into the possibility of dividing insurance contracts into 2 main categories: contracts that mainly transfer insurance risk and contracts that include financing components as well as (or instead of) transfers of insurance risk.

Organizations could use existing accounting guidelines to report transfers of insurance risk. Policyholders could record premiums for those transfers as expenses and record any insurance recoveries as gains in income, FASB says.

Financing components would be accounted for as deposits. Policyholders could record those components as assets. For those components, “any recovery from an insured event would reduce the deposit and not have a significant income statement benefit,” FASB says.

FASB is asking members of the public to discuss the definition of insurance risk and whether insurance and reinsurance contracts should be bifurcated into insurance and deposit components.

FASB also is asking for comments about which contracts should be bifurcated and how the contracts should be bifurcated.

Under Generally Accepted Accounting Principles, “insurance risk” requires both “underwriting risk” and “timing risk,” according to FASB.

Underwriting risk includes matters such as the frequency and severity of claims, and timing risk includes matters such as when claims might be paid, FASB says.

“For life insurance, although death is certain, the timing of the death and the existence of insurance coverage at the time of death are not,” FASB says.

A copy of the invitation for comment is on the Web at Document Link