The Financial Accounting Standards Board could respond to the finite reinsurance controversy by forcing policyholders to treat a portion of many types of policies, including group life and group health policies, as a deposit.
FASB, Norwalk, Conn., has released an “invitation to comment” on the idea of “bifurcating,” or splitting, financial reporting of what it describes as the “insurance risk transfer components” and the “financing components” built into insurance and reinsurance contracts.
Organizations could use existing accounting guidelines to report transfers of traditional insurance risk. Policyholders could record premiums for those transfers as expenses and record any insurance recoveries as gains in income, the authors of the invitation to comment write.
If that proposal took effect as is, organizations would have to treat financing components as deposits and include those components in reporting of assets. When the holder of a policy with a financing component collected on a claim, “any recovery from an insured event would reduce the deposit and not have a significant income statement benefit,” the authors write.
FASB would allow organizations to stick automatically with traditional expense accounting rules for policies that “unequivocally transfer significant insurance risk,” according to the invitation authors.
Those policies might include individual life insurance policies and “a single-risk reinsurance contract under which all the insurance risk in the reinsured portion of an underlying insurance contract is reviewed by the reinsurer, who may decline coverage for that risk.”
But FASB is thinking about the possibility of requiring a split in reporting for typical group health and group life insurance contracts.
“A portion of the premium for group and similar contracts compensates the insurer for the likely payment of expected claim losses,” the invitation authors write. “That arrangement is adaptable to bifurcation and deposit accounting. Similarly, portfolios of contracts that qualify individually as unequivocal insurance contracts would have expected losses. Contracts that reinsure these portfolios would not meet the unequivocal test because those contracts also would have an expected level of claim activity. Accordingly, arrangements that provide for reinsurance of any portion of business written by the reinsured would be subject to further bifurcation testing.”
In the invitation to comment, FASB is asking members of the public to discuss the definition of insurance risk and whether they like the idea of bifurcation of reporting.