Chapter 5 — Application of the CECL Model to Off-Balance-Sheet Commitments, Trade and Lease Receivables, and Reinsurance Receivables

5.4 Reinsurance Receivables

A reinsurance transaction is one in which a reinsurer (an assuming entity) assumes all or part of a risk undertaken originally by another insurer (a ceding entity) for consideration. As noted in Chapter 2, ASC 326-20 applies to all reinsurance receivables that result from insurance transactions within the scope of ASC 944 regardless of the underlying measurement basis of the receivables (i.e., measured at amortized cost or on a discounted basis). The CECL model does not have any special provisions or guidance that specifically applies to reinsurance receivables. However, we believe that an entity will need to carefully consider the following when applying the CECL model to reinsurance receivables:

Isolating credit risk — Determining what portion of the collectibility concerns about reinsurance receivables is related to credit risk versus other risks (e.g., dispute risk, legal risk).
Unit of account — ASC 326-20 requires entities to perform a collective assessment if the reinsurance receivables share similar risk characteristics.

5.4.1 Isolating Credit Risk

Before being amended by ASU 2016-13, ASC 944-310-35-4 stated, in part, that “the ceding entity shall assess the collectibility of those [reinsurance] recoverables in accordance with Subtopic 450-20.” Accordingly, under current U.S. GAAP, an entity is not required to consider the reasons why collectibility concerns exist. Rather, ASC 944 requires entities to evaluate such concerns in accordance with ASC 450-20, even if they result from a combination of different risks associated with the asset.

However, ASU 2016-13 amended ASC 944-310-35-4 to state that although “[a]n entity shall measure contingent losses relating to disputed amounts in accordance with Subtopic 450-20 on loss contingencies[,] the ceding entity shall measure expected credit losses relating to reinsurance recoverables in accordance with Subtopic 326-20 on financial instruments measured at amortized cost” (emphasis added). Consequently, under ASU 2016-13, an entity is required to isolate the collectibility concerns that are related only to credit risk and measure the expected credit losses in accordance with ASC 326. The requirement to bifurcate risks to isolate credit risk may be challenging for entities that have reinsurance receivables.

5.4.2 Unit of Account

As described in Chapter 3, the CECL model does not prescribe a unit of account (e.g., an individual asset or a group of financial assets) in the measurement of expected credit losses. However, an entity is required to evaluate financial assets within the scope of the model on a collective (i.e., pool) basis when assets share similar risk characteristics. If a financial asset’s risk characteristics are not similar to those of any of the entity’s other financial assets, the entity would evaluate that asset individually.

Although entities will be required to use judgment when evaluating the risk characteristics of all financial assets, they will need to pay particular attention to the specific risk characteristics of reinsurance receivables. Example 17 in ASC 326-20 illustrates the evaluation of different types of risks related to reinsurance receivables.

ASC 326-20

Example 17: Identifying Similar Risk Characteristics in Reinsurance Recoverables

55-81 Reinsurance recoverables may comprise a variety of risks that affect collectibility including:

Credit risk of the reinsurer/assuming company
Contractual coverage disputes between the reinsurer/assuming company and the insurer/ceding company including contract administration issues
Other noncontractual, noncoverage issues including reinsurance billing and allocation issues.

55-82 This Subtopic only requires measurement of expected losses related to the credit risk of the reinsurer/assuming company.

55-83 In situations in which similar risk characteristics are not present in the reinsurance recoverables, the ceding insurer should measure expected credit losses on an individual basis. Similar risk characteristics may not exist because any one or a combination of the following factors exists, including, but not limited to:

Customized reinsurance agreements associated with individual risk geographies
Different size and financial conditions of reinsurers that may be either domestic or international
Different attachment points among reinsurance agreements
Different collateral terms of the reinsurance agreements (such as collateral trusts or letters of credit)
The existence of state-sponsored reinsurance programs.

55-84 However, similar risk characteristics may exist for certain reinsurance recoverables because any one or combination of the following exists:

Reinsurance agreements that have standardized terms
Reinsurance agreements that involve similar insured risks and underwriting practices
Reinsurance counterparties that have similar financial characteristics and face similar economic conditions.

55-85 Judgment should be applied by ceding insurers in determining if and when similar risks exist within their reinsurance recoverables.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.