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.