FASB.944

Reading: Accounting Standards Codification 944, “Financial Guarantee Insurance Contracts,” 2011, Section 15, Scope and Scope Exceptions, paragraphs:

• 1-2
• 5-7
• 34-35
• 41-44
• 49-54

Candidates are not responsible for material relating to long-duration contracts and/or life insurance.

Author: Financial Accounting Standards Board

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BA Quick-Summary: FASB 944 - Financial Guarantee Contracts This paper provides guidance from FASB regarding Financial Guarantee insurance contracts.

Study Tips

Virtually all of the content in this reading is covered in other reinsurance readings. The only thing you might want to learn is the definition of financial guarantee insurance.

BattleTable

• this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.

reference	part (a)	part (b)	part (c)	part (d)
no prior questions

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In Plain English!

A financial guarantee is a non-cancellable indemnity bond backed by an insurer to guarantee investors that principal and interest payments will be made. Or in simpler terms:

• it covers a lender from the liability resulting from the borrower defaulting on a loan

The reading draws a distinction between short and long-duration contracts. A short-duration contract is characterized by:

• providing insurance protection for a fixed period of short duration (pretty darn obvious!)
• enabling insurer to cancel the contract or adjust the provision at the end of the contract period

Financial reporting of a reinsurance contract depends on whether the contract is:

• short or long-duration
• prospective or retrospective

1. Two Conditions for Reinsurance Accounting

From ASC 944, reinsurance accounting applies only if:

• Significant insurance risk is transferred
• A significant loss to the reinsurer is reasonably possible

(See paragraphs 15-41 in the source.)

2. Definition of "Significant Insurance Risk"

ASC 944 clarifies that insurance risk must include:

• Uncertainty in the amount of losses
• Uncertainty in the timing of losses

(This aligns with Freihaut's definition of underwriting risk + timing risk.)

3. Mechanics of the Significant-Loss Test

ASC 944 establishes the GAAP framework that underlies ERD logic:

• Use the present value of all cash flows
• Use one consistent discount rate
• Include all cash flows between insurer and reinsurer (regardless of labeling)
• Use gross premiums (no expense netting)

(See paragraphs 15-49 through 15-51.)

4. "Reasonably Possible Scenario" Requirement

A scenario is considered reasonably possible only if:

• The entire set of assumptions could reasonably occur together

(This prevents cherry-picking favorable assumptions.)

5. The Narrow "Substantially All" Exception

Risk transfer may still exist even without a significant-loss possibility if:

• The reinsurer assumes substantially all of the insurance risk
• The cedant retains no more than trivial risk
• The reinsurer’s economics are virtually equivalent to directly writing the business

(See paragraphs 15-53 and 15-54. This corresponds to Freihaut’s Method 2.)

6. If No Risk Transfer → Deposit Accounting

ASC 944 reiterates:

• Without indemnification of insurance risk, ceded premium is treated as a deposit

(This is the accounting consequence of failing risk transfer.)

7. Prospective vs. Retroactive Reinsurance

Conceptual distinctions relevant to interpreting contract structure:

• Prospective reinsurance covers future insured events
• Retroactive reinsurance covers past insured events
• Contracts may include both elements

(Useful context, but lightly tested.)

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