United States

Accounting for freestanding insurance contracts under ASU 2016-13


At its March 11, 2020 meeting, the Financial Accounting Standards Board (FASB) discussed the accounting for insurance recovery assets from certain freestanding insurance contracts (such as lender-paid mortgage insurance, investor-paid mortgage insurance, lender loss participation and pool insurance) covering credit losses on financial instruments. Although no decisions were made by the FASB on this matter, its staff concluded that it would be appropriate for an insurance recovery asset to be recognized at the time of recording insured expected credit losses under Accounting Standards Update 2016-13, Financial Instruments – Credit Losses, if such freestanding insurance contracts (a) are not accounted for as a derivative because they meet the scope exception for certain insurance or financial guarantee contracts in paragraph 815-10-15-13(c) and (d) of the FASB’s Accounting Standards Codification (ASC) and (b) pass the risk transfer test in ASC 340-30, “Other Assets and Deferred Costs – Insurance Contracts That Do Not Transfer Insurance Risk,” and ASC 944-20, “Financial Services – Insurance – Insurance Activities.” 

Under this view, the recovery asset would be estimated using assumptions consistent with those used for the loss estimate. Although the timing of the recognition of the loss and insurance receivable would be aligned, the effect of the freestanding contract would be recorded outside the allowance for credit losses (in accordance with ASC 326-20-30-12, which states that a freestanding contract, such as a freestanding insurance contract, may not offset the expected credit losses on that asset). In other words, the insurance receivable and related recovery would not be recognized as a reduction of the allowance for credit losses or credit loss expense, but rather would be classified as a receivable, recognized through gain recognition. 

The FASB staff also noted that other views, such as recording the insurance recovery asset on an incurred basis, are appropriate. However, the staff believes it would be inappropriate to extend the staff conclusions to other freestanding contracts, such as credit default swaps or similar instruments.

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