FASB Insurance Contracts Proposal Would Apply To Non-Insurance Companies

If adopted, a proposed Accounting Standards Update from the FASB relating to accounting for insurance contracts would apply to many companies that are not insurance companies because of a broad proposed definition of an "insurance contract." Contracts such as product warranties, financial guarantees, performance bonds, standby letters of credit, merger and acquisition guarantees, minimum revenue guarantees, and other contracts that are issued by banks, guarantors, service providers, and other non-insurance companies—in addition to contracts issued by insurance companies—would come within the scope of the definition.

The Accounting Standards Update defines an insurance contract as "a contract under which one party (the issuing entity) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or its designated beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder." "Insurance risk" is defined as the risk arising from uncertainties about the amount of net cash flows from premiums, commissions, claims, and claim settlement expenses paid under a contract, as opposed to "financial risk," which is the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity...