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!

Definition of Financial Guarantee

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 protects the lender if the borrower defaults.

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 the 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 ← recall that you are not responsible for the material on long-duration contracts
• prospective or retrospective

Review of Reinsurance Accounting Concepts

#	Topic	What Matters for Exam 6-US
1	Two Conditions for Reinsurance Accounting	Significant insurance risk must be transferred Significant loss to reinsurer must be reasonably possible
2	Definition of Significant Insurance Risk	Insurance risk must include: Uncertainty in amount of losses Uncertainty in timing of losses
3	Mechanics of the Significant-Loss Test	GAAP rules underlying ERD/10-10 logic: PV of all cash flows One consistent discount rate Include all cash flows between parties Use gross premiums (no expense netting)
4	Reasonably Possible Scenario Requirement	A scenario is considered valid only if: The entire set of assumptions can reasonably occur together (Prevents cherry-picking assumptions.)
5	"Substantially All" Exception	Risk transfer may still exist if significant loss is not possible, provided: Reinsurer assumes substantially all risk Cedant retains no more than trivial risk Reinsurer's economics ≈ direct writer
6	Deposit Accounting Trigger	If no indemnification of insurance risk exists: Ceded premium treated as a deposit No reserve credit / no reinsurance accounting
7	Prospective vs. Retroactive Reinsurance	Conceptual distinctions: Prospective reinsures future events Retroactive reinsures past events Some treaties contain both types

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