long-duration contract

This Subtopic applies Topic 815's derivative and hedging guidance to insurance entities, chiefly for long-duration contracts such as variable annuities. Its core rules are that a traditional variable annuity contract is not a hybrid instrument containing an embedded derivative requiring bifurcation (815-944-25-1 through 25-2), that the traditional variable annuity serves as the host contract for a nontraditional variable annuity whose other features (excluding market risk benefits) may be embedded derivatives (815-944-25-5), and that these conclusions are exceptions that may not be analogized to other structures (815-944-25-3, 25-6). It also illustrates when an insurer may apply cash flow hedge accounting to forecasted interest credited on surrenderable fixed-rate contracts.

ASC 944-20 sets the framework for insurance accounting based on the nature of the contract rather than the type of entity: contracts are classified at inception as short-duration (fixed short coverage period, insurer can cancel or reprice each period, 944-20-15-7) or long-duration (not subject to unilateral change, services rendered over an extended period, 944-20-15-10), with sub-models for traditional, universal life-type, participating, and financial guarantee contracts. It also defines when a contract with a reinsurer actually transfers insurance risk (significant insurance risk plus reasonable possibility of significant loss, 944-20-15-41) and prescribes recognition and with-and-without measurement for multiple-year retrospectively rated contracts. Contracts lacking indemnification or significant insurance risk are accounted for under the deposit method (340-30) or as investment contracts.