Hi AO,
I recently ran into an accounting issue with how a client’s insurance company should record collaterals on its balance sheet, and was wondering if I could get some help from you guys.
Client writes a guarantee product that provides payment to banks in the event that the borrowers (policy holders) are unable to fulfill their payment obligations to the bank. Loans between borrowers and banks are always collateralized and the rights on collaterals are transferred to the insurer after it makes payment to the bank. The insurer also has several reinsurance contracts in place to transfer its losses.
The claim procedure goes as follows:
1. Policy holder (borrower) defaults on its loan to the bank.
2. Insurer pays the bank and receives rights to the borrower’s collateral from the bank.
3. Insurer notifies reinsurers that it has paid a loss and seeks reinsurance recoverable, typically reinsurers will first pay close to the full amount requested without deducting value of the collateral.
4. Insurer sells the collaterals and then sends some of that money back to reinsurers.
Client currently does not record collaterals on its balance sheet before they are sold, and only records an estimated recoverable amount from collaterals as negative case reserves. Client however, would like to record these collaterals on its balance sheet after it receives the rights. The problem arises with the reinsurance contracts, because if the collaterals are recorded as assets on client’s balance sheet, even before they could be sold, then the client will have to pay some amount of money back to its reinsurers, or reduce reinsurance recoverable. Because the final amounts that can be received from selling collaterals are unknown, this creates a huge uncertainty for both reinsurers and the insurer.
Has anyone run into an issue with this or has an idea on how this could be handled? Any ideas would be appreciated, thanks!
I recently ran into an accounting issue with how a client’s insurance company should record collaterals on its balance sheet, and was wondering if I could get some help from you guys.
Client writes a guarantee product that provides payment to banks in the event that the borrowers (policy holders) are unable to fulfill their payment obligations to the bank. Loans between borrowers and banks are always collateralized and the rights on collaterals are transferred to the insurer after it makes payment to the bank. The insurer also has several reinsurance contracts in place to transfer its losses.
The claim procedure goes as follows:
1. Policy holder (borrower) defaults on its loan to the bank.
2. Insurer pays the bank and receives rights to the borrower’s collateral from the bank.
3. Insurer notifies reinsurers that it has paid a loss and seeks reinsurance recoverable, typically reinsurers will first pay close to the full amount requested without deducting value of the collateral.
4. Insurer sells the collaterals and then sends some of that money back to reinsurers.
Client currently does not record collaterals on its balance sheet before they are sold, and only records an estimated recoverable amount from collaterals as negative case reserves. Client however, would like to record these collaterals on its balance sheet after it receives the rights. The problem arises with the reinsurance contracts, because if the collaterals are recorded as assets on client’s balance sheet, even before they could be sold, then the client will have to pay some amount of money back to its reinsurers, or reduce reinsurance recoverable. Because the final amounts that can be received from selling collaterals are unknown, this creates a huge uncertainty for both reinsurers and the insurer.
Has anyone run into an issue with this or has an idea on how this could be handled? Any ideas would be appreciated, thanks!
How do you record collateral on your B.S?