B.3 Reinsurance

Question 1

How FAS 113 governs GAAP Accounting for reinsurance

Answer 1

1. assumption reins:
   - ceding company removes the assets and liab related to the reins contract
   - immediately reflect g/l in income
2. indemnity insurance
   - ceding company reports reins receivable assets separately
   - reduce DAC to reflect reins items associated with recoverability of acquisition costs

if a reins treaty doesnt satisfy the risk transfer rules:

• classify contract as investment
• report assets transferred form reins to ceding company as deposit liabilities on the ceding company’s balance sheet… report as an asset on reins balance sheet
• reins fees are reported as expenses for ceding company, income for reins

Question 2

Qualification as reinsurance under FAS 113

Answer 2

• there must be a reasonable possibility that the reins may realize a significant loss
• qualitative approach: if treaty transfers “substantially all the insurance risk on the reins portions”
• quantitative approach:
• set a numerical definition for significant loss
• set probability threshold for sig loss
• project results under various scenarios
• if significant loss occurs with probability greater than the threshold amount, it satisfies FAS 113

Question 3

FAS 113: Accounting for Reins on FAS 60 - Coinsurance

Answer 3

pg 114 for formula example

• goal is to adjust the original direct GAAP book profit to reflect the reins items and ultimately arrive at GAAP book profit net of reins
• net GAAP book profit is a level % of both ceded and net premium income
• ceding company profit margins are higher than w/o reins because EA received > expenses paid

Question 4

FAS 113: Accounting for Reins on FAS 60 - Modified coinsurance

Answer 4

Modco works like coins with the following exception

1. cede retains all assets
2. reins pays a modco adjustment to cede
3. the modco adjustment is treated as an additional stream of income to the cede company for GAAP purposes

**the modco interest rate drives all the differences with regular coins

Question 5

FAS 113: Accounting for Reins on FAS 60 - YRT

Answer 5

• reins will charge YRT premiums on the ceded portion of the NAR
• cant scale like coins. profit wont emerge as a level % of net retained premiums
• for the reins, profit will still emerge as level % of ceded premiums