NAIC SSAP 62R

Question 1

Accounting treatment of prospective and retrospective reinsurance according to SAP

Answer 1

Prospective:
* if there is a claim, then loss reserves increase

Retrospective:
* if there is a claim, then loss reserve do NOT increase
* the claim amount is recorded as a write-in liability

Question 2

What is a novation?

Answer 2

• an issuance of a new contract
• releases the primary insurer of all liability
• may be eligible for reinsurance accounting treatment but not in these situations:
  1. retroactive reinsurance
  2. novation with an affiliated company

Question 3

Items a regulator might consider before approving a reinsurance accounting treatment for a runoff agreement?

Answer 3

• reinsurer is properly licensed
• contract must meet normal risk transfer requirements
• policy limits & coverage don’t change (liabilities being transferred “as is”)
• reinsurer must be rated at least as high as cedant by 2 different rating agencies (otherwise primary insurer could dump their book onto a weak insurer and possibly expose the policyholders to increased risk)

Question 4

Classifying Reinsurance Contracts (Decision tree)

Answer 4

• Contracts with anniversary date before 1994 > grandfathered in
• UW & timing risk?
• Reasonably possible that the reinsurer may realize a significant loss?
• Substantially all?
• Only reinsure losses from insured events that may occur after the date the contract is entered into? > prospective reinsurance, otherwise retrospective reinsurance