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Exam 6 > Part 25 (SSAP 62R) > Flashcards

Part 25 (SSAP 62R) Flashcards

Statutory Accounting Principles for Reinsurance

1
Q

What are the benefits of Reinsurance

A
  • Expands Capacity
  • Share large risks
  • spread the risk of catastrophes and stabilize underwriting results
  • finance expanding volume (by sharing the reserves)
  • aid withdrawing from a line
  • reduce the net liability to amounts appropriate to its financial resources
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2
Q

Cut-off definition

A

Reinsurer not responsible for losses incurred after contract termination

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3
Q

Run-off definition

A

reinsurer responsible for losses from reinsured policies in force at time of termination of the contract

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4
Q

Types of Reinsurance contracts

A

Treaty (Pro Rata)
Treaty (Excess of Loss)
Treaty (Catastrophe)
Facultative (Pro Rata)
Facultative (Excess of Loss)

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5
Q

Treaty (Pro Rata) Types

A

Quota share: Reinsurer picks up portion of business, like 30% of premium and losses

Surplus share

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6
Q

Treaty (Excess of Loss) Types

A

Excess per Risk: For each single loss or insured, the reinsurance contract picks up loss in excess of threshold

Aggregate Excess of Loss: aggregate loss, reinsurance picks up losses that exceed amount.

Both have a limit which reinsurance company is responsible for

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7
Q

Treaty (Catastrophe)

A

Just another version of Excess of Loss. Deals with CATs.

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8
Q

Criteria for a reinsurance agreement

A
  • agreement contains an insolvency clause
  • recoveries dye to the ceding company must be available without delay and in appropriate format to allow for quick reimbursement
  • no guarantee of profit for either party
  • reporting of premiums and losses at least quarterly
  • reinsurance intermediary clause (says credit risk actually belongs to reinsurance company even if they don’t get paid from broker)
  • include a funding clause if reinsurer is certified (provide enough collateral to ceding company)
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9
Q

Criteria for retroactive reinsurance

A
  • the criteria listed for normal reinsurance
  • premium must be a specific, fixed amount stated in agreement
  • direct or indirect compensation to ceding company or reinsurer is prohibited
    – everything should be outlined in contract
  • also prohibited is a provision for adjustment based on the actual experience
    • in other words, ceding company can’t be charged more if a reinsurance company has losses, unless ceding company can participate in the profit
  • Contract shall not be canceled or rescinded without approval of the commissioner of the state of the ceding company
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10
Q

Requirements for reinsurance treatment qualification

A
  • Transfer of risk exists
  • Is reasonable possible for the reinsurer to realize a significant loss
    • Or substantially all criteria is met
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11
Q

Test for existence of Transfer of Risk

A

Uncertainty about both:

  • Ultimate amount of net cash flows (needs to have UW risk)
  • timing of those cash flows (needs to have timing risk)
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12
Q

What contractual features should be looked for to determine if Transfer of risk exists

A

features that

  • Limit the amount of reinsurance risk to which an insurer is subject
  • delay the timely reimbursement
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13
Q

Significant Loss determiniation

A

Look at the PV of the cash flows between the ceding and assuming enterprise

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14
Q

Substantially all clause

A

If mostly all of the insurance risk related to the reinsured portion has been assumed by the reinsurer, then there is significant loss

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15
Q

Prospective Reinsurance Rules:
Ceded premium shall be reported as what

A

a reduction to WP and EP

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16
Q

Prospective Reinsurance Rules:
Reinstatement (policies that have limits, then the reinsurance contract will end if limit is met) premium should be earned from when

A

Time of enshrinement to the expiration of the agreement

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17
Q

Prospective Reinsurance Rules:
Changes in the estimated reinsurance recoverable are recognized as what

A

changes in losses incurred in the income statement

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18
Q

Prospective Reinsurance Rules:
Reinsurance recoverable on LOSS payments is what

A

an admitted asset “reinsurance recoverable on loss and LAE payments”

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19
Q

Prospective Reinsurance Rules:
Reinsurance recoverable on Unpaid Losses is recognized how

A

by reducing the respective reserves

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20
Q

Prospective Reinsurance Rules:
Insurers should on take credit for reinsurance to what extent.

A

that the losses exceed the AP (attachment point)

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21
Q

Retroactive Reinsurance Ceding company treatment:
Reserves are recorded as what.
The recoverables are recorded as a what

A

gross

contra liability “retroactive reinsurance reserve ceded”

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22
Q

Retroactive Reinsurance Ceding company treatment:
any surplus gain should be recorded how

A

as a special surplus fund

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23
Q

Retroactive Reinsurance Ceding company treatment:
As recoveries begin to exceed the consideration paid, the excess can be converted from special surplus to what

A

unassigned funds

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24
Q

Retroactive Reinsurance Ceding company treatment:
What is the limit for unassigned funds transfer

When can the remaining balance be transferred.

A

the lesser of
- actual amount recovered in excess of the consideration paid
- initial surplus gain resulting from the retroactive contract

upon elimination of the policy obligations

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25
Q

Retroactive Reinsurance Ceding company treatment:
The special surplus also needs to be adjusted to reflect any change in what

A

the ceded reserve

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26
Q

Retroactive Reinsurance Ceding company treatment:
The initial gain should be recorded as a what

A

Write in item in other income, “retroactive reinsurance gain”

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27
Q

Retroactive Reinsurance Ceding company treatment:
What happens when consideration paid occurs

A

reduces the assets

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28
Q

Retroactive Reinsurance Assuming company treatment:
Assumed balances are excluded from what and instead recorded as what

A

Existing Reserves

A liability “ Retroactive Reinsurance Reserve Assumed”

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29
Q

Retroactive Reinsurance Assuming company treatment:
The loss is recorded as what

A

A write in item “Retroactive Reinsurance Loss” under Other Income

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30
Q

Retroactive Reinsurance Assuming company treatment:
What is affected when consideration received occurs

A

increases the assets

31
Q

What is a Novation

A

transaction where the original insurer’s obligation are completely extinguished, and so there is no more exposure to loss from the novated business

32
Q

How should Novations be treated/accounted for

A

Prospective reinsurance

33
Q

What things are affected in Novations since it is treated as prospective instead of retro

A
  • amounts paid are recorded as a reduction of WP or EP
  • Novated balances are written off
  • assuming insurer reports:
    amounts received as WP and EP and
    obligation assumed as incurred losses
34
Q

Funds held or deposited with reinsured companies are considered to be an admitted asset as long as what

A
  • the funds do not exceed the liabilities that they secure
  • the reinsured is solvent
35
Q

Interest earned on funds are treated as what

A

Other Income

36
Q

If no specified due date in contract, what assumption is used

A

It is deemed due 30 days after either of the following dates:

date at which notice of premium is provided to the ceding entity

date at which the assuming entity books the premium

37
Q

When are Reinsurance premiums nonadmitted

A

when over 90 days overdue unless;

  • reinsurer maintains UEPR and loss reserves due to the ceding entity or
  • ceding entity is licensed and in good standing
38
Q

Ceded premiums payable (net of ceding commissions) is recorded as what

A

as a liability

39
Q

If reinsurance premium is paid prior to the effective date, the prepaid item is recorded as what

A

An admitted asset

40
Q

Amounts withheld by the ceding company recorded as

A

funds held by the entity under reinsurance treaties

41
Q

Interest due or payable is recorded as a what

A

a write in for miscellaneous income

42
Q

Ceded retroactive reinsurance premiums need to be what

A

excluded from all schedules

43
Q

What are the 3 features that can be adjustable in retrospective rating

A

Commissions
Premium
Amount of Coverage

44
Q

what to know about commissions and adjusting

A

The insurer need to accrue for this

45
Q

What to know about premium and adjusting

A

accrue a liability for the additional premium due during the period of the loss event that generated the additional premium

46
Q

Amount of coverage

A

An asset/liability is established by adjusting the initial premium for the change in the amount of coverage

47
Q

Commissions payable on ceded business are treated as what

A

as an offset to Agent’s Balances

48
Q

Commissions payable on ceded business are treated as what

A

an offset to Agent’s balances

49
Q

Commissions receivable on ceded business are treated as what

A

an offset to ceded reinsurance balances payable

50
Q

Ceding commissions are designed to cover what

A

Acquisition costs

51
Q

If Ceding commissions > Anticipated Acquisition costs

A
  • the ceding company needs to establish a write in liability equal to the difference
  • this liability is amortized prorata over the effective period
52
Q

Credit for reinsurance ceded to a certified reinsurer is depended on what

A

the reinsurer’s rating

53
Q

If the rating of a certified reinsurer is upgraded how will this apply

A

on a prospective basis

the revised requirements will apply to the future incepting business

54
Q

If the rating of a certified reinsurer is downgraded how will this apply

A

on a retroactive basis

the revised requirements will apply to all in force contracts

55
Q

How long is the grace period for downgraded collateral that is needed

A

30 days

56
Q

What can classify a balance as in dispute

A

when the insurer received formal written communication to classify a balance as being in dispute

57
Q

Can the ceding insurer take credit for disputed balances

A

The may or may not choose to

58
Q

Can the ceding insurer take credit for recoverables in dispute with an affiliate

A

No

59
Q

What is a commutation

A

when a reinsurance contract is closed and money is still owed from the reinsurance company to the ceded company

60
Q

Commutation Ceding company accounting treatment

A
  • ceding company eliminates the reinsurance recoverable, and records the cash received as a negative paid loss
  • any gain/ loss is treated as underwriting income
61
Q

Commutation Reinsurer accounting treatment

A
  • eliminate the reserves, and record the payment made to the ceding
  • recognize the gain/ loss as underwriting income
62
Q

Where are the commuted balances written off

A

Off the exhibits in which they were initially recorded

63
Q

What accounting does it qualify for if it does not qualify for reinsurance

A

Deposit Accounting

64
Q

How is the amount paid recorded by the ceding company under deposit accounting

A

as a deposit

65
Q

How is the amount paid recorded by the assuming company under deposit accounting

A

as a liability

66
Q

When is the deposit an admitted asset for the ceding company

A
  • the assuming entity is licensed in the ceding company’s state of domicile or
  • there are funds held by the ceding company
67
Q

Can the ceding company reduce the reserves in deposit accounting

A

No

68
Q

The assuming company will record the consideration to be returned to the ceding company as what

A

A liability

69
Q

At each reporting date what happens to the deposit in deposit accounting

A

the amount of the deposit is adjusted to reflect both the payments made to date, and expected future payments

70
Q

If total losses are valued upwards in deposit accounting what happens to the assuming and ceding company

A
  • assuming company will record an interest expense
  • Ceding company will:
    • increase the deposit
    • increase the outstanding loss liability
    • increase the interest income
    • increase the incurred losses
71
Q

Run-off agreements

A

transfer almost all the risk of a line that is no longer actively marketed by the insurer

72
Q

Criteria to receive run-off agreement, name a few of the list

A
  • Assuming entity is properly licensed
  • Agreement should contain the same limits and coverages as the original contract
  • does not contain any adjustable features, profit sharing or retrospective rating
  • agreement meets the requirements of risk transfer
  • Assuming reinsurer must receive financial strength ratings from at least two different agencies that is at least equal to that of the transferring insurer
  • The assuming reinsurer is responsible for all assessments on the assumed business
  • The agreement must only cover liabilities of lines that are no longer actively marketed by the transferring entity
  • Neither party can cancel the agreement for any reason
73
Q

Run-off agreements accounting treatment for the transferring entity

A
  • payment to the reinsurer is recorded as a paid loss
  • if payment is less than the reserves transferred, the difference is recorded as a decrease in the losses incurred
  • The reinsurance recoverable increases by the amount of the transferred reserve
74
Q

Run-off agreements accounting treatment for the assuming entity

A
  • the transactions need to be recorded in the same line of business, and in the same level of detail as recorded by the transferring entity
  • premium received is treated as a negative paid loss

Exam 6 (31 decks)

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