Part 25 (SSAP 62R) Flashcards
Statutory Accounting Principles for Reinsurance
What are the benefits of Reinsurance
- 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
Cut-off definition
Reinsurer not responsible for losses incurred after contract termination
Run-off definition
reinsurer responsible for losses from reinsured policies in force at time of termination of the contract
Types of Reinsurance contracts
Treaty (Pro Rata)
Treaty (Excess of Loss)
Treaty (Catastrophe)
Facultative (Pro Rata)
Facultative (Excess of Loss)
Treaty (Pro Rata) Types
Quota share: Reinsurer picks up portion of business, like 30% of premium and losses
Surplus share
Treaty (Excess of Loss) Types
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
Treaty (Catastrophe)
Just another version of Excess of Loss. Deals with CATs.
Criteria for a reinsurance agreement
- 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)
Criteria for retroactive reinsurance
- 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- Contract shall not be canceled or rescinded without approval of the commissioner of the state of the ceding company
Requirements for reinsurance treatment qualification
- Transfer of risk exists
- Is reasonable possible for the reinsurer to realize a significant loss
- Or substantially all criteria is met
Test for existence of Transfer of Risk
Uncertainty about both:
- Ultimate amount of net cash flows (needs to have UW risk)
- timing of those cash flows (needs to have timing risk)
What contractual features should be looked for to determine if Transfer of risk exists
features that
- Limit the amount of reinsurance risk to which an insurer is subject
- delay the timely reimbursement
Significant Loss determiniation
Look at the PV of the cash flows between the ceding and assuming enterprise
Substantially all clause
If mostly all of the insurance risk related to the reinsured portion has been assumed by the reinsurer, then there is significant loss
Prospective Reinsurance Rules:
Ceded premium shall be reported as what
a reduction to WP and EP
Prospective Reinsurance Rules:
Reinstatement (policies that have limits, then the reinsurance contract will end if limit is met) premium should be earned from when
Time of enshrinement to the expiration of the agreement
Prospective Reinsurance Rules:
Changes in the estimated reinsurance recoverable are recognized as what
changes in losses incurred in the income statement
Prospective Reinsurance Rules:
Reinsurance recoverable on LOSS payments is what
an admitted asset “reinsurance recoverable on loss and LAE payments”
Prospective Reinsurance Rules:
Reinsurance recoverable on Unpaid Losses is recognized how
by reducing the respective reserves
Prospective Reinsurance Rules:
Insurers should on take credit for reinsurance to what extent.
that the losses exceed the AP (attachment point)
Retroactive Reinsurance Ceding company treatment:
Reserves are recorded as what.
The recoverables are recorded as a what
gross
contra liability “retroactive reinsurance reserve ceded”
Retroactive Reinsurance Ceding company treatment:
any surplus gain should be recorded how
as a special surplus fund
Retroactive Reinsurance Ceding company treatment:
As recoveries begin to exceed the consideration paid, the excess can be converted from special surplus to what
unassigned funds
Retroactive Reinsurance Ceding company treatment:
What is the limit for unassigned funds transfer
When can the remaining balance be transferred.
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
Retroactive Reinsurance Ceding company treatment:
The special surplus also needs to be adjusted to reflect any change in what
the ceded reserve
Retroactive Reinsurance Ceding company treatment:
The initial gain should be recorded as a what
Write in item in other income, “retroactive reinsurance gain”
Retroactive Reinsurance Ceding company treatment:
What happens when consideration paid occurs
reduces the assets
Retroactive Reinsurance Assuming company treatment:
Assumed balances are excluded from what and instead recorded as what
Existing Reserves
A liability “ Retroactive Reinsurance Reserve Assumed”
Retroactive Reinsurance Assuming company treatment:
The loss is recorded as what
A write in item “Retroactive Reinsurance Loss” under Other Income
Retroactive Reinsurance Assuming company treatment:
What is affected when consideration received occurs
increases the assets
What is a Novation
transaction where the original insurer’s obligation are completely extinguished, and so there is no more exposure to loss from the novated business
How should Novations be treated/accounted for
Prospective reinsurance
What things are affected in Novations since it is treated as prospective instead of retro
- 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
Funds held or deposited with reinsured companies are considered to be an admitted asset as long as what
- the funds do not exceed the liabilities that they secure
- the reinsured is solvent
Interest earned on funds are treated as what
Other Income
If no specified due date in contract, what assumption is used
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
When are Reinsurance premiums nonadmitted
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
Ceded premiums payable (net of ceding commissions) is recorded as what
as a liability
If reinsurance premium is paid prior to the effective date, the prepaid item is recorded as what
An admitted asset
Amounts withheld by the ceding company recorded as
funds held by the entity under reinsurance treaties
Interest due or payable is recorded as a what
a write in for miscellaneous income
Ceded retroactive reinsurance premiums need to be what
excluded from all schedules
What are the 3 features that can be adjustable in retrospective rating
Commissions
Premium
Amount of Coverage
what to know about commissions and adjusting
The insurer need to accrue for this
What to know about premium and adjusting
accrue a liability for the additional premium due during the period of the loss event that generated the additional premium
Amount of coverage
An asset/liability is established by adjusting the initial premium for the change in the amount of coverage
Commissions payable on ceded business are treated as what
as an offset to Agent’s Balances
Commissions payable on ceded business are treated as what
an offset to Agent’s balances
Commissions receivable on ceded business are treated as what
an offset to ceded reinsurance balances payable
Ceding commissions are designed to cover what
Acquisition costs
If Ceding commissions > Anticipated Acquisition costs
- the ceding company needs to establish a write in liability equal to the difference
- this liability is amortized prorata over the effective period
Credit for reinsurance ceded to a certified reinsurer is depended on what
the reinsurer’s rating
If the rating of a certified reinsurer is upgraded how will this apply
on a prospective basis
the revised requirements will apply to the future incepting business
If the rating of a certified reinsurer is downgraded how will this apply
on a retroactive basis
the revised requirements will apply to all in force contracts
How long is the grace period for downgraded collateral that is needed
30 days
What can classify a balance as in dispute
when the insurer received formal written communication to classify a balance as being in dispute
Can the ceding insurer take credit for disputed balances
The may or may not choose to
Can the ceding insurer take credit for recoverables in dispute with an affiliate
No
What is a commutation
when a reinsurance contract is closed and money is still owed from the reinsurance company to the ceded company
Commutation Ceding company accounting treatment
- ceding company eliminates the reinsurance recoverable, and records the cash received as a negative paid loss
- any gain/ loss is treated as underwriting income
Commutation Reinsurer accounting treatment
- eliminate the reserves, and record the payment made to the ceding
- recognize the gain/ loss as underwriting income
Where are the commuted balances written off
Off the exhibits in which they were initially recorded
What accounting does it qualify for if it does not qualify for reinsurance
Deposit Accounting
How is the amount paid recorded by the ceding company under deposit accounting
as a deposit
How is the amount paid recorded by the assuming company under deposit accounting
as a liability
When is the deposit an admitted asset for the ceding company
- the assuming entity is licensed in the ceding company’s state of domicile or
- there are funds held by the ceding company
Can the ceding company reduce the reserves in deposit accounting
No
The assuming company will record the consideration to be returned to the ceding company as what
A liability
At each reporting date what happens to the deposit in deposit accounting
the amount of the deposit is adjusted to reflect both the payments made to date, and expected future payments
If total losses are valued upwards in deposit accounting what happens to the assuming and ceding company
- 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
Run-off agreements
transfer almost all the risk of a line that is no longer actively marketed by the insurer
Criteria to receive run-off agreement, name a few of the list
- 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
Run-off agreements accounting treatment for the transferring entity
- 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
Run-off agreements accounting treatment for the assuming entity
- 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
