Section F Flashcards
If a reinsurance agreement involves multiple cedants, an allocation agreement is required with these 2 characteristics
in writing
terms must be fair and equitable
The “realizing a significant loss” element of reinsurance can also be met if
substantially all of the insurance risk related to the reinsured poriton has been assumed by the reinsurer
If a certified reinsurer receives an upgrade to its rating,
the upgrade will apply on a prospective basis (conservative)
If a certified reinsurer receives a downgrade to its rating,
it applies on a retroactive basis
Describe the reinsurer accounting treatment of runoff agreements
premium received is a negative paid loss
transaction stay in same LOB and level of detail
large line capacity
the insurer’s maximum exposure appetite to an individual policy or location
Under GAAP accounting, retroactive reinsurance is treated
the same as prospective, although the recognition of any gain is deferred
internal reinsurance
sharing of premium and loss among business units within the same legal entity in order to stabilize the results for an individual business unit
Commutation: taxable income for ceding
commutation price - discounted ceded reserves
ceding company’s benefit of a commutation
commutation price - discounted ceded reserves + tax benefit
tax benefit of a ceding company in a commutation
(discounted reserves - price ) * tax rate
commutation: taxable income of a reinsurer
Discounted ceded reserves - commutation price
resinsurer’s benefit from a commutation
discounted ceded reserves - commutation price - tax loss
4 reasons to enter into a commutation
exit a line of business
concerns about the other party’s solvency
end a troubled relationship
each side may believe that they are benefitting
ceding company accounting of a commutation
premium is a recovery of paid loss
eliminate the reserves ceded to the reinsurer
