SSAP 62 Flashcards
What contract provisions affect accounting practices?
-reporting responsibility of the ceding entity
-payment terms (time schedules)
-payment of premium taxes (who does it? usually ceding)
-termination
-cut-off: reinsurer not responsible for losses incurred after termination
- run-off: responsible for PIF at termination of the contract
-insolvency clause: reinsurers obligations maintained if ceding company goes insolvent
What are the required terms of a reinsurance agreement?
-contains insolvency clause
-recoveries due to ceding must be available without delay
-no guarantee of profit
-reporting of P/L at least quarterly, unless no activity
-if reinsurance intermediary, reinsurer is responsible for credit risk
-funding clause (for certified reinsurers), they must provide enough security such that insurer does not incur any financial statement penalty
Additional required terms for retroactive reinsurance
-premium paid is fixed
-can’t cancel without dom com permission
-no loss sensitive adjustments
-no direct or indirect compensation
What contract provisions should you examine when doing risk transfer testing?
any provisions that…
-limit amount of reinsurance risk (refunds, adjustable features)
-delay the timely reimbursement
2 basic requirements for reinsurance risk transfer
- must transfer insurance risk
-must be a reasonable chance for a substantial loss suffered by the reinsurer (unless “substantially all” risk is ceded)
Prospective Reinsurance Accounting
-premiums are reduction in EP/WP
-changes in recoverables are changes in losses incurred in IS
-reins recoverable is admitted asset
-reins recoverable on unpaid loss is netted out of reserves
- only take credit for non-prop reins when gross incurred > attachment point
-reinstatement prems are earned over period from reinstatement to expiration
Retroactive Reinsurance Def
-covers past insurable events
-with exceptions, if signed after 9 months since effective date, its retroactive
Exceptions to retroactive reinsurance 9 months after rule
-facultative contracts
-rensurance agreements when one of parties is in conservation, rehab, receivership, or liquidation
-more than one reinsurer agreements which are signed by lead reinsurer within 9 months
-other bs
Ceding company retroactive reinsurance accounting
reserves are gross of reinsurance
recoverables are a contra liability (retro reins reserve ceded)
gain is special surplus until recov > premium then unassigned surplus
special surplus reflects change in ceded reserves
initial gain is write-in for other income
premium reduces assets (cash)
Transfer of special surplus to unassigned surplus (retroactive reinsurance)
limited to the lesser of:
-the actual amount recovered in excess of the consideration paid
-the initial surplus gain resulting from the retroactive contract
after contract is over, remaining balance is transferred over
assuming company retroactive reinsurance accounting
The assumed retroactive reinsurance is excluded from the existing reserves.
Instead, it is recorded as a liability, “Retroactive Reinsurance Reserve Assumed”.
The loss is recorded as a write in item, “Retroactive Reinsurance Loss” under Other Income.
The consideration received increases the assets
What reinsurance agreements DO NOT receive retroactive reinsurance accounting treatment?
structured settlement annuities
novations
run offs
intercompany reinsurance agreements
termination of reinsurance treaties entered into in ordinary business
What accounting is for retroactive agreements with affiliates?
deposit accounting
no deduction in loss reserves, premium is a deposit.
What is a novation>
insurers obligations are extinguished
for reinsurance accounting…
- parties are not affiliates (if so, need reg approval)
-will not be changed from retro to pros accounting
Novation accounting treatment
-amounts paid are deductions in EP/WP
-novated balances are written off in original accounts
-assuming records EP/WP and incurred losses
claims made reinsurance accounting
-covering claims to be reported in the future that occurred before entering is retroactive
-if primary CM policy then prospective
When are funds held or deposited with reinsured companies an admitted asset?
as long as funds do not exceed associated liabilities
reinsured is solvent
-interest earned is aggregate write in for misc income (Other Income)
What should an assuming insurer do if they receive advance premium?
record as a liability to offset cash asset
can’t be income until the effective date
if premium is received after effective but before due date, reduce deferred but not yet due asset
If theres no due date for reinsurance premiums in the contract when are they due?
30 days after one of….
-date when notice of premium is provided
-date at which assuming entity books the premium
When are reinsurance premiums over 90 days overdue considered admitted?
If reinsurer maintains UEPR and reserves due to the ceding entity
or
ceding entity is licensed and in good standing
ceded reinsurance info
ceded premiums payable net of ceding commissions are a liability
Adjustable features accounting
needs to accrue for these commissions
-contingent : percent of profit
- sliding scale: based on actual experience
if premium is adjusted, accrue a liability for additional premium
if amount of coveragr adjusted, asset or liability is established by adjusting initial premium for change in coverage
change in coverage can be change in probability or amount of potential future recoverables
Multiplie Year retrospectively rated contracts
-events in one year influence the terms of the next years agreement
-at least a part of retrospective rating is obligatory
for reinsurance accounting, risk transfer and reasonable estimate ultimate premium
How should we account for when a ceding company needs to make additional payments to get more coverage?
two transaction split
- expanded coverage received from pmt
- loss cedant incurred that is generating the pmt
e.g. cedant bought $6 cov for $1, pays $4 more for $6 more if loss occurs
prem new cov = $1
prem for reimbursemt of loss = 4 - 1 = $3
What are commissions payable an offset to?
agent’s balances
commissions receivable are an offset to ceded reinsurance payable
ceded to certified reinsurer treatment
if receives a downgrade, effective immediately
if receives upgrade, effective in any contracts after
Syndicated letter of credit
LOC from multiple banks
-agent bank issues a LOC to the ceding on behalf of all issuing banks (group)
for ceding to benefit….
- all banks must be qualified / NAIC SVO certified banks
- banks are severally and not jointly liable
- specific percentages for each bank are in the LOC
What is required for recoverables to be in dispute, officially?
insurer needs WRITTEN communication
Commutation accounting treatment for the insurer
no more reinsurance recoverable
cash paid is negative paid loss
gain/loss is UW income
Commutation accounting treatment for the reinsurer
eliminate reserves, record payment made
gain/loss is UW income
Key aspects of deposit accounting
ceding company records premium as deposit (assuming is liability)
-deposit is admitted if assuming is licensed, funds are held by ceding
-cant reduce reserves
-deposit adjusted for pmts to date and e[future pmts] at each reporting date , if upward (assuming interest expense)
ceding will increase deposit, liability, interest income, incurred loss
What is needed to approved a run-off agreement?
-assuming is licensed
-same limits and coverages in original contract
-no adjustable features, profit sharing, loss sensitivity
-reinsurer need 2+ fin strength ratings >= insurer
-can’t cancel
-reinsurer is responsible for all assessments on business (GFs, e.g)
Accounting treatment for run-offs, transferring entity
-pmt is paid loss
if pmt < reserves transferred (recorded as decrease in incurred loss)
-recoverables increase by transferred reserve
Accounting treatment for run-offs, assuming entity
-transactions are recorded in same LOB, same detail as transferring
-premium is negative paid loss
