SSAP 62

Question 1

5 benefits of reinsurance:

Answer 1

1. expands capacity
2. shares large risks
3. spreads the risk of catastrophes/ stabilizes underwriting results
4. aids in withdrawing from line
5. reduces net liability to amounts appropriate to the insurers financial resources

Question 2

2 classes of reinsurance contracts:

Answer 2

1. treaty: transfers the entire class

2. facultative: transfers individual risks

Question 3

Contract provisions included in most reinsurance contracts:

Answer 3

• Reporting responsibility of the ceding entity: contains the time schedules to report losses.
• Payment terms: contains time schedules to make payments, currencies that the payments must be made in, and the rights of parties to withhold funds.
• Payment of premium taxes: indicates which party needs to pay the premium taxes
• Termination: This can either be on a cut-off or run-off basis
• Insolvency clause: claims that the reinsurer’s obligations will be maintained (without any reduction) in the event of insolvency of the ceding company.

Question 4

4 criteria that the reinsurance agreement must meet in order to qualify as having risk transfer:

Answer 4

1. the reinsurance agreement must contain an insolvency clause
2. recoveries due to the ceding company must be available without delay
3. the agreement should provide no guarantee of profit for either party
4. the agreement must provide for reporting of premiums & losses at least quarterly, unless there is no activity.

Question 5

4 additional criteria that retroactive reinsurance require for risk transfer:

Answer 5

1. the premium paid must be a specific, fixed amount stated in the agreement
2. direct or indirect compensation to the ceding company or reinsurer is prohibited
3. also prohibited is a provision for adjustment based on the actual experience, (except in the case where the ceding company can participate in the reinsurer’s profit)
4. the contract shall not be cancelled or rescinded without approval of the commissioner of the domiciliary state of the ceding company.

Question 6

2 components of Insurance Risk:

Answer 6

1. the ultimate amount of net cash flows (underwriting risk)

2. the timing of those cash flows (timing risk)

Question 7

Procedure to test that it is reasonably possible for the reinsurer to realize a significant loss:

Answer 7

Compare the present value of the cash flows between the ceding and assuming enterprise

Question 8

Briefly describe the accounting treatment of prospective reinsurance:

Answer 8

• Amounts paid for prospective reinsurance shall be reported as a reduction to written and earned premiums.
• Changes in the estimated reinsurance recoverables are recognized as changes in losses incurred in the income statement.
• Reinsurance recoverable on loss payments is an admitted asset.
• Reinsurance recoverable on unpaid losses is recognized by reducing the respective reserves

Question 9

Briefly describe the ceding company’s accounting treatment of retroactive reinsurance:

Answer 9

• reserves are recorded on a gross basis. The recoverables are recorded as a contra liability.
• any surplus gain from the retroactive transaction should be recorded as a special surplus fund.
• this gain shall not be classified as unassigned funds until the actual retroactive reinsurance recovered exceeds the consideration paid.
• the initial gain should be recorded as a write in item in the statement of income, identified as “Retroactive Reinsurance Gain”.
• The consideration paid reduces the assets

Question 10

Describe the accounting treatment of novations:

Answer 10

Accounted for as prospective reinsurance agreements.

• the amounts paid shall be recorded as a reduction of written or earned premium
• novated balances shall be written off the accounts where they were originally recorded
• the assuming insurer shall report the amounts received as WP or EP, and obligations assumed as incurred losses.

Question 11

Criteria for funds held or deposited with reinsured companies to be admitted assets:

Answer 11

• they do not exceed the liabilities that they secure

* the reinsured is solvent

Question 12

Accounting treatment if the assuming insurer receives the premium prior to the effective date:

Answer 12

• Record it as a liability, and can not consider it as income until the effective date.
• If premium is received after the effective date but prior to the due date, it is recorded as a reduction to the deferred but not yet due asset.

Question 13

If there is no specific contract with a due date for reinsurance premiums, when are they considered due:

Answer 13

• 30 days after date at which notice of premium due is provided to the ceding entity; or
• 30 days after date at which the assuming entity books the premium

Question 14

Criteria for reinsurance premiums over 90 days overdue to be admitted:

Answer 14

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

Question 15

Accounting treatment if Ceding commission > Anticipated Acquisition Costs:

Answer 15

The ceding company needs to establish a liability equal to the difference between the two. This liability is amortized prorata over the effective period of the reinsurance agreement.

Question 16

Accounting treatment of uncollectible reinsurance:

Answer 16

Uncollectible balances need to be written off from the schedules in which they were originally recorded.

Question 17

Ceding company’s accounting treatment of commutations:

Answer 17

The ceding company eliminates the reinsurance recoverable, and records the cash received as a negative paid loss. Any gain/ loss is treated as underwriting income.

Question 18

Reinsurer’s accounting treatment of commutations:

Answer 18

The reinsurer will eliminate the reserves, and record the payment made to the ceding. It also recognizes the gain/ loss as underwriting income.

The commuted balances are written off the exhibits in which they were initially recorded.

Question 19

How should the reinsurance agreement be treated if it does not transfer both components of insurance risk:

Answer 19

Deposit accounting

Question 20

Briefly describe deposit accounting for the ceding company:

Answer 20

• The ceding entity records the amount paid as a deposit.
• The deposit is an admitted asset if the assuming entity is licensed, or there are funds held by the ceding company.
• The ceding company can not reduce the reserves
• At each reporting date, the amount of the deposit is adjusted to reflect both the payments made to date, and expected future payments. If the total losses are valued upwards, the ceding company will increase the deposit/ increase the outstanding loss liability/ increase the interest income/ increase the incurred losses

Question 21

Briefly describe deposit accounting for the assuming company:

Answer 21

• The assuming entity records it as a liability.
• The assuming company will record the consideration to be returned to the ceding company as a liability
• If the total losses are valued upwards, the assuming company will record an interest expense

Question 22

Describe a run-off agreement:

Answer 22

Reinsurance or retrocession agreements intended to transfer almost all the risk of a line of business that is no longer actively marketed by the (re)insurer.

Question 23

Conditions needed to receive run-off agreement accounting treatment:

Answer 23

• Assuming entity is properly licensed
• The agreement should contain the same limits and coverages as the original contract
• The agreement should not contain any adjustable features, profit sharing or retrospective rating
• The agreement must meet the requirements of risk transfer
• The 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 business being assumed
• 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

Question 24

Briefly describe transferring entitys accounting treatment of run off agreements:

Answer 24

• the payment to the reinsurer is recorded as a paid loss
• if the 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

Question 25

When is a disclosure for unsecured aggregate recoverables required & what must be disclosed.

Answer 25

If the entity has unsecured aggregate recoverables with any individual reinsurers for reserves and UEPR over 3% of the ceding company’s surplus, it must list each reinsurer and the unsecured aggregate recoverable pertaining to that reinsurer.

Question 26

When is a disclosure for reinsurance recoverables in dispute required

Answer 26

Reinsurance recoverable in dispute shall be identified if:

• the amounts in dispute from any entity exceeds 5% of the ceding entity’s surplus,
• the aggregate from all entities exceeds 10% of the surplus.

Question 27

What needs to be disclosed about uncollectible reinsurance was written off during the year:

Answer 27

• name of reinsurer
• losses incurred
• LAE incurred
• premiums earned

Question 28

What needs to be disclosed when there is a commutation:

Answer 28

• name of reinsurer
• losses incurred
• LAE incurred
• premiums earned

Question 29

What needs to be disclosed in the “Reinsurance Assumed & Ceded” section of the Notes to the financial statements:

Answer 29

• the maximum return commission due to the reinsurers if all reinsurance cancelled
• the accrual of additional or return commission based on the loss experience