01.12. Reinsurance Accounting Basics

  1. Assumed Reinsurance
    • GAAP and statutory: accounting rules exist regarding the amount of risk transfer required for a contract to be categorized as reinsurance
    • reinsurance for tort liability usually splits losses and legal defense cost (=LAE). Therefore legal defense cost can be loss (insurer) or LAE (reinsurer), distorting comparisons
  2. Ceded Reinsurance
    • can record ceded reinsurance entries in the same place as corresponding direct loss
    • can record the purchase of ceded reinsurance as purchase of an asset
    • can combine the 2 approaches - U.S. GAAP treats ceded reinsurance premiums and losses as negative premiums and negative losses for income statement purposes, but treats ceded loss reserves as an asset rather than as an offset to a liability for balance sheet purposes
  3. Commutations
    • finalizes the remaining obligations under the agreement of either party to the other
    • does not negate contract - only finalizes obligations through fixed payments or series of payments
    • final payment accounted for as paid loss (reflects time value of money)
  4. Prospective vs Retrospective Reinsurance
    • examples of retro reinsurance include:
    • loss portfolio transfer
    • aggregate loss cover
    • historically, special retro reinsurance was reportedly used to generate earnings by ceding undiscounted loss reserves at discounted premium
  5. Reinsurance Reporting Lags
    • reporting requirements: specified in contract to 1) effect payment transactions, 2) provide sufficient data to assuming company to perform its own reserve analysis, and 3) enable assuming cpy to meet its own accounting requirements
    • lags in filing and receiving reports: due to time required to accumulate data, coordinating inputs from multiple parties, etc.
    • accounting framework recording: may require assuming cpy to record estimated transactions when lags are material
  6. Bordereau Reporting
    • summarized reinsurance report (not by claim)
    • may include product line or type of loss
Card Set
01.12. Reinsurance Accounting Basics
Reinsurance Accounting Basics