01.13. Deposit Accounting

  1. Deposit Accounting
    • The method of accounting for premium when the policy or reinsurance agreement does not qualify as insurance.
    • The premium is not recognized as income but as a deposit to the insurer's surplus.
    • Losses paid are not an expense but rather return of capital.
  2. Deposit Accounting Rules
    • contract with specific: no risk transfer, timing risk but negligible amount at risk, retro reinsurance
    • typical deposit accounting: handled contract-by-contract; amount received recorded as a deposit liability (no effect on income); deposit = PV of future obligations
  3. Approaches for Deposit Accounting
    • bank deposit approach: initial deposit grows w interest; ending deposit does not depend on pattern of cash flows
    • prospective approach: current value = PV of future payments, irrespective of initial deposit
    • retrospective approach: deposit is a function of initial deposit, past payments, and current estimate of all future payments. Interest rate = IRR for past payment = initial deposit
Card Set
01.13. Deposit Accounting
Deposit Accounting