1. Characteristics of reinsurance agreements affecting accounting
    • reporting responsibility of ceding entity: details required, time schedules
    • payment terms: time schedules, currencies, right of parties to withhold funds
    • payment of premium taxes: customarily responsibility of ceding entity
    • termination: may be on cut-off (loss date) or run-off (inforce) basis
    • insolvency clause: survival of reinsurer’s obligation in event of insurer insolvency
  2. Required terms for a reinsurance agreement
    • acceptable insolvency clause
    • recoveries must be available without delay
    • agreement shall constitute the entire contract and provide no guarantee of profit
    • must provide for report of premium and losses at least quarterly
  3. Insurance risk uncertainties
    • underwriting risk: ultimate amount of net cash flows and 
    • timing risk: timing of receipt and payment of those cash flows (quarterly = still timely)
  4. Requirements to recognize reinsurance
    • reinsurer assumes significant insurance risk under the reinsured portions
    • it is reasonably possible that the reinsurer may realize a significant loss (unless the reinsurer assumed substantially all of the risk related to the reinsured portion)
  5. Accounting for prospective reinsurance agreement
    • amounts shall be reported as a reduction of WP, EP and gross losses by insurer
    • shall be earned over the remaining contract period in proportion of reinsurance provided
    • reinstatement premium shall be earned over period from reinstatement to expiration
  6. P&C runoff agreement (loss portfolio reinsurance)
    • transfer essentially all risks and benefits of a specific LOB no longer actively marketed
    • original company remains primary liable, so not a novation
    • regulatory requirements include:
    •    assuming entity is properly licensed
    •    limits and coverage remain the same
    •    agreement shall not contain adjustable features, profit share, retro rating
    •    meet requirements for risk transfer
  7. P/S ratio vs reinsurance
    • before: reduce surplus by amount of acquisition expense
    • after: from previous surplus, add expected commission; reduce premium by reinsurance
  8. Retrospective Reinsurance
    reinsurance in which a reinsurer agrees to reimburse a ceding company for liabilities incurred as a result of past insurable events under certain contracts
  9. Additional requirements to recognize credit or deduction from liability from retro reinsurance
    • consideration paid by ceding company must be stated as sum certain
    • no other direct or indirect compensation of either party to the contract is allowed
    • no retro adjustment based on loss experience other than profit sharing
    • commissioner of ceding company’s domicile must approve cancellation or rescission
  10. Accounting for retroactive reinsurance agreements - ceding company
    • initial gain: recorded as write-in item on statement of income
    • surplus gain: classified as special surplus from retro until actual recovery is paid
    • Schedule F: shows premium for retro reinsurance separately by reinsuring company
    • loss reserves: unchanged, but record amount as contra-liability, reducing total liabilities
    • statutory income: increase other income and net statutory income
  11. Accounting principles for retro reinsurance don’t apply to
    • structured settlement annuities
    • novations (prospective), termination or reduction of participation in reinsurance treaty
    • inter-company reinsurance agreement
    • reinsurance / retrocession agreements meeting criteria of P&C runoff agreements
  12. Deposit accounting
    • use when reinsurance agreement does not transfer both components of insurance risk
    • premium is a deposit for ceding and liability for assuming, adjusted for yield
    • calculation of effective yield shall use estimated amount and timing of cash flows
    • any cash transaction for settlement of losses reduces deposit 
    • no deduction shall be made for loss and LAE expense reserves
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