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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
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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
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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)
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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)
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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
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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
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P/S ratio vs reinsurance
- before: reduce surplus by amount of acquisition expense
- after: from previous surplus, add expected commission; reduce premium by reinsurance
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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
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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
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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
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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
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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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