Part 25 (SSAP 62R)

Question 1

What are the benefits of Reinsurance

Answer 1

• Expands Capacity
• Share large risks
• spread the risk of catastrophes and stabilize underwriting results
• finance expanding volume (by sharing the reserves)
• aid withdrawing from a line
• reduce the net liability to amounts appropriate to its financial resources

Question 2

Cut-off definition

Answer 2

Reinsurer not responsible for losses incurred after contract termination

Question 3

Run-off definition

Answer 3

reinsurer responsible for losses from reinsured policies in force at time of termination of the contract

Question 4

Types of Reinsurance contracts

Answer 4

Treaty (Pro Rata)
Treaty (Excess of Loss)
Treaty (Catastrophe)
Facultative (Pro Rata)
Facultative (Excess of Loss)

Question 5

Treaty (Pro Rata) Types

Answer 5

Quota share: Reinsurer picks up portion of business, like 30% of premium and losses

Surplus share

Question 6

Treaty (Excess of Loss) Types

Answer 6

Excess per Risk: For each single loss or insured, the reinsurance contract picks up loss in excess of threshold

Aggregate Excess of Loss: aggregate loss, reinsurance picks up losses that exceed amount.

Both have a limit which reinsurance company is responsible for

Question 7

Treaty (Catastrophe)

Answer 7

Just another version of Excess of Loss. Deals with CATs.

Question 8

Criteria for a reinsurance agreement

Answer 8

• agreement contains an insolvency clause
• recoveries dye to the ceding company must be available without delay and in appropriate format to allow for quick reimbursement
• no guarantee of profit for either party
• reporting of premiums and losses at least quarterly
• reinsurance intermediary clause (says credit risk actually belongs to reinsurance company even if they don’t get paid from broker)
• include a funding clause if reinsurer is certified (provide enough collateral to ceding company)

Question 9

Criteria for retroactive reinsurance

Answer 9

• the criteria listed for normal reinsurance
• premium must be a specific, fixed amount stated in agreement
• direct or indirect compensation to ceding company or reinsurer is prohibited
  – everything should be outlined in contract
• also prohibited is a provision for adjustment based on the actual experience
• • in other words, ceding company can’t be charged more if a reinsurance company has losses, unless ceding company can participate in the profit
• Contract shall not be canceled or rescinded without approval of the commissioner of the state of the ceding company

Question 10

Requirements for reinsurance treatment qualification

Answer 10

• Transfer of risk exists
• Is reasonable possible for the reinsurer to realize a significant loss
• • Or substantially all criteria is met

Question 11

Test for existence of Transfer of Risk

Answer 11

Uncertainty about both:

• Ultimate amount of net cash flows (needs to have UW risk)
• timing of those cash flows (needs to have timing risk)

Question 12

What contractual features should be looked for to determine if Transfer of risk exists

Answer 12

features that

• Limit the amount of reinsurance risk to which an insurer is subject
• delay the timely reimbursement

Question 13

Significant Loss determiniation

Answer 13

Look at the PV of the cash flows between the ceding and assuming enterprise

Question 14

Substantially all clause

Answer 14

If mostly all of the insurance risk related to the reinsured portion has been assumed by the reinsurer, then there is significant loss

Question 15

Prospective Reinsurance Rules:
Ceded premium shall be reported as what

Answer 15

a reduction to WP and EP

Question 16

Prospective Reinsurance Rules:
Reinstatement (policies that have limits, then the reinsurance contract will end if limit is met) premium should be earned from when

Answer 16

Time of enshrinement to the expiration of the agreement

Question 17

Prospective Reinsurance Rules:
Changes in the estimated reinsurance recoverable are recognized as what

Answer 17

changes in losses incurred in the income statement

Question 18

Prospective Reinsurance Rules:
Reinsurance recoverable on LOSS payments is what

Answer 18

an admitted asset “reinsurance recoverable on loss and LAE payments”

Question 19

Prospective Reinsurance Rules:
Reinsurance recoverable on Unpaid Losses is recognized how

Answer 19

by reducing the respective reserves

Question 20

Prospective Reinsurance Rules:
Insurers should on take credit for reinsurance to what extent.

Answer 20

that the losses exceed the AP (attachment point)

Question 21

Retroactive Reinsurance Ceding company treatment:
Reserves are recorded as what.
The recoverables are recorded as a what

Answer 21

gross

contra liability “retroactive reinsurance reserve ceded”

Question 22

Retroactive Reinsurance Ceding company treatment:
any surplus gain should be recorded how

Answer 22

as a special surplus fund

Question 23

Retroactive Reinsurance Ceding company treatment:
As recoveries begin to exceed the consideration paid, the excess can be converted from special surplus to what

Answer 23

unassigned funds

Question 24

Retroactive Reinsurance Ceding company treatment:
What is the limit for unassigned funds transfer

When can the remaining balance be transferred.

Answer 24

the lesser of
- actual amount recovered in excess of the consideration paid
- initial surplus gain resulting from the retroactive contract

upon elimination of the policy obligations

Question 25

Retroactive Reinsurance Ceding company treatment: The special surplus also needs to be adjusted to reflect any change in what

Answer 25

the ceded reserve

Question 26

Retroactive Reinsurance Ceding company treatment: The initial gain should be recorded as a what

Answer 26

Write in item in other income, "retroactive reinsurance gain"

Question 27

Retroactive Reinsurance Ceding company treatment: What happens when consideration paid occurs

Answer 27

reduces the assets

Question 28

Retroactive Reinsurance Assuming company treatment: Assumed balances are excluded from what and instead recorded as what

Answer 28

Existing Reserves A liability " Retroactive Reinsurance Reserve Assumed"

Question 29

Retroactive Reinsurance Assuming company treatment: The loss is recorded as what

Answer 29

A write in item "Retroactive Reinsurance Loss" under Other Income

Question 30

Retroactive Reinsurance Assuming company treatment: What is affected when consideration received occurs

Answer 30

increases the assets

Question 31

What is a Novation

Answer 31

transaction where the original insurer's obligation are completely extinguished, and so there is no more exposure to loss from the novated business

Question 32

How should Novations be treated/accounted for

Answer 32

Prospective reinsurance

Question 33

What things are affected in Novations since it is treated as prospective instead of retro

Answer 33

- amounts paid are recorded as a reduction of WP or EP - Novated balances are written off - assuming insurer reports: amounts received as WP and EP and obligation assumed as incurred losses

Question 34

Funds held or deposited with reinsured companies are considered to be an admitted asset as long as what

Answer 34

- the funds do not exceed the liabilities that they secure - the reinsured is solvent

Question 35

Interest earned on funds are treated as what

Answer 35

Other Income

Question 36

If no specified due date in contract, what assumption is used

Answer 36

It is deemed due 30 days after either of the following dates: date at which notice of premium is provided to the ceding entity date at which the assuming entity books the premium

Question 37

When are Reinsurance premiums nonadmitted

Answer 37

when over 90 days overdue unless; - reinsurer maintains UEPR and loss reserves due to the ceding entity or - ceding entity is licensed and in good standing

Question 38

Ceded premiums payable (net of ceding commissions) is recorded as what

Answer 38

as a liability

Question 39

If reinsurance premium is paid prior to the effective date, the prepaid item is recorded as what

Answer 39

An admitted asset

Question 40

Amounts withheld by the ceding company recorded as

Answer 40

funds held by the entity under reinsurance treaties

Question 41

Interest due or payable is recorded as a what

Answer 41

a write in for miscellaneous income

Question 42

Ceded retroactive reinsurance premiums need to be what

Answer 42

excluded from all schedules

Question 43

What are the 3 features that can be adjustable in retrospective rating

Answer 43

Commissions Premium Amount of Coverage

Question 44

what to know about commissions and adjusting

Answer 44

The insurer need to accrue for this

Question 45

What to know about premium and adjusting

Answer 45

accrue a liability for the additional premium due during the period of the loss event that generated the additional premium

Question 46

Amount of coverage

Answer 46

An asset/liability is established by adjusting the initial premium for the change in the amount of coverage

Question 47

Commissions payable on ceded business are treated as what

Answer 47

as an offset to Agent's Balances

Question 48

Commissions payable on ceded business are treated as what

Answer 48

an offset to Agent's balances

Question 49

Commissions receivable on ceded business are treated as what

Answer 49

an offset to ceded reinsurance balances payable

Question 50

Ceding commissions are designed to cover what

Answer 50

Acquisition costs

Question 51

If Ceding commissions > Anticipated Acquisition costs

Answer 51

- the ceding company needs to establish a write in liability equal to the difference - this liability is amortized prorata over the effective period

Question 52

Credit for reinsurance ceded to a certified reinsurer is depended on what

Answer 52

the reinsurer's rating

Question 53

If the rating of a certified reinsurer is upgraded how will this apply

Answer 53

on a prospective basis the revised requirements will apply to the future incepting business

Question 54

If the rating of a certified reinsurer is downgraded how will this apply

Answer 54

on a retroactive basis the revised requirements will apply to all in force contracts

Question 55

How long is the grace period for downgraded collateral that is needed

Answer 55

30 days

Question 56

What can classify a balance as in dispute

Answer 56

when the insurer received formal written communication to classify a balance as being in dispute

Question 57

Can the ceding insurer take credit for disputed balances

Answer 57

The may or may not choose to

Question 58

Can the ceding insurer take credit for recoverables in dispute with an affiliate

Answer 58

No

Question 59

What is a commutation

Answer 59

when a reinsurance contract is closed and money is still owed from the reinsurance company to the ceded company

Question 60

Commutation Ceding company accounting treatment

Answer 60

- 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 61

Commutation Reinsurer accounting treatment

Answer 61

- eliminate the reserves, and record the payment made to the ceding - recognize the gain/ loss as underwriting income

Question 62

Where are the commuted balances written off

Answer 62

Off the exhibits in which they were initially recorded

Question 63

What accounting does it qualify for if it does not qualify for reinsurance

Answer 63

Deposit Accounting

Question 64

How is the amount paid recorded by the ceding company under deposit accounting

Answer 64

as a deposit

Question 65

How is the amount paid recorded by the assuming company under deposit accounting

Answer 65

as a liability

Question 66

When is the deposit an admitted asset for the ceding company

Answer 66

- the assuming entity is licensed in the ceding company's state of domicile or - there are funds held by the ceding company

Question 67

Can the ceding company reduce the reserves in deposit accounting

Answer 67

No

Question 68

The assuming company will record the consideration to be returned to the ceding company as what

Answer 68

A liability

Question 69

At each reporting date what happens to the deposit in deposit accounting

Answer 69

the amount of the deposit is adjusted to reflect both the payments made to date, and expected future payments

Question 70

If total losses are valued upwards in deposit accounting what happens to the assuming and ceding company

Answer 70

- assuming company will record an interest expense - Ceding company will: - - increase the deposit - - increase the outstanding loss liability - - increase the interest income - - increase the incurred losses

Question 71

Run-off agreements

Answer 71

transfer almost all the risk of a line that is no longer actively marketed by the insurer

Question 72

Criteria to receive run-off agreement, name a few of the list

Answer 72

- Assuming entity is properly licensed - Agreement should contain the same limits and coverages as the original contract - does not contain any adjustable features, profit sharing or retrospective rating - agreement meets the requirements of risk transfer - 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 assumed business - 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 73

Run-off agreements accounting treatment for the transferring entity

Answer 73

- payment to the reinsurer is recorded as a paid loss - if 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 74

Run-off agreements accounting treatment for the assuming entity

Answer 74

- the transactions need to be recorded in the same line of business, and in the same level of detail as recorded by the transferring entity - premium received is treated as a negative paid loss