SSAP 62

Question 1

What contract provisions affect accounting practices?

Answer 1

-reporting responsibility of the ceding entity
-payment terms (time schedules)
-payment of premium taxes (who does it? usually ceding)
-termination
-cut-off: reinsurer not responsible for losses incurred after termination
- run-off: responsible for PIF at termination of the contract
-insolvency clause: reinsurers obligations maintained if ceding company goes insolvent

Question 2

What are the required terms of a reinsurance agreement?

Answer 2

-contains insolvency clause
-recoveries due to ceding must be available without delay
-no guarantee of profit
-reporting of P/L at least quarterly, unless no activity
-if reinsurance intermediary, reinsurer is responsible for credit risk
-funding clause (for certified reinsurers), they must provide enough security such that insurer does not incur any financial statement penalty

Question 3

Additional required terms for retroactive reinsurance

Answer 3

-premium paid is fixed
-can’t cancel without dom com permission
-no loss sensitive adjustments
-no direct or indirect compensation

Question 4

What contract provisions should you examine when doing risk transfer testing?

Answer 4

any provisions that…
-limit amount of reinsurance risk (refunds, adjustable features)
-delay the timely reimbursement

Question 5

2 basic requirements for reinsurance risk transfer

Answer 5

• must transfer insurance risk
  -must be a reasonable chance for a substantial loss suffered by the reinsurer (unless “substantially all” risk is ceded)

Question 6

Prospective Reinsurance Accounting

Answer 6

-premiums are reduction in EP/WP
-changes in recoverables are changes in losses incurred in IS
-reins recoverable is admitted asset
-reins recoverable on unpaid loss is netted out of reserves
- only take credit for non-prop reins when gross incurred > attachment point
-reinstatement prems are earned over period from reinstatement to expiration

Question 7

Retroactive Reinsurance Def

Answer 7

-covers past insurable events
-with exceptions, if signed after 9 months since effective date, its retroactive

Question 8

Exceptions to retroactive reinsurance 9 months after rule

Answer 8

-facultative contracts
-rensurance agreements when one of parties is in conservation, rehab, receivership, or liquidation
-more than one reinsurer agreements which are signed by lead reinsurer within 9 months
-other bs

Question 9

Ceding company retroactive reinsurance accounting

Answer 9

reserves are gross of reinsurance
recoverables are a contra liability (retro reins reserve ceded)
gain is special surplus until recov > premium then unassigned surplus
special surplus reflects change in ceded reserves
initial gain is write-in for other income
premium reduces assets (cash)

Question 10

Transfer of special surplus to unassigned surplus (retroactive reinsurance)

Answer 10

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

after contract is over, remaining balance is transferred over

Question 11

assuming company retroactive reinsurance accounting

Answer 11

The assumed retroactive reinsurance is excluded from the existing reserves.

Instead, it is recorded as a liability, “Retroactive Reinsurance Reserve Assumed”.

 The loss is recorded as a write in item, “Retroactive Reinsurance Loss” under Other Income.
 The consideration received increases the assets

Question 12

What reinsurance agreements DO NOT receive retroactive reinsurance accounting treatment?

Answer 12

structured settlement annuities
novations
run offs
intercompany reinsurance agreements
termination of reinsurance treaties entered into in ordinary business

Question 13

What accounting is for retroactive agreements with affiliates?

Answer 13

deposit accounting
no deduction in loss reserves, premium is a deposit.

Question 14

What is a novation>

Answer 14

insurers obligations are extinguished
for reinsurance accounting…
- parties are not affiliates (if so, need reg approval)
-will not be changed from retro to pros accounting

Question 15

Novation accounting treatment

Answer 15

-amounts paid are deductions in EP/WP
-novated balances are written off in original accounts
-assuming records EP/WP and incurred losses

Question 16

claims made reinsurance accounting

Answer 16

-covering claims to be reported in the future that occurred before entering is retroactive
-if primary CM policy then prospective

Question 17

When are funds held or deposited with reinsured companies an admitted asset?

Answer 17

as long as funds do not exceed associated liabilities
reinsured is solvent
-interest earned is aggregate write in for misc income (Other Income)

Question 18

What should an assuming insurer do if they receive advance premium?

Answer 18

record as a liability to offset cash asset
can’t be income until the effective date
if premium is received after effective but before due date, reduce deferred but not yet due asset

Question 19

If theres no due date for reinsurance premiums in the contract when are they due?

Answer 19

30 days after one of….
-date when notice of premium is provided
-date at which assuming entity books the premium

Question 20

When are reinsurance premiums over 90 days overdue considered admitted?

Answer 20

If reinsurer maintains UEPR and reserves due to the ceding entity
or
ceding entity is licensed and in good standing

Question 21

ceded reinsurance info

Answer 21

ceded premiums payable net of ceding commissions are a liability

Question 22

Adjustable features accounting

Answer 22

needs to accrue for these commissions
-contingent : percent of profit
- sliding scale: based on actual experience

if premium is adjusted, accrue a liability for additional premium
if amount of coveragr adjusted, asset or liability is established by adjusting initial premium for change in coverage
change in coverage can be change in probability or amount of potential future recoverables

Question 23

Multiplie Year retrospectively rated contracts

Answer 23

-events in one year influence the terms of the next years agreement
-at least a part of retrospective rating is obligatory
for reinsurance accounting, risk transfer and reasonable estimate ultimate premium

Question 24

How should we account for when a ceding company needs to make additional payments to get more coverage?

Answer 24

two transaction split
- expanded coverage received from pmt
- loss cedant incurred that is generating the pmt
e.g. cedant bought $6 cov for $1, pays $4 more for $6 more if loss occurs
prem new cov = $1
prem for reimbursemt of loss = 4 - 1 = $3

Question 25

What are commissions payable an offset to?

Answer 25

agent’s balances
commissions receivable are an offset to ceded reinsurance payable

Question 26

ceded to certified reinsurer treatment

Answer 26

if receives a downgrade, effective immediately
if receives upgrade, effective in any contracts after

Question 27

Syndicated letter of credit

Answer 27

LOC from multiple banks
-agent bank issues a LOC to the ceding on behalf of all issuing banks (group)
for ceding to benefit….
- all banks must be qualified / NAIC SVO certified banks
- banks are severally and not jointly liable
- specific percentages for each bank are in the LOC

Question 28

What is required for recoverables to be in dispute, officially?

Answer 28

insurer needs WRITTEN communication

Question 29

Commutation accounting treatment for the insurer

Answer 29

no more reinsurance recoverable
cash paid is negative paid loss
gain/loss is UW income

Question 30

Commutation accounting treatment for the reinsurer

Answer 30

eliminate reserves, record payment made
gain/loss is UW income

Question 31

Key aspects of deposit accounting

Answer 31

ceding company records premium as deposit (assuming is liability)
-deposit is admitted if assuming is licensed, funds are held by ceding
-cant reduce reserves
-deposit adjusted for pmts to date and e[future pmts] at each reporting date , if upward (assuming interest expense)
ceding will increase deposit, liability, interest income, incurred loss

Question 32

What is needed to approved a run-off agreement?

Answer 32

-assuming is licensed
-same limits and coverages in original contract
-no adjustable features, profit sharing, loss sensitivity
-reinsurer need 2+ fin strength ratings >= insurer
-can’t cancel
-reinsurer is responsible for all assessments on business (GFs, e.g)

Question 33

Accounting treatment for run-offs, transferring entity

Answer 33

-pmt is paid loss
if pmt < reserves transferred (recorded as decrease in incurred loss)
-recoverables increase by transferred reserve

Question 34

Accounting treatment for run-offs, assuming entity

Answer 34

-transactions are recorded in same LOB, same detail as transferring
-premium is negative paid loss