SSAP 62R - Reinsurance

Question 1

benefits of reinsurance (6)

Answer 1

• expand capacity
• share large risks
• spread risk of catastrophe while stabilizing results
• finance expanding volume
• withdrawal from a line or class of business
• reduce net liability to an appropriate amount

Question 2

describe quota share treaty

Answer 2

insurer and reinsurer share a fixed proportion of loss on every risk in a portfolio

Question 3

describe surplus share treaty

Answer 3

a fixed “line” represents the maximum loss the ceding company can retain per risk; the line defines the retained proportion of loss and premium, relative to the limit of the underlying policy

Question 4

describe excess of loss per risk treaty

Answer 4

coverage for losses above a specified retention for each covered risk

Question 5

describe aggregate excess of loss treaty

Answer 5

coverage for losses exceeding a specified dollar amount or percentage of subject premium

Question 6

catastrophe treaty

Answer 6

coverage for losses exceeding a specified retention, where the accumulated losses result from a catastrophe

Question 7

facultative pro rata

Answer 7

insurer and reinsurer share a fixed proportion of loss on a specific policy

Question 8

facultative excess of loss

Answer 8

coverage for losses from a specific policy exceeding a specified retention

Question 9

common reinsurance contract provisions (5)

Answer 9

• reporting responsibility
• payment terms
• payment of premium taxes (typically paid by ceding entity)
• termination – may be on a cut-off basis (reinsurer is not liable for loss from occurrences after termination date) or runoff basis (reinsurer remains liable for loss from occurrences on policies that were in force on termination date, until they expire or are canceled)
• insolvency clause – reinsurer obligations remain even if the ceding entity becomes insolvent

Question 10

required terms for a ceding entity to use reinsurance recoverables as a deduction to liabilities (4)

Answer 10

• insolvency clause included
• recoveries due to cedant must be available without delay
• no guarantee of profit for either party
• reports of premium, losses, and payments made at least quarterly

Question 11

additional required terms for retroactive reinsurance (4)

Answer 11

• premium paid must be a fixed amount stated in the agreement
• direct or indirect compensation to the cedant or reinsurer is prohibited
• adjustment for actual experience is prohibited unless the cedant can participate in the reinsurer’s profit
• contract cannot be canceled or rescinded without commissioner approval

Question 12

two components of insurance risk

Answer 12

• timing risk - uncertainty about timing of net cash flows

* underwriting risk - uncertainty about ultimate amounts of net cash flows

Question 13

requirements for reinsurance risk transfer (2)

Answer 13

• reinsurer assumes significant insurance risk

* it is reasonably possible that the reinsurer may realize a significant loss

Question 14

conditions for funds held with reinsured companies to be admitted assets (2)

Answer 14

• funds held do not exceed the liabilities they secure

* the reinsured is solvent

Question 15

accounting for prospective reinsurance:

• how amounts paid for prospective reinsurance are reported
• how changes in estimated reinsurance recoverables are recognized on the income statement
• how reinsurance recoverables on paid losses are recorded on the balance sheet
• how reinsurance recoverables on unpaid losses are recognized on the balance sheet

Answer 15

• as a reduction to written and earned premium
• as changes to losses incurred
• as an admitted asset
• by reducing the liability for gross losses

Question 16

why specific rules are needed for accounting for retroactive reinsurance

Answer 16

to reduce abuse involving creation of surplus and distortion of underwriting results

Question 17

accounting for reinsurance by ceding company:

• how reserves are recorded
• how recoverables are recorded
• how any gain to surplus is recorded
• how initial gain from a retroactive reinsurance transaction is recorded on the income statement

Answer 17

• on a gross basis
• as a write-in contra-liability
• as a special surplus fund, and is not classified as unassigned funds until the actual retroactive reinsurance recovered exceeds the premium paid
• as a write-in item “retroactive reinsurance gain”

Question 18

accounting for reinsurance by assuming company:

• how retroactive reinsurance is recorded on the balance sheet
• how initial loss from a retroactive reinsurance transaction is recorded on the income statement

Answer 18

• excluded from reserves and recorded as a write-in liability
• as a write-in item

Question 19

when deposit accounting applies to a reinsurance agreement

Answer 19

when the agreement does not transfer both timing and underwriting risk

Question 20

accounting for a deposit

Answer 20

• recorded as a deposit by the cedant and as a liability by the assuming company
• amount is adjusted at each reporting date to reflect payments, interest income, and expenses
• if losses are valued upward, record as interest income/expense

Question 21

conditions for a multi-year retrospectively rated contract to use reinsurance accounting (2)

Answer 21

• no contract features that prevent risk transfer criteria from being applied, and risk transfer criteria are met
• ultimate premium expected to be paid/received is reasonably estimable and allocable

Question 22

accounting for commutations by ceding company

Answer 22

• eliminate the reinsurance recoverable and record the cash received as a negative paid loss
• gain/loss is treated as underwriting income

Question 23

accounting for commutations by assuming company

Answer 23

• eliminate the reserve and record the payment as paid loss

* gain/loss is treated as underwriting income

Question 24

describe runoff agreement

Answer 24

a transaction where all liability is ceded but the ceding company is liable if the reinsurer defaults

Question 25

accounting for runoff agreements

Answer 25

must be approved by regulators

• ceding entity records the payment as paid loss and increases reinsurance recoverables by the amount of the reserves transferred
• if payment is less than the reserves transferred the difference is recorded as a decrease in incurred losses
• reinsurer records the payment received as negative paid loss

Question 26

disclosures required for reinsurance (4)

Answer 26

• list each individual reinsurer for which unsecured reinsurance recoverables is more than 3% of the reporting entity’s surplus
• list reinsurance recoverable in dispute if the disputed amounts from one entity is more than 5% of the reporting entity’s surplus, or if the disputed amounts from all entities is more than 10% of surplus
• describe uncollectible reinsurance written off during the year
• describe commutations of ceded reinsurance during the year