FASB Question

[Examinator]

I'm pulling this from paragraph 40 of FASB No. 60, but it's appeared in at least two other tests (maybe No. 113?).

If a reinsurance contract (or, To the extent a reinsurance contract) does not provide for indemnification of the ceding enterprise against loss or liability, the premium paid less the premium to be retained by the reinsurer shall be accounted for as a deposit by the decing enterprise. As a result from such a contract, a net credit shall be reported as a liability by the ceding enterprise, and a net charge shall be reported as an asset by the reinsurer.

I don't really know what this is saying.

I assume the reinsurance contract is failing to provide protection (at least to an extent) because there isn't sufficient insurance risk (underwriting or timing). Is that correct?

Also, what exactly is this amount? Premium paid [to the reinsurer?] less what is retained by the reinsurer seems to be ceding commission. Are any ceded losses figured into this? How does this translate into the liability for the cedant at the end?

[dumples]

It's saying that if the reinsurance agreement fails to meet certain criteria, the money given to the reinsurer by the primary insurer is accounted for the way that a bank accounts for deposits. Money returned to the primary insurer isn't a reinsurance recoverable, it's a withdrawal.

Reinsurance accounting is favorable. Perhaps someone else here can explain the in's and out's of why that is.

[Examinator]

That makes some sense and is easy to rationalize. By all means, others are welcome to chime in. I assume that's all that one would need to know, i.e., not the details of deposit accounting.

[Avi]

I seem to remember that deposit accounting in no way shape or form affects policyholder surplus. Insurance companies need surplus to support premiums, get good ratings, meet RBC requirements, etc.

In statutory accounting, loss reserves are net of reinsurance recoverables, so having smaller loss reserves means more of the assets are available as surplus. If the recoverable is on a deposit accounting basis, the loss reserve is gross of that recoverable, and thus surplus is smaller.

Someone correct me if I am wrong, please.

[Examinator]

What ultimately should we know for this article and the CAS response? I've got note cards full of list-type information, but that's about it. Just memorize and regurgitate?