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Old 05-03-2017, 08:39 PM
WilliamL WilliamL is offline
 
Join Date: May 2017
College: UNSW, UTS (MBA)
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Default Accounting for Reinsurance Commutation

Hi all,

Question on accounting for Reinsurance (RI) commutation for a ceding insurer from an Australian perspective. The Reinsurance is a quota share treaty.

On the balance sheet, the following RI balances exist

Assets:
1. RI recoveries (OSLR Central Estimate, Risk Margin /case + IBNR)
2. Deferred reinsurance expense /Ceded UPR (UPR = unearned premium reserves)

Liabilities:
3. Amounts due on RI contracts - DAC (deferred acquisition costs)


Upon commutation, I read that we

A - transfer the RI recoveries to the Income statement as change in loss reserves.

B - Book the receipt from proceeds of the commutation to "Paid Losses" in income statement.

Question 1 : Do we also just transfer the following items to the income statement at the values at commutation date?

- Ceded UPR

- Ceded DAC

Question 2: Is the commutation outcome for the ceding insurer "almost" always going to be a loss to the income statement given the reinsurer will only agree on a commutation price whereby the reserves are more heavily discounted than normal.

Question 3: From a solvency perspective, will the APRA solvency coverage by net assets in Australia always be worse off as a result of a commutation as the asset risk charge, operational risk charge, insurance risk charges etc will all be higher without reinsurance?
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Old 05-03-2017, 10:04 PM
Arlie_Proctor Arlie_Proctor is offline
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Default

The only place I can offer you a modicum of advice is your second question. Your first and third require knowledge of Australian accounting requirements where I am completely ignorant.

I have seen commutation values on both sides of the central estimate, even after discount. If the ceded liabilities are subject to substantial variability, the reinsurer is sometimes willing to pay a risk premium to exit the agreement. That case is usually limited to very long-tailed liabilities.
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