Fall 2018 Q25
I'm not sure I'm understanding what timing risk is, because if I were, this question is nonsensical. The question says all ceded losses are paid on 1/1/2020. Why doesn't this eliminate timing risk, negating risk transfer and rendering the ERD and 10-10 rule useless?
Thanks in advance!
Comments
just a fellow test taker here but I think the answer is trying to be tricky. There are two accounting treatments: deposit accounting and reinsurance accounting. If you made a mistake in part a and had that risk transfer did not occur in either case you could use that as justification for using deposit accounting instead of reinsurance accounting. If you did part a correctly and realized that it passed the ERD method, you had to realize that it still doesn't qualify for reinsurance accounting due to lack of timing risk, so you still have to use deposit accounting.