When is ceded premium booked?
Let's say that insurer XYZ is ceding a 100% quota share on a risks attaching basis with a ceding commission of 30%. XYZ anticipates direct written premium of 100, 20% of which will be expensed to acquisition costs. Would XYZ book amounts based on the estimated DWP of 100 when the reinsurance contract becomes effective, or would XYZ book amounts as business that is ceded to the contract is written (or something else)? If it's the former, I think the following balance sheet and income statement items would be affected:
| Account | Location | Debit | Credit | Change to Account |
|---|---|---|---|---|
| Unearned premiums | Liabilities, Line 9 | 100 | (100) | |
| Ceded reinsurance premiums payable (net of ceding commission) | Liabilities, Line 12 | 70 | 70 | |
| Other underwriting expenses incurred | Statement of Income, Line 4 | 20 | (20) | |
| Excess ceding commission | Liabilities, write-in | 10 | 10 |
This would immediately generate surplus aid of 20 although no acquisition costs have been incurred, which seems unreasonable, but I am struggling to find anything to refute this. Am I missing something?
Comments
UEP Line 9 should also be net of what is ceded. In this case, it would be zero.
Surplus Aid is 30 regardless, by way of increasing income by that much.