NAIC.SSAP-62R

From BattleActs
Jump to navigation Jump to search

This reading establishes SAP (Statutory Accounting Principles) for reinsurance. It overlaps with Freihaut.Reins regarding whether risk transfer has actually occurred. If no risk transfer has occurred then reinsurance accounting does not apply. You would have to use something called deposit accounting instead.

  Forum

Study Tips

The CAS syllabus citation for this article is confusing. The syllabus says this is a new reading but it actually isn't. The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

The syllabus lists paragraphs 1-111 as being covered in SSAP-62R (which is available as part of the COPLFR pdf). The most direct and comprehensive way to study this material is to carefully read each paragraph, takes notes, then memorize. Unfortunately that's also an ineffective way. We already have a history of exam problems and they cover everything that's important. Spend 60 minutes here.

Note that the syllabus contains 6 readings on the subject of reinsurance. The most heavily tested, by far, are:

The other 3 relatively minor reinsurance readings are:

There is only so much that can be asked on reinsurance on one exam, so you know these minor readings are never going to count for much. If you know the highlights and can do the old exam problems, you will be well prepared. (You can never know for certain what the CAS is going pull out from under a rock, but you would most likely be wasting your time if you spend more than 60 minutes here, not counting periodic review of the BattleCards.)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

  • reins accting treatment - requirements, prospective versus retroactive, deposit accounting
  • type of reinsurance - prospective versus retroactive
  • novation, benefits of reinsurance
Questions held out from Fall 2019 exam: #13. (Skip these now to have a fresh exam to practice on later. For links to these questions, see Exam Summaries.)
reference part (a) part (b) part (c) part (d)
E (2019.Spring #23) Freihaut.Reins reins accting treatment:
- paid, case & IBNR
E (2018.Spring #27) BK.Reins reins accting treatment:
- prospective / retroactive 2
E (2017.Fall #28) type of reinsurance:
- prospective / retroactive 		type of reinsurance:
- prospective / retroactive 1 		reins accting treatment:
- deposit accounting losses
E (2014.Fall #24) novation:
- versus runoff 		novation:
- reinsurance ineligibility 		reins accting treatment:
- for runoff business 		reins accting treatment:
- runoff purchase
E (2014.Fall #25) type of reinsurance
- prospective/retroactive 3 		reins accting treatment:
- required conditions 		reins accting treatment:
- examples of violations
E (2012.Fall #30) reins accting treatment:
- yes or no? 		reins accting treatment:
- change in provision
1 There is an error in part (b) the examiner's report answer. They required you to say there was both no timing risk and no risk of significant loss for the reinsurer to disprove risk transfer. This is incorrect; you only need to say one of them. Reason: In mathematical logic, if you want to disprove the logical statement (A and B), it is sufficient to prove (not A) or (not B). You do not have to prove both (not A) and (not B).
2 The solution to part (b) in the examiner's report contains a small typo. They refer to "retrospective" reinsurance when they should say "retroactive".
3 There is an error a sample answer in the examiners' report. See this forum discussion.

Full BattleQuiz You must be logged in or this will not work.

  Forum

In Plain English!

It's obvious from the BattleTable that the most important topic is the conditions required for a contract to receive reinsurance accounting treatment. Click the link for relevant information already covered in Freihaut.Reins. These exam problems are included in SSAP-62R because at least one part of each question contained material specific to SSAP-62R.

Prospective vs Retroactive Insurance

Click the link to read the definition of prospective reinsurance. If you scroll further down on that page, you'll find the definition of retroactive reinsurance. Note that some contracts provide for a mixture of prospective and retroactive coverage because of different types of risk covered within the contract. Once you've read the definitions, part (a) of the following exam problem demonstrates the difference:

E (2014.Fall #25)

Assuming you now know whether reinsurance is prospective or retroactive, do you know how each is accounted for in financial statements?

Question: describe the accounting treatment of prospective and retroactive reinsurance according to SAP
prospective reinsurance:
  • if there is a claim then loss reserves increase
retroactive reinsurance:
  • if there is a claim then loss reserves do not increase
  • the claim amount is recorded as a write-in liability

There is a decision tree in the SSAP-62R reading that you can use to determine whether a reinsurance contract is prospective or retroactive. It's more detailed than you need for the exam problems, but it can't hurt to take a look. I will walk you through how to use it in quiz #2, BattleCards #4 & #5.

Decision Tree for Prospective/Retroactive Reinsurance

Sometimes, a contract doesn't qualify as reinsurance at all. In this case, the accounting treatment is deposit accounting and there a few simple factoids in the quiz. Part (c) of the following exam problem also asked a question about deposit accounting that you should know the answer to:

E (2017.Fall #28)
It may be helpful to review this discussion thread on accounting treatment of prospective and retroactive reinsurance

mini BattleQuiz 1 You must be logged in or this will not work.

And some related exam problems: (shout-out to MS!)

mini BattleQuiz 2 You must be logged in or this will not work.

Novations

Here's a nice, easy-to-understand explanation of novation . You should read that first, then look at paragraph 31b of SSAP-62R, which I've linked to below. (Warning: It is very confusing.)

SSAP-62R - paragraph 31b

There are 3 main things to understand about novations in a reinsurnace context:

  • a novation is an issuance of a new contract
  • a novation releases the primary insurer of all liability. (This is not the case in a typical runoff agreement where the primary insurer could still be liable, if, for example, the reinsurer were to become insolvent.)
  • a novation may be eligible for reinsurance accounting treatment but not in these situtations:
   - retroactive reinsurance
   - novation with an affiliated company

Now you can do the exam problems on novation. See the BattleTable above or just do the quiz below.

mini BattleQuiz 3 You must be logged in or this will not work.

Runoff Agreements

The only reinsurance accounting treatment question that deserves special mention is part (c) of:

E (2014.Fall #24)

Here, they ask you for things a regulator might consider before approving reinsurance accounting treatment for a runoff agreement. This is directly from paragraph 82 of SSAP-62R. If you had memorized this bullet point list, this would be easy points, but really??!! Who's going to memorize a random list from the middle of a reading like that. Luckily, this is a question where you could take an educated guess and have a decent chance of being right. There are many possible answers.

Question: identify items a regulator might consider before approving a reinsurance accounting treatment for a runoff agreement
  • reinsurer is properly licensed (obvious!)
  • contract must meet normal risk transfer requirements (obvious!)
  • policy limits & coverage don't change (the liabilities are being transferred "as is")
  • reinsurer must be rated at least as high as cedant by 2 different rating agencies (otherwise the primary insurer could just dump their book of business onto a weak reinsurer for a low price, possibly exposing the policyholders to increased risk)

mini BattleQuiz 4 You must be logged in or this will not work.

Brief Comment on 2019.Spring #23

I'd like to very briefly discuss this exam problem since it was one of the worst done questions on the 2019.Spring exam.

E (2019.Spring #23)

In part (b) of that problem, they ask how the following items are recorded on the balance sheet:

  • reinsurance recoverables on paid losses
  • reinsurance recoverables on case + IBNR losses

The answer is in paragraph 27 of the source text (recall that paragraphs 1-90 are on the syllabus) but who in the world is going memorize something from a paragraph buried in the middle of such a tedious and boring reading? The answer to the exam problem is actually quite simple:

  • recoverable paid losses are recorded as an asset on the balance sheet
  • recoverable case + IBNR losses are netted against gross loss+LAE liability (there isn't a specific entry on the balance sheet, but it affects the balance sheet by being part of the liability entry for net losses)

Anyway, Alice explained to me another way to get the answer: (without memorizing paragraph 27!)

  • recoverable paid losses: if you practiced BattleQuiz 2 from Odomirok.8-9-IS then you would know that recoverable paid losses is listed as a line item on the asset side of the balance sheet (there is a practice template in that quiz that tests your knowledge of the location of various annual statement items)
  • recoverable case + IBNR losses: in BattleQuiz 1 from Freihaut.Reins, there is a question on the effect on an insurer's balance sheet if reinsurance accounting cannot be used – the answer is the reserves cannot be shown net of reinsurance

It's true that Alice's way of getting the answer is a little more indirect, but unless you have a photographic memory (or are just very lucky) then this might be your best bet. Make sure you drill yourself on that location quiz.

Full BattleQuiz You must be logged in or this will not work.

Retrieved from "https://battleacts6us.ca/wiki6us/index.php?title=NAIC.SSAP-62R&oldid=7351"