NAIC.SSAP-66

Reading: Accounting Practices and Procedures Manual, 2019, Statement of Statutory Accounting Principles 66, “Retrospectively Rated Contracts,”

Author: NAIC

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.

SSAP-66 covers detailed accounting procedures for retrospectively rated contracts. It's 5 pages long and is organized into 18 paragraphs but only covers the following:

• * paragraphs 1-5, 7.a., 8, 9.a., 10, and 11-14

My plan is to spend ≤ 2 hours extracting the testable information. There are likely just 2 or 3 facts that have a material likelihood of appearing on the exam. I will limit myself to roughly 5-6 BattleCards altogether. (Paragraphs that I judged not to contain testable material are omitted from this wiki article. If you're curious and you have extra time, you can consult the source text.)

Note that SSAP-66 does not apply to reinsurance contracts. For guidance on reinsurance, consult NAIC.SSAP-62R.

Estimated study time: 1 hour (not including subsequent review time)

BattleTable

No past exam questions are available for this reading.

reference	part (a)	part (b)	part (c)	part (d)

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In Plain English!

Paragraph 3-4

Since this reading is about retrospectively rated contracts, we might as well be sure we know the definition.

Question: what is a retrospectively rated contract

• a contract where the final premium is based on the loss experience of the policy
• includes loss development after expiration
• final premium is determined by a formula written into the policy or by law

The way it works is that an initial premium is charged, let's say $10,000, then adjustments are made periodically after the policy has expired. For example if 1 year later the loss experience to date has been good, the insured may get $500 back, whereas if the loss experience has been adverse, the insured may be charged an extra $300. This type of arrangement provides incentive to the insured to mitigate and prevent losses.

Question: what is a term for a contract that has retrospective features

• loss-sensitive contract

Question: are premium adjustments due "to" or "from" insureds considered to be admitted assets

• yes, but with certain exceptions, like if amounts are deemed uncollectible

(recall that admitted assets tend to be liquid while non-admitted assets like office furniture tend not to be liquid)

Paragraph 7a

This next fact seems important because it describes (in a very general way) how the premium adjustments are made. That's the key point for retrospectively rated policies.

Question: briefly describe 2 ways of estimating retrospective premium adjustments

[1] apply the historical ratio of (retrospective rated developments)/(earned standard premium) to the premium for the policy being rated

[2] for each risk, compare known to anticipated loss development (including IBNR) to estimate return or additional premium earned at that point in time

Paragraph 9a

This paragraph describes how retrospective premium adjustments are accounted for in financial statements. This strikes me as a likely exam question because there was a similar exam question related to retroactive policies. Click the link to review that topic.

Question: briefly describe the accounting treatment of "accrued additional" & "accrued return" retrospective premium

accrued additional retrospective premium

→ record as a receivable

→ with a corresponding entry in written premium or an adjustment to earned premium

accrued return retrospective premium

→ record as a liability (as a change in unearned premium)

→ with a corresponding entry in written premium or an adjustment to earned premium (same as for accrued additional premium)

Paragraph 13

The last testable topic from SSAP-66 is required financial statement disclosures. Disclosures is an important topic both in the SAO and in financial statements so you should probably have some idea of what needs to be disclosed regarding retrospectively rate policies. It's actually pretty obvious and you can probably guess the answer.

Question: identify required financial statement disclosures regarding retrospectively rated policies

• estimation method for premium adjustments (recall from above that there are 2 methods for doing this)
• accounting method for premium adjustments (whether through written premium or an adjustment to earned premium)
• amount & proportion of net premiums subject to retrospective adjustments (a high proportion increases uncertainty of final costs)
• calculation of non-admitted retrospective premium

About the last disclosure regarding non-admitted retrospective premium: This topic is discussed in paragraph 10 but it is very detailed and involves things like an insured's credit rating and the likelihood of non-collectability of additional premium. I felt that discussion was too detailed to include in the wiki, but you should be aware that not all accrued retrospective premium is admitted and that the non-admitted amount must be disclosed in the notes to the financial statements. (shout-out to AB!)

That's it. We're done! 😲

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