2017 Fall Q12

Under GAAP accounting, liability increases because a retro reins liability is created to offset deferred gain. So how does the PHS not decrease? If Liability increases, PHS should decrease...

Comments

  • Is it because an asset is created for the deferred gain amt and it equals the liability exactly?

  • Yes. GAAP liability is gross of retro reins, and an asset is set up for retro ceded reserves. They cancel each other, and surplus stays the same.

    There's more to it. Here's from the wiki:

    "When retroactive reinsurance is purchased, any income gain is deferred then amortized. The way this is done on the books is to set up a liability and gradually decrease this liability as the gain is "earned"."

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