NAIC.SSAP-62R

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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.

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Study Tips

The syllabus lists paragraphs 1-90 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 of the 90 paragraphs, takes notes, then memorize. Unfortunately that's also the dumbest 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 to pull out of their ass, 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
reference part (a) part (b) part (c) part (d)
E (2018.Spring #27) reinsurance benefits:
- use B/S & I/S 		reins accting treatment:
- prospective / retroactive
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 		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).

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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
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 retrospective. It's more detailed than you need to do the exam problems, but it can't hurt to take a look. I will walk you through how to use it in the quiz.

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. Click the link and study the definition. Then do the quiz below.

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And some related exam problems:

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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 2 main things to understand:

  • 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.

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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)

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