Insurance Insights
When Reinsurance Premium Payable Turns into an Asset
Article reading time: 2 minutes 20 seconds
Hot Take:
Occasionally, non-proportional treaty reinsurance contracts can cause an anomaly in an insurance company’s reporting, potentially turning a reinsurance premium payable into an asset. How? And can this asset be admitted under statutory accounting principles?
Full Article
Non-proportional reinsurance
Under a non-proportional reinsurance treaty, a reinsurer agrees to cover the losses of a reinsured that exceeds a certain amount up to pre-agreed limits (e.g., stop loss, excess of loss, catastrophe reinsurance). The reinsurer will calculate the price for this protection based on factors such as previous loss experience and estimated premium written to be included in the reinsurance contract. The calculated deposit premium will be paid by the reinsured in installments (e.g., semi-annually or quarterly) over the effective period of the treaty.
Because the installments are based on the expected premium volume at the beginning of the treaty period, an adjustment is required at the expiration date to settle the difference between estimated and actual premium written.
Reinsurance premium payable turns into an asset
Accountants occasionally come across a scenario whereby a liability for reinsurance premium on the insurance company’s financial statements becomes an asset. It is due to a difference caused by the actual premiums at the financial statement date (not coinciding with the treaty expiration date) being lower than expected.
Example:
Insurance Company Inc. enters a property excess per risk reinsurance contract with Reinsurer Re. This is a one-year contract effective July 1, 20X1. The deposit premium is payable in four installments on September 30 and December 31, 20X1, and March 31 and June 30, 20X2.
Within 90 days following the expiration of the contract, the Insurance Company Inc. is to calculate adjusted premium and report it to Reinsurer Re. The adjusted premium shall be equal to the greater of:
- Deposit premium, or
A percentage (i.e., premium rate) of the subject net earned premium.
Assume that Insurance Company Inc. wrote less premium in Q3 and Q4 20X1 than expected when entering the reinsurance contract. At December 31, 20X1, the year-end reporting date, the net earned premium subject to the reinsurance treaty was $12,000,000.
In absence of any other reinsurance agreements that would result in a liability to offset the calculated reinsurance premium, there is a calculated asset of $119,200 at December 31, 20X1.
As far as the asset admissibility, SSAP 62, ⁋22 makes the following statement: “Reinsurance assets meet the definition of assets as defined by SSAP No. 4—Assets and Nonadmitted Assets and are admitted to the extent they conform to the requirements of this statement.” While SSAP 62 does not specifically identify the scenario above (reinsurance premium payable turns temporarily into an asset), the intent of the statement appears to be to admit such asset as long as respective reinsurers are solvent and in good standing. If reinsurer solvency or standing were an issue, the situation would be open to interpretation based on the circumstances of the asset development.
Had the declining trend continued for the remainder of the treaty, in our example, Reinsurer Re would need to return some of the excess reinsurance deposit premium received upon expiration of the treaty, but not more than the minimum premiums that it is entitled to per the reinsurance contract.
Conclusion
Insurance companies experiencing declining premium writings and a tight surplus may, paradoxically, need to monitor assets generated by their worsened financial position closely. Given the strict nature of the SSAPs, these companies must carefully analyze the admissibility of these assets for financial reporting purposes.
