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CHANGES TO SSAP #62 PROPERTY & CASULTY REINSURANCE. NAIC Property and Casualty Reinsurance Study Group Chicago, IL May 10, 2005 Michael Moriarty Director, Capital Markets Bureau NY Insurance Dept. SSAP # 62 CURRENT FRAMEWORK. Reinsurance Accounting or Deposit Accounting

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Changes to ssap 62 property casulty reinsurance

CHANGES TO SSAP #62PROPERTY & CASULTY REINSURANCE

NAIC Property and Casualty Reinsurance Study Group

Chicago, IL

May 10, 2005

Michael Moriarty

Director, Capital Markets Bureau

NY Insurance Dept.


Ssap 62 current framework
SSAP # 62 CURRENT FRAMEWORK

  • Reinsurance Accounting or Deposit Accounting

    • “Either/Or” Approach

    • Standard for Favorable Reinsurance Accounting Treatment: “Transfer of Underwriting Risk”

    • Equates to Significant Risk of Significant Loss

    • Otherwise the Deposit Accounting Approach Applies


Binary approach in ssap 62
Binary Approach in SSAP #62

  • Does Not Reflect the Economics of Certain Significant Reinsurance Transactions

  • Reinsurance Agreements Can Have a Range of Transfer of Insurance Risk

  • Main Intent of Transactions May Be Financing – Temporarily Taking Reserves Off the Books/”Parking” Reserves


Why finance losses in a reinsurance agreement
Why “Finance” Losses In a Reinsurance Agreement

IF Reinsurance Accounting Can Be Secured:

  • Discount in Reserves Can Be “Unlocked”

    • Enhance Capital Position

    • Improve Underwriting Results (& Earnings)

    • Improve Leverage Ratios (NPW to Surplus; Underwriting Ratios; Reserves to Surplus)


Sample transaction excess of loss
Sample TransactionExcess of Loss

  • COVER - $80 Million xs $50 Million

  • GROSS WRITTEN PREMIUM $150 Million

  • EXPECTED LOSSES by Ceding Company

    $120 Million

  • Probability of $110 Million in Losses>90%

  • PREMIUM for Cover $60 Million

  • ACTUAL LOSSES INCURRED $120 Million


Sample transaction excess of loss financial statement impact reinsurance accounting ssap 62
Sample Transaction - Excess of Loss Financial Statement ImpactReinsurance Accounting – SSAP #62


Sample transaction excess of loss what really happened
Sample Transaction - Excess of Loss ImpactWhat Really Happened

  • Reinsurer Took Marginal Risk – Was Exposed to $10 Million Over Expected Losses

  • Exposure Probably Achieved Transfer of Insurance Risk Under 10/10 Rule ($10 Mln Exposure/$60Mln Premium = 16.7% Loss)

  • Ceding Company KNEW it Was Transferring Losses That Would Be Indemnified ($50 Mln to $110 Mln Layer)


Sample transaction excess of loss what is driving transaction
Sample Transaction - Excess of Loss ImpactWhat is Driving Transaction?

  • What is the Economic Purpose of Ceding This Layer? Is it Insurance or Financing?

  • If the Ceding Company Wanted to Hedge its Underwriting Risk, Shouldn’t it Have Secured a $10Mln xs of $120 mln Cover Instead (i.e. Variability Above Expected Losses)

  • Reinsurer May “Lose” on Transaction from Accounting Perspective, but Not Economically

  • Significant Accounting Benefit of “Parking” the Working Layer off-Balance Sheet


Sample transaction excess of loss w bifurcation
Sample Transaction ImpactExcess of Loss w: Bifurcation

  • COVER - $80 Million xs $50 Million

  • GROSS WRITTEN PREMIUM $150 Million

  • EXPECTED LOSSES by Ceding Co. $120 Million

  • Probability of $110 Million in Losses>90%

  • FINANCING PREMIUM for $60 Mln xs $50 Mln = $53 Mln

  • INSURANCE PREMIUM for $20 Mln xs $110 Mln = $7 Mln

  • ACTUAL LOSSES INCURRED $120 Million


Sample transaction excess of loss financial statement impact bifurcation framework
Sample Transaction - Excess of Loss Financial Statement ImpactBifurcation Framework

* $53 Mln Receivable Under Deposit Acct.


Reinsurance accounting vs deposit accounting
Reinsurance Accounting Vs. Deposit Accounting Impact

  • Reinsurance Accounting is Favorable

  • Disclosure Brings Better Transparency, but Does NOT Address the Issue that Seems to Be Driving Certain Transactions

  • How to Address: Bifurcation; Raising the Standard of Transfer of Insurance Risk; Allowing Discounting of Reserves; or Something Else??


Propose revisions to ssap 62
PROPOSE REVISIONS TO SSAP # 62 Impact

  • Discussion Draft Dated May 5, 2005

  • NY Asks That It Be Received by Study Group and Exposed for Public Comment

  • Identify Issues that Need to be Addressed in Order to Connect the Concept with the Practical Application

  • Open to Alternatives

  • Casualty Actuarial Task Force Is Reviewing Issue


Ssap 62 revisions continued
SSAP #62 Revisions (continued) Impact

New Paragraph 1 (N1) - Page 1

  • Statement in the “Reinsurance Contracts Must Include Transfer of Risk” Section that Certain Reinsurance Agreements Will Require Bifurcation

  • It then Refers Readers to New Paragraphs 2, 3, & 4 for Further Guidance


Ssap 62 revisions continued1
SSAP #62 Revisions (continued) Impact

New Paragraph 2 (N1) - Page 3

  • Leads off the New “Bifurcation of Reinsurance Agreements” Section in SSAP

  • Provides Reasoning for Bifurcation of Reinsurance Agreements

  • Alerts Readers that Bifurcation Will Not be Required for All Agreements; Only Those that Exhibit “Common Characteristics of Financing”


Ssap 62 revisions continued2
SSAP #62 Revisions (continued) Impact

New Paragraph 3 (N3) - Page 3

  • Paragraph Specifies Six Categories of Reinsurance Agreements that Need NOT be Bifurcated

    • Excess Per Risk - Does Not Lend Itself To Predictability

    • Excess Per Occurrence - “ “ “

    • Fronting Arrangements - No Reserves Typically Kept by Ceding Company


Ssap 62 revisions continued3
SSAP #62 Revisions (continued) Impact

New Paragraph 3 (N3) - Page 3 (continued)

  • Six Categories of Reinsurance Agreements that Need NOT be Bifurcated

    • Facultative - Have Not See Abuses in These Types of Deals

    • Premium/Limit Ratio is Low - In Financing Deals, the Premium Is “High” in Relation to the Losses Transferred, Which are Generally Capped

    • Any Other Agreements - that do not have the “Finite” Characteristics Set Forth In New Paragraph 4


Ssap 62 revisions continued4
SSAP #62 Revisions (continued) Impact

New Paragraph 4 (N4) - Pages 3 & 4

  • Sets Forth Those Reinsurance Agreements NOT Specifically Exempted That Need to Be Bifurcated

  • Three Broad Categories

    • Contain Specific Contract Provisions

    • All Retroactive Agreements

    • All Multi-Year Agreements

  • If Exempted Under N3 OR Does Not Meet Any of the Conditions in N4, Agreement Need NOT Be Bifurcated


Ssap 62 revisions continued5
SSAP #62 Revisions (continued) Impact

New Paragraph 4 (N4) - Page 3 & 4 (continued)

  • Contractual Provisions Triggering Bifurcation

    • Premium/Limit Ratio is High - In Financing Deals, the Premium Is “High” in Relation to the Losses Transferred, Which are Generally Capped

    • Aggregate Loss Ratio Limits - Transferring Expected Losses

    • Loss Corridors - Limitations on Reinsurer’s Exposure

    • Retrospective Premium Adjustments - Revisions Intended to Reimburse Reinsurer’s Losses Under Contract


Ssap 62 revisions continued6
SSAP #62 Revisions (continued) Impact

New Paragraph 4 (N4) - Page 3 & 4 (continued)

  • Contractual Provisions Triggering Bifurcation (continued)

    • Sliding Scale/Adjustable Commissions - Can Reduce Reinsurer’s Expenses Based Upon Losses

    • Mandatory Reinstatement Premiums - Can Ensure that Reinsurer is Reimbursed for Unexpected Incurred Losses

    • Commutation Clause - allows ceding insurers a full refund of unused premiums


Ssap 62 revisions continued7
SSAP #62 Revisions (continued) Impact

New Paragraph 4 (N4) - Page 3 & 4 (continued)

  • Contractual Provisions Triggering Bifurcation (continued)

    • Conditional Cancellation Provisions That Require Entering Into New Agreements - Can Move Obligations from One Period to a Future Period

    • No Consistent Reporting - Indicative of Minimal Substance to Agreement

    • Funds Held - allows ceding insurers to retain funds to pay losses


Ssap 62 revisions continued8
SSAP #62 Revisions (continued) Impact

New Paragraph 5 (N5) - Page 4

  • Guidance on HOW to Account for Bifurcation of Reinsurance Agreements

    • Estimate Layer of Coverage Where There is a Greater than Ninety Percent Probability That Ceding Company Will be Indemnified for Losses

    • Premiums/Expenses/Losses Attributable to That Layer Gets Booked Under Deposit Accounting Guidance; Remainder Gets Booked under Reinsurance Accounting Guidance


Ssap 62 revisions continued9
SSAP #62 Revisions (continued) Impact

Changes to Eliminate Current Treatment for Retroactive Agreements - Pages 5-9

  • ALL Retroactive Reinsurance Contracts Must be Bifurcated

  • Portion that Transfers Insurance Risk Should Be Reported Under Reinsurance Guidance; Part that Finances Losses Should Be Reported Under Deposit Accounting Guidance

  • Similar to FAS 113 Approach


Ssap 62 revisions continued10
SSAP #62 Revisions (continued) Impact

Implementation Q&A - Page 9

  • NO CHANGES Pending Exposure of Concepts Under Consideration

  • Revisions WILL Be Needed


Ssap 62 project p c reinsurance study group timetable
SSAP #62 PROJECT ImpactP&C REINSURANCE STUDY GROUP TIMETABLE

  • P/C Reinsurance Study Group – continue to review over Summer

  • August – Receive Report from NAIC Casualty Actuarial Task Force

  • Put a Final Proposal on Study Group’s Agenda in the Fall and Move to Statutory Accounting Principles Working Group