Sample Questions
Question 1
Easy
The provision for reinsurance calculated in Schedule F of the P&C Annual Statement is best described as:
Solution
C is correct. The provision for reinsurance is a statutory liability that reduces surplus. It captures the collectibility risk of ceded balances by charging for recoverables from unauthorized reinsurers (unless collateralized) and for authorized-reinsurer balances that are overdue, functioning as a penalty for weak security and slow payment.
Question 2
Medium
A reinsurer that stopped writing casualty business several years ago is winding down its remaining portfolio and offers a lump sum to commute a decade-old excess of loss treaty with a solvent, authorized cedant. Which motivation best explains the reinsurer's interest in the commutation?
Solution
B is correct. Commutation motivations are party specific, and the stem pins the reinsurer. A reinsurer in run-off pays consideration to extinguish assumed obligations, which removes the assumed reserves and the associated adverse development risk from its balance sheet, releases the capital supporting those reserves, ends years of claim monitoring and reporting cost on a line it no longer writes, and lets it close out and eventually dissolve the run-off entity. The cedant's motivations run the other way: it receives cash, sheds counterparty credit risk on future recoverables, and clears any related balance sheet provision. Because the reinsurer is the payer, a cash infusion is never its reason to commute. Deferral is also not available as a motive: each party recognizes the effect of the settlement in the period of the commutation, with the tax leg measured against discounted reserves under the IRC section 846 rules rather than statutory carried amounts, and the deferral of gain until recoveries exceed consideration belongs to retroactive reinsurance accounting under SSAP No. 62R, not to a commutation by the assuming party.
Question 3
Hard
A ceding insurer enters a retroactive reinsurance agreement, paying $34,000,000 of consideration to transfer $40,000,000 of booked loss reserves on prior accident years. The contract qualifies as reinsurance (risk transfer is met). Under statutory accounting for retroactive reinsurance, how is the resulting gain treated in the ceding company's surplus?
Solution
E is correct. Under statutory accounting for retroactive reinsurance the cedant's loss reserves remain GROSS; the ceded amount is recorded as a write-in contra-liability that reduces total liabilities, while the consideration paid reduces assets. The surplus gain equals ceded reserves minus consideration: $40,000,000 - $34,000,000 = $6,000,000. Statutory rules segregate that gain into a special surplus account (special surplus from retroactive reinsurance) so it is not unassigned funds available for dividends until recoveries exceed the consideration paid. The deposit answer applies only where risk transfer fails, the $40,000,000 answer counts the whole ceded balance instead of netting the consideration, and the $34,000,000 decline ignores the contra-liability entirely.
