amount of claims in any given contract period.

Unauthorized Reinsurer

A reinsurer that is neither authorized, certified nor accredited (see "Authorized Reinsurer" and
"Certified Reinsurer"). The ceding entity still may be able to take credit in its financial statements for
reinsurance ceded to an unauthorized reinsurer if the reinsurer provides sufficient security for
amounts due under the reinsurance treaty. This can usually be accomplished by permitting the ceding
entity to withhold funds due the reinsurer (funds withheld approach) or by the reinsurer providing the
ceding entity with a letter of credit, in a form acceptable to the state in question, or by the reinsurer
establishing a trust agreement for the benefit of the ceding entity.

Yearly Renewable Term (YRT)

A form of life reinsurance under which the mortality or morbidity risks, but not the permanent plan
reserves, are transferred to the reinsurer for a premium that varies each year with the amount at risk
and the ages of the insureds. The amount of reinsurance, which may change annually, is generally the
amount of insurance provided by the policy in excess of the primary insurer's reserve.

SSAP No. 62 - Revised

Property and Casualty Reinsurance

STATUS

Type of Issue: Common Area

Issued: Finalized March 13, 2000; Substantively revised December 5, 2009, and
December 18, 2012
Effective Date: January 1, 2001; Substantive revisions in paragraphs 31.e., 81-84 and 99
(detailed in Issue Paper No. 137) effective January 1, 2010; Certified reinsurer
changes effective December 31, 2012
Affects: Supersedes SSAP No. 75 with guidance incorporated August 2011; Nullifies
and incorporates INT 02-06 and INT 02-09
Affected by: No other pronouncements
Interpreted by: INT 02-22, INT 03-02
Relevant Appendix A Guidance: A-440; A-785

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STATUS

SCOPE OF STATEMENT

SUMMARY CONCLUSION

General

Characteristics of Reinsurance Agreements

Required Terms for Reinsurance Agreements

Reinsurance Agreements with Multiple Cedents

Reinsurance Contracts Must Include Transfer of Risk

Accounting for Reinsurance

Accounting for Prospective Reinsurance Agreements

Accounting for Retroactive Reinsurance Agreements

Deposit Accounting

Assumed Reinsurance

Ceded Reinsurance

Adjustable Features/Retrospective Rating

Commissions

Unauthorized Reinsurance

Reinsurance Ceded to a Certified Reinsurer

Funds Held Under Reinsurance Treaties

Provision for Reinsurance

Asbestos and Pollution Contracts - Counterparty Reporting Exception

Syndicated Letters of Credit

Disputed Items

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 Uncollectible Reinsurance

Commutations

National Flood Insurance Program

Accounting for the Transfer of Property and Casualty Run-off Agreements

Disclosures

Relevant Literature

Effective Date and Transition

REFERENCES

Relevant Issue Papers

CLASSIFYING REINSURANCE CONTRACTS

EXHIBIT A – IMPLEMENTATION QUESTIONS AND ANSWERS

EXHIBIT B – P&C RUNOFF REINSURANCE TRANSACTIONS

EXHIBIT C – ILLUSTRATION OF A REINSURANCE CONTRACT THAT IS ACCOUNTED

FOR AS A DEPOSIT USING THE INTEREST METHOD

EXHIBIT D – ILLUSTRATION OF ASBESTOS AND POLLUTION COUNTERPARTY

REPORTING EXCEPTION

Property and Casualty Reinsurance

SCOPE OF STATEMENT

1. This statement establishes statutory accounting principles for property and casualty reinsurance.
A wide range of methods for structuring reinsurance arrangements can be employed depending on the
requirements of individual companies. This statement deals with the more commonly employed methods.

SUMMARY CONCLUSION

© 1999-2017 National Association of Insurance Commissioners

 General

2. Reinsurance is the assumption by an insurer of all or part of a risk undertaken originally by

another insurer. The transaction whereby a reinsurer cedes all or part of the reinsurance it has assumed to
another reinsurer is known as a retrocession.

3. Reinsurance has many beneficial purposes. Among them are that it enables an insurance entity
to (a) expand its capacity, (b) share large risks with other insurers, (c) spread the risk of potential
catastrophes and stabilize its underwriting results, (d) finance expanding volume by sharing the financial
burden of reserves, (e) withdraw from a line or class of business, and (f) reduce its net liability to
amounts appropriate to its financial resources.

4. Reinsurance agreements are generally classified as treaty or facultative. Treaty reinsurance refers
to an arrangement involving a class or type of business written, while facultative reinsurance involves
individual risks offered and accepted.

5. Reinsurance coverage can be pro rata (i.e., proportional reinsurance) where the reinsurer shares a
pro rata portion of the losses and premium of the ceding entity or excess of loss (i.e., non-proportional)
where the reinsurer, subject to a specified limit, indemnifies the ceding entity against the amount of loss
in excess of a specified retention. Most reinsurance agreements fall into one of the following categories:

I. Treaty Reinsurance Contracts–Pro Rata:

A. Quota Share Reinsurance–The ceding entity is indemnified against a fixed

percentage of loss on each risk covered in the agreement;

B. Surplus Share Reinsurance–The ceding entity establishes a retention or "line" on

the risks to be covered and cedes a fraction or a multiple of that line on each
policy subject to a specified maximum cession;

II. Treaty Reinsurance Contracts-Excess of Loss:

A. Excess Per Risk Reinsurance–The ceding entity is indemnified, subject to a

specified limit, against the amount of loss in excess of a specified retention with
respect to each risk covered by a treaty;

B. Aggregate Excess of Loss Reinsurance–The ceding entity is indemnified against

the amount by which the ceding entity's net retained losses incurred during a
specific period exceed either a predetermined dollar amount or a percentage of
the entity's subject premiums for the specific period subject to a specified limit;

III. Treaty Reinsurance Contracts–Catastrophe: The ceding entity is indemnified, subject to a

specified limit, against the amount of loss in excess of a specified retention with respect

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 to an accumulation of losses resulting from a catastrophic event or series of events;

IV. Facultative Reinsurance Contracts–Pro Rata: The ceding entity is indemnified for a
specified percentage of losses and loss expenses arising under a specific insurance policy
in exchange for that percentage of the policy's premium;

V. Facultative Reinsurance Contracts–Excess of Loss: The ceding entity is indemnified,

subject to a specified limit, for losses in excess of its retention with respect to a
particular risk.

Characteristics of Reinsurance Agreements

6. Common contract provisions that may affect accounting practices include:

a. Reporting responsibility of the ceding entity-Details required and time schedules shall be
established;

b. Payment terms–Time schedules, currencies intended, and the rights of the parties to
withhold funds shall be established;

c. Payment of premium taxes-Customarily the responsibility of the ceding entity, a recital

of nonliability of the reinsurer may be found;

d. Termination–May be on a cut-off or run-off basis. A cut-off provision stipulates that the

reinsurer shall not be liable for loss as a result of occurrences taking place after the date
of termination. A run-off provision stipulates that the reinsurer shall remain liable for
loss under reinsured policies in force at the date of termination as a result of occurrences
taking place after the date of termination until such time as the policies expire or are
canceled; and

e. Insolvency clause–Provides for the survival of the reinsurer's obligations in the event of
insolvency of the ceding entity, without diminution because of the insolvency.

7. Reinsurance contracts shall not permit entry of an order of rehabilitation or liquidation to

constitute an anticipatory breach by the reporting entity, nor grounds for retroactive revocation or
retroactive cancellation of any contracts of the reporting entity.

Required Terms for Reinsurance Agreements

8. In addition to credit for reinsurance requirements applicable to reinsurance transactions

generally, no credit or deduction from liabilities shall be allowed by the ceding entity for reinsurance
recoverable where the agreement was entered into after the effective date of these requirements (see

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paragraphs 108 and 109) unless each of the following conditions is satisfied:

a. The agreement must contain an acceptable insolvency clause;

b. Recoveries due the ceding entity must be available without delay for payment of losses
and claim obligations incurred under the agreement, in a manner consistent with orderly
payment of incurred policy obligations by the ceding entity;

c. The agreement shall constitute the entire contract between the parties and must provide
no guarantee of profit, directly or indirectly, from the reinsurer to the ceding entity or
from the ceding entity to the reinsurer;

d. The agreement must provide for reports of premiums and losses, and payment of losses,
no less frequently than on a quarterly basis, unless there is no activity during the period.
The report of premiums and losses shall set forth the ceding entity's total loss and loss
expense reserves on the policy obligations subject to the agreement, so that the
respective obligations of the ceding entity and reinsurer will be recorded and reported on
a basis consistent with this statement;

e. The agreement must include a proper reinsurance intermediary clause, if applicable,

which stipulates that the credit risk for the intermediary is carried by the assuming
insurance entity;

f. With respect to reinsurance contracts involving a certified reinsurer, the agreement must
include a proper funding clause, which requires the certified reinsurer to provide and
maintain security in an amount sufficient to avoid the imposition of any financial
statement penalty on the ceding insurance entity for reinsurance ceded to the certified
reinsurer. However, this does not preclude negotiation for higher contractual collateral
amounts; and

g. With respect to retroactive reinsurance agreements, the following additional conditions

apply:

i. The consideration to be paid by the ceding entity for the retroactive reinsurance
must be a sum certain stated in the agreement;

ii. Direct or indirect compensation to the ceding entity or reinsurer is prohibited;

iii. Any provision for subsequent adjustment on the basis of actual experience in
regard to policy obligations transferred, or on the basis of any other formula, is
prohibited in connection with a retroactive reinsurance transaction, except that
provision may be made for the ceding entity's participation in the reinsurer's
ultimate profit, if any, under the agreement;

iv. A retroactive reinsurance agreement shall not be canceled or rescinded without

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 the approval of the commissioner of the domiciliary state of the ceding entity.

Reinsurance Agreements with Multiple Cedents

9. Reinsurance agreements with multiple cedents require allocation agreements. The allocation
agreement can be part of the reinsurance agreement or a separate agreement. If the agreement has
multiple cedents:

a. The allocation must be in writing and

b. The terms of the allocation agreement must be fair and equitable

Reinsurance Contracts Must Include Transfer of Risk

10. The essential ingredient of a reinsurance contract is the transfer of risk. The essential element of
every true reinsurance agreement is the undertaking by the reinsurer to indemnify the ceding entity, i.e.,
reinsured entity, not only in form but in fact, against loss or liability by reason of the original insurance.
Unless the agreement contains this essential element of risk transfer, no credit shall be recorded. (INT 02-22)

11. Insurance risk involves uncertainties about both (a) the ultimate amount of net cash flows from
premiums, commissions, claims, and claims settlement expenses (underwriting risk) and (b) the timing of
the receipt and payment of those cash flows (timing risk). Actual or imputed investment returns are not
an element of insurance risk. Insurance risk is fortuitous–the possibility of adverse events occurring is
outside the control of the insured.

12. Determining whether an agreement with a reinsurer provides indemnification against loss or
liability (transfer of risk) relating to insurance risk requires a complete understanding of that contract and
other contracts or agreements between the ceding entity and related reinsurers. A complete understanding
includes an evaluation of all contractual features that (a) limit the amount of insurance risk to which the
reinsurer is subject (e.g., experience refunds, cancellation provisions, adjustable features, or additions of
profitable lines of business to the reinsurance contract) or (b) delay the timely reimbursement of claims
by the reinsurer (e.g., payment schedules or accumulating retentions from multiple years).

13. Indemnification of the ceding entity against loss or liability relating to insurance risk in
reinsurance requires both of the following:

a. The reinsurer assumes significant insurance risk under the reinsured portions of the
underlying insurance agreements; and

b. It is reasonably possible that the reinsurer may realize a significant loss from the
transaction.

14. A reinsurer shall not have assumed significant insurance risk under the reinsured contracts if the
© 1999-2017 National Association of Insurance Commissioners
probability of a significant variation in either the amount or timing of payments by the reinsurer is
remote. Implicit in this condition is the requirement that both the amount and timing of the reinsurer's
payments depend on and directly vary with the amount and timing of claims settled by the ceding entity.
Contractual provisions that delay timely reimbursement to the ceding entity prevent this condition from
being met.

15. The ceding entity's evaluation of whether it is reasonably possible for a reinsurer to realize a
significant loss from the transaction shall be based on the present value of all cash flows between the
ceding and assuming companies under reasonably possible outcomes, without regard to how the
individual cash flows are described or characterized. An outcome is reasonably possible if its probability
is more than remote. The same interest rate shall be used to compute the present value of cash flows for
each reasonably possible outcome tested. A constant interest rate shall be used in determining those
present values because the possibility of investment income varying from expectations is not an element
of insurance risk. Judgment is required to identify a reasonable and appropriate interest rate.

16. Significance of loss shall be evaluated by comparing the present value of all cash flows,
determined as described in paragraph 15, with the present value of the amounts paid or deemed to have
been paid to the reinsurer. If, based on this comparison, the reinsurer is not exposed to the reasonable
possibility of significant loss, the ceding entity shall be considered indemnified against loss or liability
relating to insurance risk only if substantially all of the insurance risk relating to the reinsured portions of
the underlying insurance agreements has been assumed by the reinsurer. In this narrow circumstance, the
reinsurer's economic position is virtually equivalent to having written the insurance contract directly.
This condition is met only if insignificant insurance risk is retained by the ceding entity on the retained
portions of the underlying insurance contracts, so that the reinsurer's exposure to loss is essentially the
same as the reporting entity's.

17. Payment schedules and accumulating retentions from multiple years are contractual features
inherently designed to delay the timing of reimbursement to the ceding entity. Regardless of what a
particular feature might be called, any feature that can delay timely reimbursement violates the
conditions for reinsurance accounting. Transfer of insurance risk requires that the reinsurer's payment to
the ceding entity depend on and directly vary with the amount and timing of claims settled under the
reinsured contracts. Contractual features that can delay timely reimbursement prevent this condition from
being met. Therefore, any feature that may affect the timing of the reinsurer's reimbursement to the
ceding entity shall be closely scrutinized.

Accounting for Reinsurance

18. Reinsurance recoverables shall be recognized in a manner consistent with the liabilities
(including estimated amounts for claims incurred but not reported) relating to the underlying reinsured
contracts. Assumptions used in estimating reinsurance recoverables shall be consistent with those used in
estimating the related liabilities. Certain assets and liabilities are created by entities when they engage in
reinsurance contracts. 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

© 1999-2017 National Association of Insurance Commissioners

statement.

19. Accounting for members of a reinsurance pool shall follow the accounting for the pool member
which issued the underlying policy.(INT 03-02) Specific accounting rules for underwriting pools and
associations are addressed in SSAP No. 63–Underwriting Pools.

20. Reinsurance recoverable on loss payments is an admitted asset. Notwithstanding the fact that
reinsurance recoverables on paid losses may meet the criteria for offsetting under the provisions of SSAP
No. 64–Offsetting and Netting of Assets and Liabilities (SSAP No. 64), reinsurance recoverables on paid
losses shall be reported as an asset without any available offset. Unauthorized reinsurance and
reinsurance ceded to certified reinsurers is included in this asset and reflected separately as a liability to
the extent required. Penalty for overdue authorized reinsurance shall be reflected as a liability.

21. Funds held or deposited with reinsured companies, whether premiums withheld as security for
unearned premium and outstanding loss reserves or advances for loss payments, are admitted assets
provided they do not exceed the liabilities they secure and provided the reinsured is solvent. Those funds
which are in excess of the liabilities, and any funds held by an insolvent reinsured shall be nonadmitted.

22. Prospective reinsurance is defined as reinsurance in which a reinsurer agrees to reimburse a

ceding entity for losses that may be incurred as a result of future insurable events covered under contracts
subject to the reinsurance. Retroactive reinsurance is defined as reinsurance in which a reinsurer agrees
to reimburse a ceding entity for liabilities incurred as a result of past insurable events covered under
contracts subject to the reinsurance. A reinsurance agreement may include both prospective and
retroactive reinsurance provisions.

23. The distinction between prospective and retroactive reinsurance agreements is based on whether
the agreement reinsures future or past insured events covered by the underlying insurance policies. For
example, in occurrence-based insurance, the insured event is the occurrence of a loss covered by the
insurance contract. In claims-made insurance, the insured event is the reporting to the insurer, within the
period specified by the policy, of a claim for a loss covered by the insurance agreement. A claims-made
reinsurance contract that reinsures claims asserted to the reinsurer in a future period as a result of insured
events that occurred prior to entering into the reinsurance agreement is a retroactive agreement.
(However, a reinsurance agreement that reinsures claims reported to an insurer that are covered under
currently effective claims-made insurance policies is a prospective reinsurance agreement.)

24. It is not uncommon for a reinsurance arrangement to be initiated before the beginning of a policy
period but not finalized until after the policy period begins. Whether there was agreement in principle at
the beginning of the policy period and, therefore, the agreement is substantively prospective shall be
determined based on the facts and circumstances. However, except as respects business assumed by a
U.S. reinsurer from ceding companies domiciled outside the U.S. and not affiliated with such reinsurer,
or business assumed by a U.S. reinsurer where either the lead reinsurer or a majority of the capacity on
the agreement is domiciled outside the U.S. and is not affiliated with such reinsurer, if an agreement
entered into, renewed or amended on or after January 1, 1994 has not been finalized, reduced to a written
form and signed by the parties within nine months after the commencement of the policy period covered
by the reinsurance arrangement, then the arrangement is presumed to be retroactive and shall be
© 1999-2017 National Association of Insurance Commissioners
accounted for as a retroactive reinsurance agreement. This presumption shall not apply to: (a) facultative
reinsurance contracts, nor to (b) reinsurance agreements with more than one reinsurer which are signed
by the lead reinsurer (i.e., the reinsurer setting the terms of the agreement for the reinsurers) within nine
months after the commencement of the policy period covered by the reinsurance agreement, nor to (c)
reinsurance agreements with more than one reinsurer (whether signed by the lead reinsurer or not) which
were entered into, renewed or amended on or before December 31, 1996, (and which were not renewed
or amended after that date) if reinsurers representing more than 50% of the capacity on the agreement
have signed cover notes, placement slips or similar documents describing the essential terms of coverage
and exclusions within nine months after the commencement of the policy period covered by the
reinsurance arrangement. Also exempt from this presumption are reinsurance agreements where one of
the parties is in conservation, rehabilitation, receivership or liquidation proceedings.

25. Prospective and retroactive provisions included within a single agreement shall be accounted for
separately. If separate accounting for prospective and retroactive provisions included within a single
agreement is impracticable, the agreement shall be accounted for as a retroactive agreement provided the
conditions for reinsurance accounting are met.

Accounting for Prospective Reinsurance Agreements

26. Amounts paid for prospective reinsurance that meet the conditions for reinsurance accounting
shall be reported as a reduction of written and earned premiums by the ceding entity and shall be earned
over the remaining contract period in proportion to the amount of reinsurance protection provided or, if
applicable, until the reinsurer's maximum liability under the agreement has been exhausted. If the
amounts paid are subject to adjustment and can be reasonably estimated, the basis for amortization shall
be the estimated ultimate amount to be paid. Reinstatement premium, if any, shall be earned over the
period from the reinstatement of the limit to the expiration of the agreement.

27. Changes in amounts of estimated reinsurance recoverables shall be recognized as a reduction of

gross losses and loss expenses incurred in the current period statement of income. Reinsurance
recoverables on paid losses shall be reported as an asset, reinsurance recoverables on loss and loss
adjustment expense payments, in the balance sheet. Reinsurance recoverables on unpaid case-basis and
incurred but not reported losses and loss adjustment expenses shall be netted against the liability for
gross losses and loss adjustment expenses.

Accounting for Retroactive Reinsurance Agreements

28. Certain reinsurance agreements which transfer both components of insurance risk cover
liabilities which occurred prior to the effective date of the agreement. Due to potential abuses involving
the creation of surplus to policyholders and the distortion of underwriting results, special accounting
treatment for these agreements is warranted.

29. All retroactive reinsurance agreements entered into, renewed or amended on or after January 1,
© 1999-2017 National Association of Insurance Commissioners
1994 (including subsequent development of such transactions) shall be accounted for and reported in the
following manner:

a. The ceding entity shall record, without recognition of the retroactive reinsurance, loss
and loss expense reserves on a gross basis on the balance sheet and in all schedules and
exhibits;

b. The assuming entity shall exclude the retroactive reinsurance from loss and loss expense
reserves and from all schedules and exhibits;

c. The ceding entity and the assuming entity shall report by write-in item on the balance
sheet, the total amount of all retroactive reinsurance, identified as retroactive reinsurance
reserve ceded or assumed, recorded as a contra-liability by the ceding entity and as a
liability by the assuming entity;

d. The ceding entity shall, by write-in item on the balance sheet, restrict surplus resulting
from any retroactive reinsurance as a special surplus fund, designated as special surplus
from retroactive reinsurance account;

e. The surplus gain from any retroactive reinsurance shall not be classified as unassigned
funds (surplus) until the actual retroactive reinsurance recovered exceeds the
consideration paid;

f. The special surplus from retroactive reinsurance account for each respective retroactive
reinsurance agreement shall be reduced at the time the ceding entity begins to recover
funds from the assuming entity in amounts exceeding the consideration paid by the
ceding entity under such agreement, or adjusted as provided in paragraph 29.j.;

g. For each agreement, the reduction in the special surplus from retroactive reinsurance
account shall be limited to the lesser of (i) the actual amount recovered in excess of
consideration paid or (ii) the initial surplus gain resulting from the respective retroactive
reinsurance agreement. Any remaining balance in the special surplus from retroactive
reinsurance account derived from any such agreement shall be returned to unassigned
funds (surplus) upon elimination of all policy obligations subject to the retroactive
reinsurance agreement;

h. The ceding entity shall report the initial gain arising from a retroactive reinsurance
transaction (i.e., the difference between the consideration paid to the reinsurer and the
total reserves ceded to the reinsurer) as a write-in item on the statement of income, to be
identified as Retroactive Reinsurance Gain and included under Other Income;

i. The assuming entity shall report the initial loss arising from a retroactive reinsurance
transaction, as defined in the preceding paragraph 29.g., as a write-in item on the
statement of income, to be identified as Retroactive Reinsurance Loss and included

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 under Other Income;

j. Any subsequent increase or reduction in the total reserves ceded under a retroactive
reinsurance agreement shall be reported in the manner described in the preceding
paragraphs 29.h. and 29.i., in order to recognize the gain or loss arising from such
increase or reduction in reserves ceded. The Special Surplus from Retroactive
Reinsurance Account write-in entry on the balance sheet shall be adjusted, upward or
downward, to reflect such increase or reduction in reserves ceded. The Special Surplus
from Retroactive Reinsurance Account write-in entry shall be equal to or less than the
total ceded reserves under all retroactive reinsurance agreements in-force as of the date
of the financial statement. Special surplus arising from a retroactive reinsurance
transaction shall be considered to be earned surplus (i.e., transferred to unassigned funds
(surplus)) only when cash recoveries from the assuming entity exceed the consideration
paid by the ceding entity as respects such retroactive reinsurance transaction; and

k. The consideration paid for a retroactive reinsurance agreement shall be reported as a

decrease in ledger assets by the ceding entity and as an increase in ledger assets by the
assuming entity.

(For an illustration of ceding entity accounting entries see Question 33 in Exhibit A.)

30. Portfolio reinsurance is the transfer of an insurer's entire liability for in force policies or
outstanding losses, or both, of a segment of the insurer's business. Loss portfolio transactions are to be
accounted for as retroactive reinsurance.

31. The accounting principles for retroactive reinsurance agreements in paragraph 29 shall not apply
to the following types of agreements (which shall be accounted for as prospective reinsurance agreements
unless otherwise provided in this statement):

a. Structured settlement annuities for individual claims purchased to implement settlements

of policy obligations;

b. Novations, (i.e., (i) transactions in which the original direct insurer's obligations are
completely extinguished, resulting in no further exposure to loss arising on the business
novated or (ii) transactions in which the original assuming entity's obligations are
completely extinguished) resulting in no further exposure to loss arising on the business
novated, provided that (1) the parties to the transaction are not affiliates (or if affiliates,
that the transaction has the prior approval of the domiciliary regulators of the parties)
and (2) the accounting for the original reinsurance agreement will not be altered from
retroactive to prospective;

c. The termination of, or reduction in participation in, reinsurance treaties entered into in
the ordinary course of business;

d. Intercompany reinsurance agreements, and any amendments thereto, among companies

© 1999-2017 National Association of Insurance Commissioners

 100% owned by a common parent or ultimate controlling person provided there is no
gain in surplus as a result of the transaction; or

e. Reinsurance/retrocession agreements that meet the criteria of property/casualty run-off

agreements described in paragraphs 81-84.

32. Retroactive reinsurance agreements resulting in surplus gain to the ceding entity (with or without
risk transfer) entered into between affiliates or between insurers under common control (as those terms
are defined in Appendix A-440) shall be reported as follows:

a. The consideration paid by the ceding entity shall be recorded as a deposit and reported as
a nonadmitted asset; and

b. No deduction shall be made from loss and loss adjustment expense reserves on the
ceding entity's balance sheet, schedules, and exhibits.

33. The accounting and reporting provisions applicable to retroactive reinsurance apply to all
transactions transferring liabilities in connection with a court-ordered rehabilitation, liquidation, or
receivership. The requirement to include stipulated contract provisions in the reinsurance agreements
shall not apply to these transactions, with written approval of the ceding entity's domiciliary
commissioner.

34. Novations meeting the requirements of paragraph 31.b. shall be accounted for as prospective
reinsurance agreements. The original direct insurer, or the original assuming insurer, shall report amounts
paid as a reduction of written and earned premiums, and unearned premiums to the extent that premiums
have not been earned. Novated balances (e.g., loss and loss adjustment expense reserves) shall be written
off through the accounts, exhibits, and schedules in which they were originally recorded. The assuming
insurer shall report amounts received as written and earned premiums, and obligations assumed as
incurred losses in the statement of income.

Deposit Accounting

35. To the extent that a reinsurance agreement does not, despite its form, transfer both components
of insurance risk, all or part of the agreement shall be accounted for and reported as deposits in the
following manner:

a. At the outset of the reinsurance agreement, the net consideration paid by the ceding
entity (premiums less commissions or other allowances) shall be recorded as a deposit by
the ceding company and as a liability by the assuming entity. The deposit shall be
reported as an admitted asset by the ceding company if (i) the assuming company is
licensed, accredited or otherwise qualified in the ceding company's state of domicile as
described in Appendix A-785 or (ii) there are funds held by or on behalf of the ceding
company which meet the requirements of paragraph 18 of Appendix A-785;

© 1999-2017 National Association of Insurance Commissioners

 b. At subsequent reporting dates, the amount of the deposit/liability shall be adjusted by
calculating the effective yield on the deposit agreement to reflect actual payments to date
(receipts and disbursements shall be recorded through the deposit/liability accounts) and
expected future payments (as discussed below), with a corresponding credit or charge to
interest income or interest expense;

c. The calculation of the effective yield shall use the estimated amount and timing of cash
flows. If a change in the actual or estimated timing or amount of cash flows occurs, the
effective yield shall be recalculated to reflect the revised actual or estimated cash flows.
The deposit shall be adjusted to the amount that would have existed at the reporting date
had the new effective yield been applied since the inception of the reinsurance
agreement. Changes in the carrying amount of the deposit asset/liability resulting from
changes in the effective yield shall be recorded as interest income or interest expense;

d. It shall be assumed that any cash transactions for the settlement of losses will reduce the
asset/liability accounts by the amount of the cash transferred. When the remaining losses
are revalued upward, an increase in the deposit liability shall be recorded as interest
expense - by the assuming company. Conversely, the ceding company shall increase its
deposit (asset) with an offsetting credit to interest income; and increase its outstanding
loss liability with an offsetting charge to incurred losses;

e. No deduction shall be made from the loss and loss adjustment expense reserves on the
ceding company's Statement of Financial Position, schedules, and exhibits;

f. The assuming company shall record net consideration to be returned to the ceding
company as a liability.

(For an illustration of the provisions of paragraph 35, see Exhibit C)

Assumed Reinsurance

36. Reinsurance premiums receivable at the end of the accounting period are combined with direct
business receivables and reported as agents' balances or uncollected premiums. Where the ceding entity
withholds premium funds pursuant to the terms of the reinsurance agreement, such assets shall be shown
by the assuming entity as funds held by or deposited with reinsured companies. Reporting entities shall
record any interest earned or receivable on the funds withheld as a component of aggregate write-ins for
miscellaneous income.

37. If the assuming entity receives reinsurance premium prior to the effective date of the reinsurance
contract, consistent with SSAP No. 53–Property Casualty Contracts-Premiums, paragraph 15, advance
premiums shall be reported as a liability in the statutory financial statement and not considered income
until the effective date of the coverage. Such amounts are not included in written premium or the
unearned premium reserve. If the assuming entity receives reinsurance premium after the effective date
of the reinsurance contract but prior to the due date, the amount received shall be reported as a reduction
© 1999-2017 National Association of Insurance Commissioners
of the asset for deferred but not yet due (earned but unbilled premiums).

38. Reinsurance premiums more than 90 days overdue shall be nonadmitted except (a) to the extent
the assuming entity maintains unearned premium and loss reserves as to the ceding entity, under
principles of offset accounting as discussed in SSAP No. 64, or (b) where the ceding entity is licensed
and in good standing in assuming entity's state of domicile. Reinsurance premiums are due pursuant to
the original contract terms (as the agreement stood on the date of execution). In the absence of a specific
contract date, reinsurance premiums will be deemed due thirty (30) days after the date on which (i) notice
or demand of premium due is provided to the ceding entity or (ii) the assuming entity books the premium
(see SSAP No. 6–Uncollected Premium Balances, Bills Receivable for Premiums, and Amounts Due
From Agents and Brokers).

39. A lag will develop between the time of the entry of the underlying policy transaction on the
books of the ceding entity and the transmittal of information and entry on the books of the assuming
entity. Assuming companies shall estimate unreported premiums and related costs to the extent necessary
to prevent material distortions in the loss development contained in the assuming entity's annual
statement schedules where calendar year premiums are compared to accident year losses.

40. Proportional reinsurance (i.e., first dollar pro rata reinsurance) premiums shall be allocated to the
appropriate annual statement lines of business in the Underwriting and Investment exhibits.
Non-proportional assumed reinsurance premiums shall be classified as reinsurance under the appropriate
subcategories.

41. Assumed retroactive reinsurance premiums shall be excluded from all schedules and exhibits as
addressed in paragraph 29.

42. Amounts payable by reinsurers on losses shall be classified as unpaid losses. Assumed
reinsurance payable on paid losses shall be classified as a separate liability item on the balance sheet.
IBNR losses on assumed reinsurance business shall be netted with ceded losses on the balance sheet and
listed separately by annual statement line of business in the Underwriting and Investment exhibits.

Ceded Reinsurance

43. Ceded reinsurance premiums payable (net of ceding commission) shall be classified as a liability.
Consistent with SSAP No. 64, ceded reinsurance premiums payable may be deducted from amounts due
from the reinsurer, such as amounts due on assumed reinsurance, when a legal right of offset exists.

44. With regard to reinsurance premium paid prior to the effective date of the contract, the ceding
entity shall reflect the prepaid item as a write-in admitted asset and it should not be recognized in the
income statement until the effective date of the coverage. Such amounts are not included in ceded written
premiums or ceded unearned premium but should be subject to impairment analysis. With regard to
reinsurance premium paid by ceding entity after the reinsurance contract is in effect but prior to the due
date, the ceding entity shall treat this item as a reduction to the liability for ceded reinsurance premiums
payable. That liability reflects not only premiums unpaid but also amounts booked but deferred and not
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yet due.

45. Amounts withheld by the ceding entity that would otherwise be payable under the reinsurance
agreement shall be reported as funds held by entity under reinsurance treaties. Reporting entities shall
record any interest due or payable on the amounts withheld as a component of aggregate write-ins for
miscellaneous income.

46. Ceded reinsurance transactions shall be classified in the annual statement line of business which
relates to the direct or assumed transactions creating the cession or retrocession.

47. Ceded retroactive reinsurance premiums shall be excluded from all schedules and exhibits as
addressed in paragraph 29.

48. Reinsurance accounting shall not be allowed for modeled trigger securitizations. Modeled trigger
securitization transactions do not result in the kind of indemnification (in form and in fact) required by
this SSAP, and are therefore not eligible for reinsurance accounting. Modeled trigger transactions should
be evaluated as securitization transactions rather than as reinsurance transactions and should receive the
accounting treatment recommended for securitization transactions.

Adjustable Features/Retrospective Rating

49. Reinsurance treaties may provide for adjustment of commission, premium, or amount of
coverage, based on loss experience. The accounting for common examples is outlined in the following
paragraphs:

Commission Adjustments

50. An accrual shall be maintained for the following adjustable features based upon the experience
recorded for the accounting period:

a. Contingent or Straight Profit–The reinsurer returns to the ceding entity a stipulated

percentage of the profit produced by the business assumed from the ceding entity. Profit
may be calculated for any specified period of time, but the calculation is often based on
an average over a period of years; and

b. Sliding Scale–A provisional rate of commission is paid over the course of the agreement,
with a final adjustment based on the experience of the business ceded under the
agreement.

Premium Adjustments

51. If the reinsurance agreement incorporates an obligation on the part of the ceding entity to pay
additional premium to the assuming entity based upon loss experience under the agreement, a liability in
the amount of such additional premium shall be recognized by the ceding entity during the accounting

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period in which the loss event(s) giving rise to the obligation to pay such additional premium occur(s).
The assuming entity shall recognize an asset in a consistent manner. If the reinsurance agreement
incorporates an obligation on the part of the assuming entity to refund to the ceding entity any portion of
the consideration received by the assuming entity based upon loss experience under the agreement, an
asset in the amount of any such refund shall be recognized by the ceding entity during the accounting
period in which the loss event(s) giving rise to the obligation to make such refund occur(s). The initial
provisional or deposit premium is recalculated retrospectively, based on loss experience under the
agreement during a specified period of time; the calculation is often based on an average over a period of
years. The assuming entity shall recognize a liability in a consistent manner.

Adjustments in the Amount of Coverage

52. The amount of coverage available for future periods is adjusted, upward or downward, based on
loss experience under the agreement during a specified period of time. If the reinsurance agreement
incorporates a provision under which the reinsurance coverage afforded to the ceding entity may be
increased or reduced based upon loss experience under the agreement, an asset or a liability shall be
recognized by the ceding entity in an amount equal to that percentage of the consideration received by
the assuming entity which the increase or reduction in coverage represents of the amount of coverage
originally afforded. The asset or liability shall be recognized during the accounting period in which the
loss event(s) (or absence thereof) giving rise to the increase or decrease in reinsurance coverage occur(s),
and shall be amortized over all accounting periods for which the increased or reduced coverage is
applicable. The term "consideration" shall mean, for this purpose, the annualized deposit premium for the
period used as the basis for calculating the adjustment in the amount of coverage to be afforded thereafter
under the agreement.

Impairment

53. Include as a nonadmitted asset, amounts accrued for premium adjustments on retrospectively
rated reinsurance agreements with respect to which all uncollected balances due from the ceding
company have been classified as nonadmitted.

Commissions

54. Commissions payable on reinsurance assumed business shall be included as an offset to Agents'
Balances or Uncollected Premiums. Commissions receivable on reinsurance ceded business shall be
included as an offset to Ceded Reinsurance Balances Payable.

55. If the ceding commission paid under a reinsurance agreement exceeds the anticipated acquisition
cost of the business ceded, the ceding entity shall establish a liability, equal to the difference between the
anticipated acquisition cost and the reinsurance commissions received, to be amortized pro rata over the
effective period of the reinsurance agreement in proportion to the amount of coverage provided under the
reinsurance contract.

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 Unauthorized Reinsurance

56. If the assuming reinsurer is not authorized, otherwise approved or certified to do business in the
ceding entity's domiciliary state, the assumed reinsurance is considered to be unauthorized. A provision
is established to offset credit taken in various balance sheet accounts for reinsurance ceded to
unauthorized reinsurers. Credit for reinsurance with unauthorized reinsurers shall be permitted to the
extent the ceding entity holds collateral in accordance with Appendix A-785. If the assuming reinsurer is
not licensed or is not an authorized reinsurer in the domiciliary state of the ceding entity or if the
reinsurance does not meet required standards, the ceding entity must set up a provision for reinsurance
liability in accordance with the NAIC Annual Statement Instructions for Property and Casualty Insurance
Companies Schedule F.

57. The provision defined in paragraph 56 shall never be less than zero for any particular reinsurer.
The change in liability for unauthorized reinsurance is a direct charge or credit to surplus.

Reinsurance Ceded to a Certified Reinsurer

58. The term certified reinsurer shall have the same meaning as set forth in the Appendix A-785.

59. Credit for reinsurance ceded to a certified reinsurer is permitted if security is held by or on behalf
of the ceding entity in accordance with the certified reinsurer's rating assigned by the domestic state of
the ceding insurance entity, and in accordance with Appendix A-785 of this manual. However, nothing in
this guidance would prohibit the parties to a reinsurance agreement from agreeing to provisions
establishing security requirements that exceed the minimum security requirements established for
certified reinsurers.

60. An upgrade in a certified reinsurer's assigned rating applies on a prospective basis, i.e., the
revised collateral requirement applies only to contracts entered into or renewed on or after the effective
date of the new rating (see A-785). A downgrade in a certified reinsurer's rating applies on a retroactive
basis, i.e., the revised collateral requirement applies to all reinsurance obligations incurred by the
assuming insurer under its certified reinsurer status. Notwithstanding a change in a certified reinsurer's
rating or revocation of its certification, a reporting entity that has ceded reinsurance to such certified
reinsurer is allowed a three (3)-month grace period before recording a provision for reinsurance due to
collateral deficiency associated with such rating downgrade and increased collateral requirement for all
reinsurance ceded to such assuming insurer under its certified reinsurer status, unless the reinsurance is
found by the commissioner of the reporting entity's domestic state to be at high risk of uncollectibility.

61. A provision is established by the ceding entity to offset credit taken in various balance sheet
accounts for reinsurance ceded to a certified reinsurer in an amount proportionate to any deficiency in the
amount of acceptable security that is provided by the certified reinsurer as compared to the amount of
security that is required to be provided in accordance with the certified reinsurer's rating. The calculation
of the provision for a collateral shortfall is separate from the calculation of the provision for overdue
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reinsurance ceded to certified reinsurers and shall be calculated in accordance with the NAIC Annual
Statement Instructions for Property and Casualty Insurance Companies.

62. The provision defined in paragraph 61 shall never be less than zero for any particular certified
reinsurer. The change in liability for reinsurance with certified reinsurers is a direct charge or credit to
surplus.

Funds Held Under Reinsurance Treaties

63. This liability is established for funds deposited by or contractually withheld from reinsurers.

Provision for Reinsurance

64. The NAIC Annual Statement Instructions for Property and Casualty Companies for Schedule
F–Provision for Overdue Reinsurance, provide for a minimum reserve for uncollectible reinsurance with
an additional reserve required if an entity's experience indicates that a higher amount should be provided.
The minimum reserve Provision for Reinsurance is recorded as a liability and the change between years
is recorded as a gain or loss directly to unassigned funds (surplus). Any reserve over the minimum
amount shall be recorded on the statement of income by reversing the accounts previously utilized to
establish the reinsurance recoverable.

65. The provision for reinsurance is calculated separately for unauthorized, authorized and certified
reinsurers. An authorized reinsurer is licensed, accredited or approved by the ceding entity's state of
domicile; a certified reinsurer is certified by the ceding entity's state of domicile; an unauthorized
reinsurer is not so licensed, accredited, approved or certified.

Asbestos and Pollution Contracts - Counterparty Reporting Exception

66. Upon approval by the domiciliary regulator(s) of the ceding entity (either the original direct
insurer in the case of a reinsurance agreement or the original assuming reinsurer in the case of a
retrocession agreement), an exception may be allowed with respect to a retroactive reinsurance
agreement providing substantially duplicate coverage as prior reinsurance agreements on asbestos and/or
pollution exposures, including reinsurance provided through an affiliated reinsurer that retrocedes to the
retroactive reinsurance counterparty. Under this exception, a reporting entity may aggregate reinsurers
into one line item in Schedule F reflecting the counterparty under the retroactive agreement for the
purposes of determining the Provision for Reinsurance regarding overdue amounts paid by the retroactive
counterparty (both authorized and unauthorized). This exception would allow the Provision for
Reinsurance to be reduced by reflecting that amounts have been recovered by the reporting entity under
the duplicate coverage provided by the retroactive contract, and that inuring balances from the original
contract(s) are payable to the retroactive counterparty. In addition, such approval would also permit the

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substitution of the retroactive counterparty for authorized original reinsurers without overdue balances
for purposes of reporting on the primary section of the annual statement Schedule F. An agreement must
meet all of the requirements in paragraphs 66.a. through 66.e. in order to be considered for this
exception.

a. The underlying agreement clearly indicates the credit risk associated with the collection
of the reporting entity's inuring reinsurance recoverables and losses related to the credit
risk will be covered by the retroactive reinsurance counterparty.

b. The retroactive reinsurance agreement must transfer significant risk of loss.

c. The assuming retroactive reinsurance counterparty must have a financial strength rating
from at least two nationally recognized statistical rating organizations (NRSRO), the
lowest of which is higher than or equal to the NRSRO ratings of the underlying
third-party reinsurers.

d. The transaction is limited to reinsurance recoverables attributable to asbestos, and/or

pollution.

e. The recoverables from the inuring reinsurers remain subject to credit analysis and
contingent liability analysis.

67. With the approval of the reporting entity's domestic state commissioner pursuant to the
applicable state credit for reinsurance law regarding the use of other forms of collateral acceptable to the
commissioner, the reporting entity shall present the amount of other approved security related to the
retroactive reinsurance agreement as an "Other Allowed Offset Item" with respect to the uncollateralized
amounts recoverable from unauthorized reinsurers for paid and unpaid losses and loss adjustment
expenses under the original reinsurance contracts. Amounts approved as "Other Allowed Offset Items"
shall be reflected as amounts recoverable from the retroactive counterparty and aggregated reporting
described in paragraph 66 shall also be applied for unpaid losses and loss adjustment expenses under the
original reinsurance contracts. The security applied as an "Other Allowed Offset Item" shall also be
reflected in the designated sub-schedule and disclosed as a prescribed or permitted practice. (See
Appendix D illustration in this statement.)

68. The reporting entity will continue to detail the reporting of original reinsurers that were
aggregated for one line reporting per paragraph 66 as provided in the annual statement instructions. The
aggregation reporting in schedule F applies only to the extent that inuring balances currently receivable
under original reinsurance contracts are also payable to the retroactive reinsurance counterparty, and
additionally to reinsurance recoverable on unpaid losses if the domestic state commissioner has approved
amounts related to the retroactive reinsurance contract as any other form of security acceptable under the
applicable provisions of the state's credit for reinsurance law. This guidance is not intended to otherwise
change the application of retroactive accounting guidance for the retroactive portions of the contract that
are not duplicative of the original reinsurance. Other than measurement of the provision for reinsurance
and presentation in Schedule F, the retroactive contracts should continue to follow guidance applicable to
retroactive accounting and reporting.

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 Syndicated Letters of Credit

69. With a Syndicated Letter of Credit (Syndicated LC), the reinsurer enters into an agreement with
a group of banks (the "Issuing Banks") and an agent bank (the "Agent"). Each Issuing Bank and the
Agent is an NAIC-approved bank and a "qualified bank". This agreement requires the Agent to issue, on
behalf of the each of the Issuing Banks, letters of credit in favor of the ceding insurer. The credit is issued
(as an administrative matter) only through the Agent's letter of credit department. Each issuing bank signs
the Syndicated LC through the Agent, as its attorney-in-fact. Syndicated LCs are consistent with A-785,
in that the Syndicated LC is the legal equivalent of multiple letters of credit separately issued by each of
the issuing banks. Reporting entities shall take a reduction in the liability on account of reinsurance
recoverables secured by the Syndicated LC if all of the following conditions are met:

a. All listed banks on the letter of credit are qualified and meet the criteria of the NAIC
SVO approved bank listing;

b. Banks are severally and not jointly liable; and

c. Specific percentages for each assuming bank are listed in the letter of credit.

Disputed Items

70. Occasionally a reinsurer will question whether an individual claim is covered under a reinsurance
agreement or may even attempt to nullify an entire agreement. A ceding entity, depending upon the
individual facts, may or may not choose to continue to take credit for such disputed balances. A ceding
entity shall take no credit whatsoever for reinsurance recoverables in dispute with an affiliate.

71. Items in dispute are those claims with respect to which the ceding entity has received formal
written communication from the reinsurer denying the validity of coverage.

Uncollectible Reinsurance

72. Uncollectible reinsurance balances shall be written off through the accounts, exhibits, and
schedules in which they were originally recorded.

Commutations

73. A commutation of a reinsurance agreement, or any portion thereof, is a transaction which results
in the complete and final settlement and discharge of all, or the commuted portion thereof, present and

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future obligations between the parties arising out of the reinsurance agreement.

74. In commutation agreements, an agreed upon amount determined by the parties is paid by the
reinsurer to the ceding entity. The ceding entity immediately eliminates the reinsurance recoverable
recorded against the ultimate loss reserve and records the cash received as a negative paid loss. Any net
gain or loss shall be reported in underwriting income in the statement of income.

75. The reinsurer eliminates a loss reserve carried at ultimate cost for a cash payout calculated at
present value. Any net gain or loss shall be reported in underwriting income in the statement of income.

76. Commuted balances shall be written off through the accounts, exhibits, and schedules in which
they were originally recorded.

National Flood Insurance Program

77. The National Flood Insurance Program was created by the Federal Emergency Management
Agency (FEMA) and is designed to involve private insurers in a write-your-own (WYO) flood insurance
program financially backed by FEMA at no risk to the insurer. To become a participating WYO entity,
the entity signs a document with the Federal Insurance Administration (FIA) of the Federal Emergency
Management Agency known as the Financial Assistance/Subsidy Arrangement.

78. Premium rates are set by FEMA. The WYO participating companies write the flood insurance
coverage qualifying for the program on their own policies, perform their own underwriting, premium
collections, claim payments, administration, and premium tax payments for policies written under the
program.

79. Monthly accountings are made to FIA and participants draw upon FEMA letters of credit for
deficiencies of losses, loss expenses, and administrative expenses in excess of premiums, subject to
certain percentage limitations on expenses.

80. Policies written by the reporting entity under the National Flood Insurance Program are
considered insurance policies issued by the reporting entity, with reinsurance ceded to FEMA. (Such
policies are not considered uninsured plans under SSAP No. 47–Uninsured Plans (SSAP No. 47).
Balances due from or to FEMA shall be reported as ceded reinsurance balances receivable or payable.
The commission and fee allowances received from FEMA shall be reported consistent with reinsurance
ceding commission.

Accounting for the Transfer of Property and Casualty Run-Off Agreements

81. Property and casualty run-off agreements are reinsurance or retrocession agreements that are
intended to transfer essentially all of the risks and benefits of a specific line of business or market
segment that is no longer actively marketed by the transferring insurer or reinsurer. A property and
casualty run-off agreement is not a novation as the transferring insurer or reinsurer remains primarily
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liable to the policyholder or ceding entity under the original contracts of insurance or reinsurance.
Reinsurance agreements between affiliates or between insurers under common control (as those terms are
defined in Appendix A-440) are not eligible for the exception for property and casualty run-off
agreements in paragraph 31.e.

Criteria

82. The accounting treatment for property and casualty run-off agreements must be approved by the
domiciliary regulators of the transferring entity (either the original direct insurer in the case of a
reinsurance agreement or the original assuming reinsurer in the case of a retrocession agreement) and the
assuming entity. If the transferring entity and assuming entity are domiciled in the same state, then the
regulator of the state where the majority of the transferred liabilities is located shall be asked to approve
the accounting treatment. In determining whether to approve an agreement for this accounting treatment,
the regulators shall require the following:

a. Assuming Entity Properly Licensed - The entity assuming the run-off agreement must
have the appropriate authority or license to write the business being assumed.

b. Limits and Coverages - The reinsurance or retrocession agreement shall provide the same
limits and coverages that were afforded in the original insurance or reinsurance
agreement.

c. Non-recourse - The reinsurance or retrocession agreement shall not contain any

adjustable features or profit share or retrospective rating, and there shall be no recourse
(other than normal representations and warranties that would be associated with a
purchase and sale agreement) directly or indirectly against the transferring entity.

d. Risk Transfer - The reinsurance or retrocession agreement must meet the requirements of
risk transfer as described in this statement.

e. Financial Strength of Reinsurer - The assuming reinsurer shall have a financial strength
rating from at least two independent rating agencies (from NAIC credit rating providers
(CRP)) which is equal to or greater than the current ratings of the transferring entity. The
lowest financial strength rating received from an NAIC acceptable rating organization
rating agency will be used to compare the financial strength ratings of the transferring
and assuming entities.

f. Assessments - The assuming reinsurer or retrocessionaire (if required in the original

reinsurance contract) shall be financially responsible for any and all assessments,
including guaranty fund assessments, that are assessed against the transferring entity
related to the insurance business being assumed.

g. Applicable Only to "Run-off" Business - The reinsurance or retrocession agreement shall

only cover liabilities relating to a line(s) of business or specific market segments no

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 longer actively marketed by the transferring entity.

h. Non-cancelable Reinsurance - The reinsurance or retrocession agreement shall provide

that the reinsurance or retrocessional coverage provided by the proposed agreement
cannot be cancelable by either party for any reason. (However, this provision will not
override standard contracts law and principles and will not prevent any remedies,
including rescission or termination that might be available for breach, misrepresentation,
etc.)

Statutory Schedules and Exhibits

83. At the inception of the transaction, the transferring entity shall record the consideration paid to
the assuming entity as a paid loss. If the consideration paid by the transferring entity is less than the loss
reserves transferred, the difference shall be recorded by the ceding entity as a decrease in losses incurred.
The assuming entity shall record the consideration received as a negative paid loss. In addition, the
transferring entity shall record an increase to ceded reinsurance recoverable for the amount of the
transferred reserve. Journal entries illustrating these transactions, including situations in which the
transaction includes an unearned premium reserve, are included in Exhibit B of this Statement.

84. The assuming entity will report the business in the same line of business as reported by the
original insurer or reinsurer. The assuming entity will report the business at the same level of detail using
the appropriate statutory schedules and exhibits.

Disclosures

85. Unsecured Reinsurance Recoverables:

a. If the entity has with any individual reinsurers, authorized, unauthorized, or certified an
unsecured aggregate recoverable for losses, paid and unpaid including IBNR, loss
adjustment expenses, and unearned premium, that exceeds 3% of the entity's
policyholder surplus, list each individual reinsurer and the unsecured aggregate
recoverable pertaining to that reinsurer; and

b. If the individual reinsurer is part of a group, list the individual reinsurers, each of its
related group members having reinsurance with the reporting entity, and the total
unsecured aggregate recoverables for the entire group.

86. Reinsurance Recoverables in Dispute–Reinsurance recoverable on paid and unpaid (including

IBNR) losses in dispute by reason of notification, arbitration or litigation shall be identified if the
amounts in dispute from any entity (and/or affiliate) exceed 5% of the ceding entity's policyholders
surplus or if the aggregate of all disputed items exceeds 10% of the ceding entity's policyholders surplus.
Notification means a formal written communication from a reinsurer denying the validity of coverage.

87. Uncollectible Reinsurance–Describe uncollectible reinsurance written off during the year
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reported in the following annual statement classifications, including the name(s) of the reinsurer(s):

a. Losses incurred;

b. Loss adjustment expenses incurred;

c. Premiums earned; and

d. Other.

88. Commutation of Ceded Reinsurance–Describe commutation of ceded reinsurance during the year
reported in the following annual statement classifications, including the name(s) of the reinsurer(s):

a. Losses incurred;

b. Loss adjustment expenses incurred;

c. Premiums earned; and

d. Other.

89. Retroactive Reinsurance–The table illustrated in the NAIC Annual Statement Instructions for
Property and Casualty Companies under Retroactive Reinsurance in the Notes to Financial Statements
section shall be completed for all retroactive reinsurance agreements that transfer liabilities for losses
that have already occurred and that will generate special surplus transactions. The insurer (assuming or
ceding) shall assign a unique number to each retroactive reinsurance agreement and shall utilize this
number for as long as the agreement exists. Transactions utilizing deposit accounting shall not be
reported in this note.

90. Reinsurance Assumed and Ceded–The tables illustrated in the NAIC Annual Statement
Instructions for Property and Casualty Companies under "Reinsurance Assumed and Ceded in the Notes
to Financial Statements" section shall be completed as follows:

a. The financial statements shall disclose the maximum amount of return commission
which would have been due reinsurers if all reinsurance were canceled with the return of
the unearned premium reserve; and

b. The financial statements shall disclose the accrual of additional or return commission,
predicated on loss experience or on any other form of profit sharing arrangements as a
result of existing contractual arrangements.

91. A specific interrogatory requires information on reinsurance of risk accompanied by an

agreement to release the reinsurer from liability, in whole or in part, from any loss that may occur on the
risk or portion thereof.

92. Disclosures for paragraphs 93-98 represent annual statement interrogatories, which are required
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to be included with the annual audit report beginning with audit reports on financial statements as of and
for the period ended December 31, 2006. The disclosures required within paragraphs 93-98 shall be
included in accompanying supplemental schedules of the annual audit report beginning in year-end 2006.
These disclosures shall be limited to reinsurance contracts entered into, renewed or amended on or after
January 1, 1994. This limitation applies to the annual audit report only and does not apply to the statutory
annual statement interrogatories and the reinsurance summary supplemental filing.

93. Disclose if any risks are reinsured under a quota share reinsurance contract with any other entity
that includes a provision that would limit the reinsurer’s losses below the stated quota share percentage
(e.g. a deductible, a loss ratio corridor, a loss cap, an aggregate limit or any similar provisions)? If yes,
indicate the number of reinsurance contracts containing such provisions and if the amount of reinsurance
credit taken reflects the reduction in quota share coverage caused by any applicable limiting provision(s).

94. Disclose if the reporting entity ceded any risk under any reinsurance contract (or under multiple
contracts with the same reinsurer or its affiliates) for which during the period covered by the statement:
(i) it recorded a positive or negative underwriting result greater than 5% of prior year-end surplus as
regards policyholders or it reported calendar year written premium ceded or year-end loss and loss
expense reserves ceded greater than 5% of prior year-end surplus as regards policyholders; (ii) it
accounted for that contract as reinsurance and not as a deposit; and (iii) the contract(s) contain one or
more of the following features or other features that would have similar results:

a. A contract term longer than two years and the contract is noncancellable by the reporting
entity during the contract term;

b. A limited or conditional cancellation provision under which cancellation triggers an

obligation by the reporting entity, or an affiliate of the reporting entity, to enter into a
new reinsurance contract with the reinsurer, or an affiliate of the reinsurer;

c. Aggregate stop loss reinsurance coverage;

d. A unilateral right by either party (or both parties) to commute the reinsurance contract,
whether conditional or not, except for such provisions which are only triggered by a
decline in the credit status of the other party;

e. A provision permitting reporting of losses, or payment of losses, less frequently than on

a quarterly basis (unless there is no activity during the period); or

f. Payment schedule, accumulating retentions from multiple years or any features

inherently designed to delay timing of the reimbursement to the ceding entity.

95. Disclose if the reporting entity during the period covered by the statement ceded any risk under
any reinsurance contract (or under multiple contracts with the same reinsurer or its affiliates) for which
during the period covered by the statement it recorded a positive or negative underwriting result greater
than 5% of prior year-end surplus as regards policyholders or it reported calendar year written premium
ceded or year-end loss and loss expense reserves ceded greater than 5% of prior year-end surplus as

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regards policyholders, excluding cessions to approved pooling arrangements or to captive insurance
companies that are directly or indirectly controlling, controlled by, or under common control with (i) one
or more unaffiliated policyholders of the reporting entity, or (ii) an association of which one or more
unaffiliated policyholders of the reporting entity is a member, where:

a. The written premium ceded to the reinsurer by the reporting entity or its affiliates
represents fifty percent (50%) or more of the entire direct and assumed premium written
by the reinsurer based on its most recently available financial statement; or

b. Twenty–five percent (25%) or more of the written premium ceded to the reinsurer has
been retroceded back to the reporting entity or its affiliates in a separate reinsurance
contract.

96. If affirmative disclosure is required for paragraph 94 or 95, provide the following information:

a. A summary of the reinsurance contract terms and indicate whether it applies to the
contracts meeting paragraph 94 or 95;

b. A brief discussion of management's principal objectives in entering into the reinsurance

contract including the economic purpose to be achieved; and

c. The aggregate financial statement impact gross of all such ceded reinsurance contracts
on the balance sheet and statement of income.

97. Except for transactions meeting the requirements of paragraph 31, disclose if the reporting entity
ceded any risk under any reinsurance contract (or multiple contracts with the same reinsurer or its
affiliates) during the period covered by the financial statement, and either:

a. Accounted for that contract as reinsurance (either prospective or retroactive) under

statutory accounting principles (“SAP”) and as a deposit under generally accepted
accounting principles (“GAAP”); or

b. Accounted for that contract as reinsurance under GAAP and as a deposit under SAP.

98. If affirmative disclosure is required for paragraph 97, explain in a supplemental filing why the
contract(s) is treated differently for GAAP and SAP.

99. Disclosures for the Transfer of Property and Casualty Run-off Agreements

a. Disclose if the reporting entity has entered into any agreements which have been
approved by their domiciliary regulator and have qualified pursuant to paragraph 31.e.,
(also see paragraphs 81-84).

b. If affirmative, provide a description of the agreement and the amount of consideration

paid and liabilities transferred.

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100. The financial statements shall disclose the following with respect to reinsurance agreements
which qualify for reinsurer aggregation in accordance with paragraphs 66-68:

a. A description of the significant terms of the reinsurance agreement, including established

limits and collateral, and

b. The amount of unexhausted limit as of the reporting date.

c. To the extent that the domestic state insurance department approves the use of the
retroactive contract as an acceptable form of security related to the original reinsurers
under the applicable provisions of the state's credit for reinsurance law, the use of such
discretion shall be disclosed in the annual statement Note 1 as a prescribed or permitted
practice. In addition, Note 1 shall disclose as part of the total impact on the provision for
reinsurance the impact on the overdue aspects of the calculation if the reporting entity
also receives commissioner approval pursuant to paragraph 66 related to overdue paid
amounts (both authorized and unauthorized).

101. The financial statements shall disclose the following with respect to reinsurance agreements that
have been accounted for as deposits:

a. A description of the reinsurance agreements.

b. Any adjustment of the amounts initially recognized for expected recoveries. The
individual components of the adjustment (e.g., interest accrual, change due to a change in
estimated or actual cash flow) shall be disclosed separately.

102. The financial statements shall disclose the impact on any reporting period in which a certified
reinsurer's rating has been downgraded or its certified reinsurer status is subject to revocation and
additional collateral has not been received as of the filing date. The disclosure should include the
following:

a. Name of certified reinsurer downgraded or subject to revocation of certified reinsurer

status and relationship to the reporting entity;

b. Date of downgrade or revocation and jurisdiction of action;

c. Collateral percentage requirements pre and post downgrade or revocation;

d. Net ceded recoverable subject to collateral;

e. As of the end of the current quarter, the estimated impact of the collateral deficiency to
the reporting entity as a result of the assuming entity's downgrade or revocation of
certified reinsurer status. (At year-end the actual impact of the collateral deficiency on
the provision for reinsurance shall be disclosed.)

103. U.S. domiciled reinsurers are eligible for certified reinsurer status. If the reporting entity is a
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certified reinsurer, the financial statements shall disclose the impact on any reporting period in which its
certified reinsurer rating is downgraded or status as a certified reinsurer is subject to revocation. Such
disclosure shall include information similar to paragraphs 102.b., 102.c. and 102.d. and the expectation
of its certified reinsurer's ability to meet the increased requirements.

104. Refer to the Preamble for further discussion regarding disclosure requirements.

Relevant Literature

105. This statement adopts with modification FASB Statement No. 113, Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts (FAS 113) and FASB Emerging Issues
Task Force No. 93-6, Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and
Assuming Enterprises for the following:

a. Reinsurance recoverables on unpaid case-basis and incurred but not reported losses and
loss adjustment expenses shall be reported as a contra-liability netted against the liability
for gross losses and loss adjustment expenses;

b. Amounts paid for prospective reinsurance that meet the conditions for reinsurance
accounting shall be reported as a reduction of unearned premiums;

c. The gain created by a retroactive reinsurance agreement because the amount paid to the
reinsurer is less than the gross liabilities for losses and loss adjustment expenses ceded to
the reinsurer is reported in the statement of income as a write-in gain in other income by
the ceding entity and a write-in loss by the assuming entity. The gain created by a
retroactive reinsurance agreement is restricted as a special surplus account until the
actual retroactive reinsurance recovered is in excess of the consideration paid;

d. This statement requires that a liability (provision for reinsurance) be established through
a provision reducing unassigned funds (surplus) for unsecured reinsurance recoverables
from unauthorized or certified reinsurers and for certain overdue balances due from
authorized reinsurers;

e. Some reinsurance agreements contain adjustable features that provide for adjustment of
commission, premium or amount of coverage, based on loss experience. This statement
requires that the asset or liability arising from the adjustable feature be computed based
on experience to date under the agreement, and the impact of early termination may only
be considered at the time the agreement has actually been terminated;

f. Structured settlements are addressed in SSAP No. 65–Property and Casualty Contracts.
Statutory accounting and FAS 113 are consistent in accounting for structured settlement
annuities where the reporting entity is the owner and payee and where the claimant is the
payee and the reporting entity has been released from its obligation. FAS 113
distinguishes structured settlement annuities where the claimant is the payee and a

© 1999-2017 National Association of Insurance Commissioners

 legally enforceable release from the reporting entity's liability is obtained from those
where the claimant is the payee but the reporting entity has not been released from its
obligation. GAAP requires the deferral of any gain resulting from the purchase of a
structured settlement annuity where the reporting entity has not been released from its
obligation; and

g. This statement requires that reinsurance recoverables on unpaid losses and loss
adjustment expenses be presented as a contra-liability. Requirements for offsetting and
netting are addressed in SSAP No. 64.

106. This statement adopts American Institute of Certified Public Accountants (AICPA) Statement of
Position 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk (SOP 98-7) paragraphs 10-12 and 19 (subsection b only). This statement rejects
AICPA SOP 98-7 paragraphs 13-17 and 19 (subsections a and c).

107. This statement rejects AICPA Statement of Position No. 92-5, Accounting for Foreign Property
and Liability Reinsurance. This statement incorporates Appendix A-785 as applicable.

Effective Date and Transition

108. This statement shall apply to:

a. Reinsurance agreements entered into, renewed, or amended on or after January 1, 1994.

An amendment is any revision or adjustment of contractual terms. The payment of
premiums or reimbursement of losses recoverable under the agreement shall not
constitute an amendment; and

b. Reinsurance agreements in force on January 1, 1995, which cover losses occurring or

claims made on or after that date on policies reinsured under such agreements.

109. This guidance shall not apply to:

a. Reinsurance agreements which cover only losses occurring or claims made before
January 1, 1994, and which were entered into before January 1, 1994, and were not
subsequently renewed or amended; and

b. Reinsurance agreements that expired before and were not renewed or amended after
January 1, 1995.

110. The guidance in paragraphs 49-53 shall be effective for all accounting periods beginning on or
after January 1, 1996, and shall apply to reinsurance agreements entered into, renewed or amended on or
after January 1, 1994.

111. This statement, including the guidance in paragraph 35 incorporated from SSAP No. 75, is
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effective for years beginning January 1, 2001. Changes resulting from the adoption of this statement shall
be accounted for as a change in accounting principle in accordance with SSAP No. 3–Accounting
Changes and Corrections of Errors.

a. Revisions to subparagraph 31.e., related to paragraphs 81-84, and disclosures in

paragraph 99 documented in Issue Paper No. 137–Transfer of Property and Casualty
Reinsurance Run-off Agreements are effective for contracts entered on or after January 1,
2010.

b. The guidance in paragraphs 35, 101 and 106 was previously included within SSAP No.
75–Reinsurance Deposit Accounting–An Amendment to SSAP No. 62R, Property and
Casualty Reinsurance (SSAP No. 75) and was also effective for years beginning January.
1, 2001. In 2011, the guidance from SSAP No. 75 was incorporated within this
statement, with SSAP No. 75 nullified. The original guidance included in this statement
for deposit accounting, as well as the original guidance adopted in SSAP No. 75, are
retained for historical purposes in Issue Paper No. 104. The guidance in paragraph 48
was originally contained within INT 02-06: Indemnification in Modeled Trigger
Transactions and was effective June 9, 2002. The guidance in paragraph 69 was
originally contained within INT 02-09: A-785 and Syndicated Letters of Credit and was
effective September 12, 2004.

c. The guidance related to certified reinsurers is applicable only to cedants domiciled in

states that have enacted/promulgated the new collateral framework and only for their
cessions to reinsurers certified under that domestic law/rule. The requirements applicable
to contracts with certified reinsurers shall be effective for all reporting periods beginning
on or after December 31, 2012.

112. The guidance in paragraphs 66-68 and 100 which allowed retroactive reinsurance exceptions for
asbestos and pollution contracts was effective for all accounting periods beginning on or after January 1,
2014, for paid losses. This guidance was revised to also allow for unpaid losses effective for reporting
periods ending on and after December 31, 2015.

REFERENCES

Relevant Issue Papers

Issue Paper No. 75–Property and Casualty Reinsurance

 Issue Paper No. 104–Reinsurance Deposit Accounting - An Amendment to SSAP No.

62R–Property and Casualty Reinsurance

Issue Paper No. 137–Transfer of Property and Casualty Reinsurance Run-off

© 1999-2017 National Association of Insurance Commissioners
 Agreements

 Issue Paper No. 153–Counterparty Reporting Exception for Asbestos and Pollution
Contracts

CLASSIFYING REINSURANCE CONTRACTS

© 1999-2017 National Association of Insurance Commissioners

 EXHIBIT A – IMPLEMENTATION QUESTIONS AND ANSWERS

© 1999-2017 National Association of Insurance Commissioners