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.
1
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
2
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

3
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)
4
Sample Transaction
Excess 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

5
Sample Transaction - Excess of Loss
Financial Statement Impact
Reinsurance Accounting – SSAP #62
W/O Treaty
With Treaty
Assets
$200 Million
$140 Million
Loss/LAE Reserves
$120 Million
$50 Million
Capital
$ 80 Million
$90 Million
NPW
$150 Million
$90 Million
Loss/LAE Ratio
NPW/Surplus
80%
1.875 to1
55.6 %
1 to 1
6
Sample Transaction - Excess of Loss
What 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)

7
Sample Transaction - Excess of Loss
What 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

8
Sample Transaction
Excess 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
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Sample Transaction - Excess of Loss
Financial Statement Impact
Bifurcation Framework
W/O Treaty
With Treaty
Assets
$200 Million
$193 Million*
Loss/LAE Reserves
$120 Million
$110 Million
Capital
$ 80 Million
$83 Million
NPW
$150 Million
$143 Million
Loss/LAE Ratio
NPW/Surplus
80%
1.875 to1
* $53 Mln Receivable Under Deposit
Acct.
77%
1.72 to 1
10
Reinsurance Accounting Vs.
Deposit Accounting



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??
11
PROPOSE REVISIONS TO SSAP # 62
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

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SSAP #62 Revisions (continued)
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

13
SSAP #62 Revisions (continued)
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”

14
SSAP #62 Revisions (continued)
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
15
SSAP #62 Revisions (continued)
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
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SSAP #62 Revisions (continued)
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
17
SSAP #62 Revisions (continued)
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
18
SSAP #62 Revisions (continued)
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
19
SSAP #62 Revisions (continued)
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
20
SSAP #62 Revisions (continued)
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
21
SSAP #62 Revisions (continued)
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
22
SSAP #62 Revisions (continued)
Implementation Q&A - Page 9
NO CHANGES Pending Exposure of
Concepts Under Consideration
 Revisions WILL Be Needed

23
SSAP #62 PROJECT
P&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

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