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Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: Nullify SSAP No. 75 and incorporate guidance into SSAP No. 62R
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
The Statutory Accounting Principles Working Group issued SSAP No. 75—Reinsurance Deposit Accounting,
An Amendment to SSAP No. 62R, Property and Casualty Reinsurance (SSAP No. 75) in 2000 to adopt
substantive revisions relating to reinsurance deposit accounting. The guidance within SSAP No. 75 directly
supersedes paragraph 35 within SSAP No. 62R—Property and Casualty Reinsurance. It is noted that recent
revisions to the AP&P Manual have attempted to consolidate information for specific types of transactions in
single SSAPs.
Existing Authoritative Literature:
From SSAP No. 75:
SCOPE OF STATEMENT
1. This statement provides statutory accounting principles for reinsurance contracts that do not transfer
both components of insurance risk (underwriting risk and timing risk).
SUMMARY CONCLUSION
2. This statement supersedes paragraph 35 of SSAP No. 62R—Property and Casualty Reinsurance
(SSAP No. 62R). The following guidance shall be followed when reinsurance contracts do not transfer
both components of insurance risk.
3. 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 16 of Appendix A-785;
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
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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 3, see Exhibit at end of this document)
Disclosures
4. 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.
5. Refer to the preamble for further discussion regarding disclosure requirements.
Relevant Literature
6. 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 to 12 and 19 (subsection b only). This statement
rejects AICPA SOP 98-7 paragraphs 13 to 17 and 19 (subsections a and c).
Effective Date and Transition
7. This statement is 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.
AUTHORITATIVE LITERATURE
Generally Accepted Accounting Principles

AICPA Statement of Position 98-7, Deposit Accounting: Accounting for Insurance and
Reinsurance Contracts That Do Not Transfer Insurance Risk
RELEVANT ISSUE PAPER

Issue Paper No. 104—Reinsurance Deposit Accounting – An Amendment to SSAP No. 62—
Property and Casualty Reinsurance
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups):
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None
Information or issues (included in Description of Issue) not previously contemplated by the SAPWG:
None
Staff Recommendation:
It is staff’s recommendation that the Working Group move this item to the substantive active listing
and expose substantive revisions to nullify SSAP No. 75, and expose revisions to SSAP No. 62R to
include the reinsurance deposit accounting guidance within that SSAP. Staff recommends replacing the
current superseded paragraph 35 in SSAP No. 62R with paragraph 3 from SSAP No. 75. The deposit
accounting disclosures included within SSAP No. 75 will be included in SSAP No. 62R as well as
authoritative literature references. Also, the deposit account illustration included in SSAP No. 75 as Exhibit
A, will be moved to SSAP No. 62R as Exhibit C. This is considered substantive because SSAP No. 75 will be
nullified; however, this is strictly a placement revision, without changes to the existing guidance. As there are
no new statutory accounting concepts, an issue paper is not considered necessary.
Staff Review Completed by:
Julie Gann and Linda Hunsucker – April 1, 2011
NAIC staff
G:\DATA\Stat Acctg\1. Statutory\A. Maintenance\a. Form A\1. Active Form A's\11-18 - Nullify SSAP No. 75.doc
Proposed Revisions to SSAP No. 62R
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 16 of Appendix A785;
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
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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)
(Note – New paragraph 87 – the remaining paragraphs will be renumbered accordingly.)
87.
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.
Relevant Literature
(Note – New paragraph – remaining paragraphs will be renumbered accordingly.)
90.
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 to 12 and 19 (subsection b only). This statement rejects
AICPA SOP 98-7 paragraphs 13 to 17 and 19 (subsections a and c).
95.
This statement, including the guidance in paragraph 35 incorporated from SSAP No. 75, is 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. Revisions to subparagraph 31.e., related paragraphs 68-71, and new disclosures in
paragraph 86 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. The guidance in paragraphs 35,
87 and 90 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 Jan. 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.
AUTHORITATIVE LITERATURE
Generally Accepted Accounting Principles



FASB Statement No. 113, Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts
FASB Emerging Issues Task Force Issue No. 93-6, Accounting for Multiple-Year
Retrospectively Rated Contracts by Ceding and Assuming Enterprises
AICPA Statement of Position 98-7, Deposit Accounting: Accounting for Insurance and
Reinsurance Contracts That Do Not Transfer Insurance Risk
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RELEVANT ISSUE PAPERS



Issue Paper No. 75—Property and Casualty Reinsurance
Issue Paper No. 137—Transfer of Property and Casualty Reinsurance Run-off Agreements
Issue Paper No. 104—Reinsurance Deposit Accounting – An Amendment to SSAP No. 62—
Property and Casualty Reinsurance
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SSAP No. 62R – EXHIBIT C
Illustration of a Reinsurance Contract That Is Accounted for as a Deposit using the Interest
Method
Assumptions:
Premium = $1,000 (assumes no commissions or allowances)
Coverage Period = 1 year
Initial expected recoveries = $225 per year (at end of year) for five years
Initial Implicit rate = 4 percent*
*present value of $225 per year for five years at 4 percent = $1,000
At the end of Year 2, the timing of anticipated recoveries under the reinsurance contract
changes. A reevaluation of the implicit interest rate produces a rate of 3.63 percent and an
asset of $640 at the end of the year.
Description
Initial payment
Year 1 (4%)
End of Year 1
Year 2 (4 %)
End of Year 2
Yield adjustment
Year 3 (3.63 %)
End of Year 3
Year 4 (3.63 %)
End of Year 4
Year 5 (3.63 %)
End of Year 5
Year 6 (3.63 %)
End of Year 6
Interest Income
Cash
Recoveries
$ 40
$ (225)
$ 33
$ (200)
$ (8)
$ 23
$ (175)
$ 18
$ (175)
$ 12
$ (175)
$7
$ (175)
Deposit Balance
$1,000
$1,040
$ 815
$ 848
$ 648
$ 640
$ 663
$ 488
$ 506
$ 331
$ 343
$ 168
$ 175
$
0
At the inception of the contract, the ceding insurer records a deposit asset of $ 1,000 and
the assuming company, a $1,000 deposit liability. The asset is admitted providing the
conditions for credit for reinsurance are met.
At subsequent reporting dates, the deposit asset is adjusted by calculating the effective yield
on the reinsurance agreement to reflect actual payments to date and expected future
payments with a corresponding credit to interest income by the ceding company and interest
expense by the assuming company.
At the end of year two, it is determined that the expected cash flows will differ from previous
estimates, resulting in a lower effective yield on the deposit asset. The deposit asset is
adjusted to the amount that would have existed at the reporting date had the new effective
yield been applied from the inception of the reinsurance agreement. The adjustment is
charged to interest income, i.e., as a reduction of interest income. Interest income during the
remaining term of the agreement is reduced accordingly (i.e., the yield is reduced from 4.0%
to 3.63%).
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