Statutory Issue Paper No62R - Reinsurance Focus

Property and Casualty Reinsurance
SSAP No. 62R
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; and
e. 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.
iii.
iv.
Direct or indirect compensation to the ceding entity or reinsurer is prohibited;
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;
A retroactive reinsurance agreement shall not be canceled or rescinded without
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.
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.
© 2009 National Association of Insurance Commissioners 62-5