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Regulators Debate Premium Treatment Of Reinsurance

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When regulators gather in New York next month, the treatment of premiums associated with reinsurance transactions and how that treatment affects surplus gain will be one of the issues they discuss.

The issue centers on how a company ceding business treats premium timing differences between direct premium it receives and reinsurance premium it cedes when the reinsurance premium is paid less frequently than the direct premium.

It is being reviewed by the Statutory Accounting Principles Working Group, which will meet during the spring meeting of the National Association of Insurance Commissioners, Kansas City, Mo. The meeting will be held in New York from March 10-12.

SAPWG had requested input from the NAIC’s Life & Health Actuarial Task Force on how surplus on these transactions should be treated. LHATF ultimately voted during a conference call to respond with a letter stating that it could not reach consensus on an appropriate response.

Regulators were divided on whether it is an accounting or an actuarial issue, according to Mike Batte, LHATF chair and New Mexico regulator. Guidance will be sent to SAPWG outlining those differences, he said.

The first vote on whether or not to proceed with a motion that no consensus could be reached was an 8-8 tie with one abstention. LHATF then voted on whether to send guidance to SAPWG that no consensus was reached. That vote was 10-6, with one abstention.

During the discussion on whether LHATF should opine that it favored a change in the current wording of SSAP No. 61 to clarify the deferred premium asset, life insurers described what a change in the current treatment would mean for them.

“We are not sure that it is overstated,” said John Bruins, senior actuary with the American Council of Life Insurers, Washington, during the discussion.

Bruins reiterated industry concerns expressed in a Feb. 2 letter, which are:

–The undoing of codification.

–Reduced transparency and comparability of financial statements by requiring identical reinsurance transactions to be reported differently and imposing a different methodology on a subset of ceded business.

–That the proposals would be “costly to companies and administratively nightmarish by requiring integration and cross-checking of direct premium billing files, reinsurance premium billing files, direct reserve files, ceded reserve files, and reinsurance allowance files–all on a policy-by-policy-by-treaty basis.”

–That no “real solvency concern” was addressed.

Bruins went on to point out in his Feb. 2 letter that the “logical question” to ask is “whether reserves established by a ceding company under current rules and methods make good and sufficient provision for liabilities when direct premiums are paid more frequently than ceded premiums.”

In the letter, he continues, “the answer is yes,” noting that “asset adequacy analysis is the best test of reserve adequacy for any questionable situation.” The proposal would increase the current reserve levels, he notes.

A number of regulators, including Sheldon Summers of California and Bill Carmello of New York, both life actuaries, maintained that LHATF needs to take a stand that amendments be made to the current SSAP 61.

“How do you justify a company overstating surplus for policies reinsured?” Summers asked during the discussion.

A Feb. 1 draft response offered by Summers but not ultimately endorsed by LHATF notes: “LHATF believes that an overstatement of surplus, and thus the reporting of artificial surplus, is a serious matter and therefore that the changes should apply to all existing business.

“However, LHATF recommends that the SAPWG consider allowing affected companies to phase in the decrease in surplus (for existing business) over a period not to exceed 3 years.”

The draft proposed by Summers would have recommended amendments clarifying that:

–”It is not appropriate for an insurer that reinsures business to get a surplus gain over an insurer that does not, for reasons unrelated to risk transfer or the payment of a ceding commission.”

–”It is not appropriate to overstate surplus due to the direct premium mode being more frequent than the reinsurance premium mode and the policy valuation net premium being larger than the gross premium.”

–”The proposed changes would alleviate this problem by not allowing the ceding entity to overstate surplus.”


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