Introduction to Reinsurance Accounting
1
Introduction to reinsurance accounting
Table of contents
Foreword
5
1. Prerequisites/Basics 1.1 Portfolio 1.2 Treaties 1.2.1 Quota share reinsurance 1.2.2 Surplus reinsurance 1.2.3 Excess of loss reinsurance 1.3 Accounting systems
6 6 8 8 8 8 9
2. Accounting procedures 2.1 Proportional reinsurance 2.1.1 Quota share reinsurance – Statement of account – Profit and loss statement 2.1.2 Surplus reinsurance – Statement of account – Profit and loss statement/ – sliding scale commission statement
11 11 11
2.2 Non-proportional reinsurance 2.2.1 Excess of loss reinsurance – Deposit premium statement – Loss advice, reinstatement – and annual statement of account
34 34
22
3. Facultative acceptances 3.1 Specialities 3.2 Quarterly statements of account 3.3 Individual statements of account
49 49 49 49
4. Financial aspects 4.1 Payments and outstanding balances 4.2 Cash calls
52 52 53
Closing remarks Selected brochures Glossary
56 57 58
4
Foreword
Dear readers, There are many publications dealing with reinsurance. Some of them also touch on the area of reinsurance accounting. For once, we are spotlighting this area and will touch only briefly on the special problems of reinsurance underwriting. Our “Service to Clients” project is aimed at everyone involved with reinsurance accounting and statistics. Thanks to its clear structure, this publication will also give reinsurance managers easy access to the subject. This “Introduction to reinsurance accounting” should be seen as a training document which strips the various accounting and statistical methods down to the bare essentials and presents them in an easy-to-follow way. A training document should certainly not cover everything, but is intended to complement seminars, on-the-job training etc. As to structure, Part 1 deals with the question “What do we need for preparing correct statements of account and statistics?” while Part 2 shows how reinsurance accounts clerks should handle the prerequisites and how the procedures work in detail. Part 3 deals with statements of account for facultative business and Part 4 covers the financial side of accounting and also cash losses. Swiss Reinsurance Company Reinsurance Accounting The authors
5
1.
Prerequisites/Basics
What do we need for preparing reinsurance statements and statistics?
1.1
Portfolio
The basic requirements are: • the reinsured portfolio, see section 1.1 • the underlying reinsurance treaties, see section 1.2 • the accounting systems used, see section 1.3
The basis for all reinsurance accounts (with the exception of facultative business, see section 3) is the portfolio specified in the contract. This is covered under the reinsurance. The arrangements in the contract calculated from the underlying portfolio provide the figures needed for reinsurance accounting.
All these points should be set out in the reinsurance treaty. This is the only way to avoid uncertainties, discussions and differences of opinion in the dealings between the party preparing the accounts (the reinsurance accounts clerk at the primary insurer’s) and the party receiving them (the reinsurance accounts clerk at the reinsurer’s). This results in higher productivity and lower costs for both sides.
Fictitious portfolio as basis for the following Quota Share and Surplus examples Eight vessels with name, sum insured, policy period, premiums and premium due dates (assuming that all due premiums were actually paid), losses with date of occurrence and date of payment.
It is worth mentioning here that, in the area of reinsurance accounting operations, we have an odd situation in that it is the purchaser of the product (the primary insurer) who has to prepare the accounts and not the seller (the reinsurer), as the reinsurer does not have the necessary data (see point 1.1, “Portfolio”). This leads to the following problems for the primary insurer and the reinsurer: Primary insurer: • Needs to develop its own processing system
for reinsurance accounting, including training and IT infrastructure. • Some necessary, specialist knowledge lacking. Reinsurer: • No accounting forms of its own but different system of processing reinsurance accounts for practically every client.
6
Assumptions: underwriting activity starts on 1.1.1996. We have chosen a small portfolio so as to be able to ensure an overview, especially for the calculations. The premium rates are therefore unrealistic, but this does not matter for the purposes of the reinsurance accounting examples.
Portfolio
Names of the vessels
Sum insured
Period
Due date/ Premiums a) 1.1.96 b) 1.10.96
Date/Losses
Tallinn
20 000.–
1.1.96 – 30.6.97
Madrid
40 000.–
1.1.96 – 31.12.96
1.2.96
2 000.–
7.4.96
500.–
2.8.96
São Paolo
75 000.–
1.4.96 – 31.3.97
1.4.96
3 750.–
6.12.96
750.–
1.2.97
Tel Aviv
100 000.–
1.7.96 – 31.12.96
2 500.– 2 500.–
5.10.96 2 000.–
Singapore
140 000.–
1.9.96 – 31.8.97
1.9.96
2 800.–
none
Hong Kong
180 000.–
1.1.97 – 30.6.97
1.1.97
3 600.–
7.4.97 15 000.–
Bombay
200 000.–
1.1.97 – 31.12.97
a) 1.1.97 b) 1.7.97
4 000.– 1 000.–
none
Manila
200 000.–
1.1.97 – 31.12.98
a) 1.1.97
1 000.–
4.3.97
b) 1.7.97
4 000.–
7
a) 1.7.96 b) 1.10.96
500.– 500.–
Date of payment
none
4 000.–
11.10.96
3.3.98
7.7.97
1.2
Treaties
1.2.2 Surplus reinsurance
The accounting and statistical methods and procedures vary depending on the type of reinsurance treaty. This means that all reinsurance accounts clerks should also have in-depth knowledge of the various types of reinsurance treaty. To go into these in detail here would exceed the scope of this publication. We would therefore like to give just a few brief individual definitions and explain the most important effects these have on reinsurance accounts: 1.2.1 1.2.2 1.2.3
Quota share reinsurance Surplus reinsurance Excess of loss reinsurance
For further, more in-depth information, please refer to three other Swiss Re publications: “Introduction to Reinsurance”, “Proportional and Non-Proportional Reinsurance” and “A Reinsurance Manual of the Non-Life Branches”.
Unlike with quota share treaties, with surplus treaties the reinsurer does not participate in all risks. Instead, the primary insurer retains all risks up to a certain amount of liability (known as the “line”). The surplus over and above this line is covered by the reinsurer. The amount of risk which the reinsurer is obliged to accept is limited by the formation of “surpluses”, which are defined as a certain number of lines. The breakdown between the retention and the portion ceded to reinsurance gives a ratio for each reinsured risk. This ratio is used for apportioning liability, premiums and all losses between the primary insurer and the reinsurer. Because the ratio has to be calculated separately for each individual risk, this type of reinsurance results in considerably more expense than quota share reinsurance.
1.2.3 Excess of loss reinsurance 1.2.1 Quota share reinsurance
In quota share reinsurance, the reinsurer accepts a freely agreed fixed percentage (quota share) of all insurance policies written by the primary insurer in the classes of business specified in the treaty. This quota share is used as the basis for apportioning liability, premiums and losses between the primary insurer and the reinsurer. This type of reinsurance is simple and costeffective. When preparing the reinsurance accounts, it is sufficient just to calculate each item in proportion to the quota share.
8
With excess of loss (XL) reinsurance it is the amount of a potential loss that counts. Here the primary insurer retains for own account all losses in the class of business specified in the treaty up to a specific limit (the excess point or “priority”), irrespective of the size of the sum insured. Losses above this limit are payable by the reinsurer up to the agreed limit of cover. Excess of loss reinsurance can be broken down into per-risk covers (WXL) and catastrophe covers (CatXL). Where reinsurance accounting operations are concerned, this type of reinsurance is completely different to quota share and surplus reinsurance. Here, special conditions regarding payment of deposit premiums, losses, reinstatement and adjustment premiums have to be agreed in detail.
1.3
Accounting systems
Before anyone can start preparing accounts and statistics, they must consider which accounting system is being used as a basis in a specific case. Ideally, this should already be specified in the reinsurance treaty. If this is not the case, an accounting system (one which is common in the relevant class of business) will then have to be chosen. The important thing is not to change the accounting system once it has been chosen. The three most important accounting systems are the accounting year system, the year of occurrence system and the underwriting year system. Definition of accounting systems
Accounting year system In the accounting year system, the premiums and losses are entered in the accounts according to the treaty criteria for the relevant accounting year (no breakdown by year of occurrence or underwriting year). Premium: basically according to premium due date, sometimes also according to premiums paid. Paid losses: according to date of payment
writing years (breakdown by underwriting year). Premium and paid losses: according to the date when the original policy was written. Importance of the accounting systems
Accounting systems are used in the following areas: • When preparing the accounts: “what premiums/losses should go into the accounts, and according to which treaty criteria and how?” • When preparing the statements required under the reinsurance treaty, such as profit and loss statement, sliding scale commission, loss participation: “what system of presentation is used here?” (This is dependent on the preparation of the accounts.) • For preparing reinsurance statistics: “what system of presentation is used here?” (This is dependent on the preparation of the accounts.) It is therefore important to know that accounting systems are used not only to present statistics but also initially to define what should be included in the accounts and how. Depending on the system chosen, the results can turn out very differently, as the following example shows:
Year of occurrence system In the year of occurrence system the premiums and losses are entered in the accounts according to the treaty criteria for the relevant year of occurrence (breakdown by year of occurrence).
Example Treaty: Fire surplus treaty with commission rate of 30% (1996) and 25% (1997). In the first quarter of 1997 a paid premium of CHF 1 000, amongst others, is entered in the accounts in respect of a premium under a 1996 policy (date written).
Premium: Basically according to premium due date, sometimes also according to premiums paid. Paid losses: According to date of loss occurence, which must be accurately defined for each class of business.
Result using accounting year system: 1 000 – 250 = 750 Result using underwriting year system: 1 000 – 300 = 700
Underwriting year system In the underwriting year system, the premiums and losses are entered in the accounts according to the treaty criteria for the relevant under-
9
These differences can arise with all the arrangements relating to the accounts, eg cover, commission, expenses, technical provision ratios etc.
10
2.
Accounting procedures
The procedures followed in the Reinsurance Accounting department vary, depending on whether proportional or non-proportional reinsurance is involved.
2.1 Proportional reinsurance
Let us now take a more in-depth look at the foregoing, using the half-yearly accounts and performance-dependent calculations in respect of a quota share and a surplus treaty. The portfolio of 8 vessels described under point 1.1 serves as the basis for the calculations. 2.1.1 Quota share reinsurance
The examples of quota share reinsurance accounting given below are based on the following treaty:
11
Treaty extract
Portfolio
Corresponds to the portfolio specified in section 1.1
Treaty inception
1.1.1996
Reinsurance share
40% Swiss Re, 40% other reinsurers, 20% ceding company’s retention
Proportional cover
Sum insured 200 000; Swiss Re’s maximum liability 80 000
Commission
22.5%
Profit commission
Management expenses 5% Sliding scale profit commission: 30% profit commission on the slice of profit from 0 –10% of premium entered in the accounts 40% profit commission on the slice of profit from 10 –20% of premium entered in the accounts 50% profit commission on the rest of the profit Losses carried forward to extinction
Rendering of accounts
Underwriting year system with half-yearly statements of account Closing of books on 31 December Deadlines: rendering of accounts 60 days, objections 15 days Settlement: ceding company 15 days, Swiss Re 15 days Accounting currency USD Payment currency USD Set-off permitted with all balances
Loss reserves
Are entered at 100%
12
Quota share reinsurance: statement of account
Based on the treaty extract and the portfolio (8 vessels), it is now possible to calculate the relevant statements of account. You can try it for yourself now. The solutions on the pages which follow are intended as correction aids. We hope you find the calculations enjoyable.
13
Statement of account for 1st half year 1996, quota share, underwriting year system
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.7.1996
Our reinsurance treaty: Marine Quota Share
Class of business: Accounting period: Accounting system: Accounting currency: 100% figures
Marine 1st half year 1996 Underwriting year USD
Treaty year 1996 1996
Premiums Commission 22.5% Paid claims Technical balance
Your 40% reinsurance share
14
Debit 1 406.25 — 4 843.75 6 250.00 1 937.50
Credit 6 250.00
6 250.00
Statement of account for 2nd half year 1996, quota share, underwriting year system
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.1.1997
Our reinsurance treaty: Marine Quota Share
Class of business: Accounting period: Accounting system: Accounting currency: 100% figures
Marine 2nd half year 1996 Underwriting year USD
Treaty year 1996 1996 1996
Premiums Commission 22.5% Paid claims Technical balance
Your 40% reinsurance share
15
Debit 1 2 3 8
867.50 500.00 932.50 300.00
1 573.00
Credit 8 300.00
8 300.00
Statement of account for 1st half year 1997, quota share, underwriting year system
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.7.1997
Our reinsurance treaty: Marine Quota Share
Class of business: Accounting period: Accounting system: Accounting currency: 100% figures
Marine 1st half year 1997 Underwriting year USD
Treaty year 1997 1997 1996
Premiums Commission 22.5% Paid claims Technical balance
Your 40% reinsurance share
16
Debit 1 935.00 750.00 5 915.00 8 600.00 2 366.00
Credit 8 600.00
8 600.00
Statement of account for 2nd half year 1997, quota share, underwriting year system
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.1.1998
Our reinsurance treaty: Marine Quota Share
Class of business: Accounting period: Accounting system: Accounting currency: 100% figures
Marine 2nd half year 1997 Underwriting year USD
Treaty year 1997 1997 1997
Premiums Commission 22.50% Paid claims Technical balance
Debit 1 125.00 4 000.00 5 125.00
Your 40% reinsurance share
17
Credit 5 000.00
125.00 5 125.00 50.00
Quota share reinsurance: profit and loss statement
From the half-yearly accounts already prepared, we can now produce the necessary performance-dependent calculations (here: profit and loss statements), paying particular attention to the accounting system.
18
Profit and loss statement, quota share, accounting year 1996, underwriting year system
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.2.1997
Our reinsurance treaty: Marine Quota Share
Class of business: Accounting period: Accounting system: Treaty year: Accounting currency: 100% figures
Marine Profit and loss statement as at 31.12.1996 Underwriting year 1996 USD
Treaty result Premiums Commission Paid claims Loss reserves for 100% Management expenses 5% Profit/loss
Debit 3 273.75 2 500.00 750.00 727.50 7 298.75 14 550.00
Calculation of profit commission 30% profit commission: up to 10% of premium 40% profit commission: for further 10% of premium 50% profit commission: for the balance remaining Profit commission
100% 1 455.00 1 455.00 4 388.75 (7 298.75)
Debit 436.50 582.00 2 194.40 3 212.90
Balance situation Profit commission Profit commission already debited Balance
31.12.1996
Debit 3 212.90
3 212.90 Your 40% reinsurance share
19
19
Credit 14 550.00
14 550.00 Credit
3 212.90 3 212.90 Credit — 3 212.90 3 212.90 1 285.15
19
Profit and loss statement, quota share, accounting year 1997, underwriting year system
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.2.1998
Our reinsurance treaty: Marine Quota Share
Class of business: Accounting period: Accounting system: Treaty year: Accounting currency: 100% figures
As the claims for the 1996 treaty year paid in the 1st half year 1997 correspond exactly to the loss reserves as of 31.12.1996 and there was otherwise no change for the 1996 treaty year, the profit remains the same as it was on 31.12.1996.
Marine Profit and loss statement as at 31.12.1997 Underwriting year 1996 USD
Treaty result Premiums Commission Paid claims Loss reserves for 100% Management expenses 5% Profit/loss
Calculation of profit commission 30% profit commission: up to 10% of premium 40% profit commission: for further 10% of premium 50% profit commission: for the balance remaining Profit commission
Debit 3 273.75 3 250.00 — 727.50 7 298.75 14 550.00 100% 1 455.00 1 455.00 4 388.75
Debit 436.50 582.00 2 194.40 3 212.90
Balance situation Profit commission Profit commission already debited Balance
31.12.1997
Debit 3 212.90
3 212.90 Your 40% reinsurance share
20
20
Credit 14 550.00
14 550.00 Credit
3 212.90 3 212.90 Credit 3 212.90 0.00 3 212.90 0.00
Profit and loss statement, quota share, accounting year 1997, underwriting year system
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.2.1998
Our reinsurance treaty: Marine Quota Share
Class of business: Accounting period: Accounting system: Treaty year: Accounting currency: 100% figures
No profit sharing. The loss is to be carried forward to the following year or years (underwriting years).
Marine Profit and loss statement as at 31.12.1997 Underwriting year 1997 USD
Treaty result Premiums Commission Paid claims Loss reserves for 100% Management expenses 5% Profit/loss
Debit 3 060.00 4 000.00 15 000.00 680.00 22 740.00
21
Credit 13 600.00
21
9 140.00 22 740.00
2.1.2 Surplus reinsurance
The examples of surplus reinsurance accounting given below are based on the following treaty:
According to the stipulations of this surplus reinsurance treaty, the individual risks were distributed as follows between insurance and reinsurance:
Risk Tallinn Madrid S達o Paolo Tel Aviv Singapore Hong Kong Bombay Manila
Insurance share 100.00% 100.00% 66.67% 50.00% 35.71% 27.78% 25.00% 25.00%
Reinsurance share 0.00% 0.00% 33.33% 50.00% 64.29% 72.22% 75.00% 75.00%
For surplus treaties the accounting is done in accordance with the accounting year system.
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Treaty extract
Portfolio
Corresponds to the portfolio specified in section 1.1
Treaty inception
1.1.1996
Reinsurance share
20% Swiss Re, 80% other reinsurers
Proportional cover
200 000 sum insured 50 000 = 1 line (cover of 200 000 = 4 lines)
Commission
30% + 0.5% if loss ratio < 42.5% + up to 7.5% if loss ratio < 28.5% Difference: 0.5% commission for 1.0% loss ratio Provisional commission during the year: 32.5%
Profit commission
Management expenses 3% Profit commission 20% Losses carried forward to extinction
Rendering of accounts
Accounting year system with half-yearly statements Closing of books at 31 December Deadlines: rendering of accounts 60 days, objections 15 days Settlement: ceding company 15 days, Swiss Re 15 days Accounting currency USD Payment currency USD Set-off permitted with all balances
Unearned premium reserve
40%
Loss reserves
Are entered at 100%
23
Surplus reinsurance: statement of account
Based on the treaty extract and the portfolio (8 vessels), it is now possible to calculate the relevant statements of account. Here you have the opportunity to try it yourself. The solutions are once again given as correction aids on the pages which follow.
24
Statement of account for the 1st half year 1996, surplus, accounting year system
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.7.1996
Our reinsurance treaty: Marine Surplus
Class of business: Accounting period: Accounting system: Accounting currency: 100% reinsurance cession
Marine 1st half year 1996 Accounting year 1996 USD
Debit Premiums Commission 32.5% Paid claims Technical balance
406.25 â&#x20AC;&#x201D; 843.75 1 250.00
Your 20% reinsurance share
25
168.75
25
Credit 1 250.00
1 250.00
Statement of account for 2nd half year 1996, surplus, accounting year system
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.1.1997
Our reinsurance treaty: Marine Surplus
Class of business: Accounting period: Accounting system: Accounting currency: 100% reinsurance cession
Marine 2nd half year 1996 Accounting year 1996 USD
Debit Premiums Commission 32.5% Paid claims Technical balance
1 1 1 4
Your 20% reinsurance share
26
26
397.50 000.00 902.50 300.00 380.50
Credit 4 300.00
4 300.00
Statement of account for 1st half year 1997, surplus, accounting year system
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.7.1997
Our reinsurance treaty: Marine Surplus
Class of business: Accounting period: Accounting system: Accounting currency: 100% reinsurance cession
Marine 1st half year 1997 Accounting year 1997 USD
Debit Premiums Commission 32.5% Paid claims Technical balance
2 063.75 250.00 4 036.25 6 350.00
Your 20% reinsurance share
27
807.25
Credit 6 350.00
6 350.00
Statement of account for 2nd half year 1997, surplus, accounting year system
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.1.1998
Our reinsurance treaty: Marine Surplus
Class of business: Accounting period: Accounting system: Accounting currency: 100% reinsurance cession
Marine 2nd half year 1997 Accounting year 1997 USD
Debit Premiums Commission 32.5% Paid claims Technical balance
Credit 3 750.00
1 218.75 3 000.00 4 218.75
Your 20% reinsurance share
28
468.75 4 218.75 93.75
29
Surplus reinsurance: profit and loss statement/sliding scale commission statement
From the half-yearly accounts already prepared, we can now produce the required performance-dependent calculations (here: profit and loss statement/sliding scale commission statement), paying particular attention to the accounting system.
30
Profit and loss statement/sliding scale commission statement for 1996, surplus, accounting year system
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.2.1997
Our reinsurance treaty: Marine Surplus
Calculation of loss ratio Loss ratio: 1250 u 100 = 37.54 % 3 330
Calculation of sliding scale commission Sliding scale commission: • Current commission 32.50% • Provisional commission 32.50% • Sliding scale commission 0.00% = 0.00 in the reinsurer’s favour
Class of business: Accounting period: Accounting system: Accounting currency: 100% reinsurance cession Treaty result Premiums Commission Sliding scale commission Paid claims Unearned premium reserve 40% Loss reserves for 100% Management expenses 3% Profit/loss
Your 20% reinsurance share
No adjustment of the commission as a result of calculation of the sliding scale commission, since according to the following table the sliding scale commission rate is the same as the provisional commission.
31
Marine Profit and loss statement/ sliding scale commission statement as at 31.12.1996 Accounting year 1996 USD
Debit
Credit 5 550.00
1 803.75 — 1 000.00 2 220.00 250.00 166.50 109.75 5 550.00 21.95
5 550.00
Table for calculating the sliding scale commission rate
Loss ratio in % 00.00 – 28.49 28.50 – 29.49 29.50 – 30.49 30.50 – 31.49 31.50 – 32.49 32.50 – 33.49 33.50 – 34.49 34.50 – 35.49 35.50 – 36.49 36.50 – 37.49 37.50 – 38.49 38.50 – 39.49 39.50 – 40.49 40.50 – 41.49 41.50 – 42.49 42.50 and over
Sliding scale commission in % 37.50 37.00 36.50 36.00 35.50 35.00 34.50 34.00 33.50 33.00 32.50 32.00 31.50 31.00 30.50 30.00
32
Minimum
Applies for accounting year 1996
Maximum (accounting year 1997)
Profit and loss statement/sliding scale commission statement 1997, surplus, accounting year system
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.2.1998
Our reinsurance treaty: Marine Surplus
Calculation of loss ratio Loss ratio:
Class of business: Accounting period:
13 833 u 100 = 167.07 % 8 280
Accounting system: Accounting currency: 100% reinsurance cession
Calculation of sliding scale commission Sliding scale commission: • Current commission 30.00% • Provisional commission 32.50% • Sliding scale commission 2.50% = 252.50 in the reinsurer’s favour
Treaty result Premiums Commission Sliding scale commission Claims paid Unearned premium reserve entry Loss reserve entry Unearned premium reserve withdrawal 40% Loss reserve withdrawal for 100% Management expenses 3% Profit/loss
Marine Profit and loss statement/ sliding scale commission statement as of 31.12.1997 Accounting year 1997 USD
Debit 3 282.50
252.50 3 250.00 2 220.00 250.00 4 040.00 10 833.00 303.00 21 708.50
Commission is adjusted to the contractually agreed minimum sliding scale commission as per the table, which is taken into account financially in a halfyearly statement of account. No profit-sharing. The resulting loss is to be carried forward to the following year or years (accounting years).
Your 20% reinsurance share
33
Credit 10 100.00
8 886.00 21 708.50 1 777.20
2.2
Non-proportional reinsurance
Let us now take a more in-depth look at the foregoing, using the deposit premium statement, the loss statement with reinstatement and the annual statement of account for a per risk working excess of loss (WXL) treaty. 2.2.1 Excess of loss reinsurance
The examples of XL reinsurance accounting which follow are based on the following treaty:
34
Treaty extract
Type of treaty
Per risk WXL
Treaty inception
1.1.1996
Reinsurance share
100% Swiss Re
Cover
150 000 XS 50 000 Accounting currency USD
Deposit premium
Due on 1.1.1996: 20 000 Due on 1.1.1997: 22 000
Reinstatement
1st reinstatement against payment of 100% of final premium
Premium calculation
Fixed percentage 3% GNPI
Class of business
Marine Hull
35 35
Deposit premium statement
The deposit premium is to be remitted on the due date. To identify the payment, the ceding company informs the reinsurer about the purpose and manner of the payment. An example of a letter providing such information is given below: Dear Sirs In accordance with the treaty stipulations, we have today given instructions for the following payments to be effected in respect of the following treaty: â&#x20AC;˘ Per risk WXL, Marine Hull, deposit premium as at 1.1.1996 â&#x20AC;˘ Total: 20 000 Payment has been made to your usual bank account.
Where several deposit premiums are paid at the same time, the reinsurer needs a detailed list per treaty indicating the total payment made.
36
Deposit premium statement, excess of loss, due date 1 January 1996
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 20.12.1995
Our reinsurance treaty: Marine Hull per risk WXL, cover 150 000 XS 50 000
Class of business: Due date: Accounting period: Accounting currency: Your reinsurance share:
Marine 1 January 1996 1996 USD 100% Treaty year 1996
Deposit premium Underwriting result Financial balance
37
Debit
Credit 20 000.00 20 000.00 20 000.00
Deposit premium statement, excess of loss, due date 1 January 1997
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 20.12.1996
Our reinsurance treaty: Marine Hull per risk WXL, cover 150 000 XS 50 000
Class of business: Due date: Accounting period: Accounting currency: Your reinsurance share:
Marine 1 January 1997 1997 USD 100% Treaty year 1997
Deposit premium Underwriting result Financial balance
38
Debit
Credit 22 000.00 22 000.00 22 000.00
Excess of loss reinsurance: loss advice, reinstatement and annual statement of account
Using the treaty extracts, the loss advice and the GNPI, it is now possible to calculate the relevant statements of account. This example does not take any account of the portfolio specified in section 1.1. Now it is again your turn to see if you have grasped the explanations given so far. The solutions are given on the pages which follow as a correction aid.
39
Loss advice, excess of loss
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 10.9.1996
Detailed loss information in respect of our loss statement of 10.9.1996 Our reinsurance treaty: Marine Hull per risk WXL, cover 150 000 XS 50 000 Class of business: Due date: Accounting period: Accounting currency: Your reinsurance share
Marine — Loss of 2 September 1996 USD 100%
Total loss Loss of 2 September 1996: Collision in the port of Rotterdam between MV Anyship and a tug while entering the harbour. Loss assessor: Mr Anybody (average adjuster) Report No. 056/633 44 54
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132 500.00
Insurer’s retention 50 000.00
Reinsurer’s share of loss 82 500.00
Loss statement with reinstatement of cover, excess of loss
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 10.9.1996
Our reinsurance treaty: Marine Hull per risk WXL, cover 150 000 XS 50 000
Calculation of reinstatement: Loss u Premium Cover
Premium 20 000 Cover 150 000 Loss 82 500
Class of business: Due date: Accounting period: Accounting currency: Your reinsurance share:
Loss Reinstatement premium Technical balance Balance
Marine â&#x20AC;&#x201D; 9 September 1996 USD 100% Treaty year 1996 1996
Debit 82 500.00
11 000.00 71 500.00 71 500.00
82 500 u 20 000 = 11 000 150 000
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Credit
Annual statement of account for 1996, excess of loss
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 10.2.1997
Our reinsurance treaty: Marine Hull per risk WXL, cover 150 000 XS 50 000
Class of business: Due date: Accounting period: Accounting currency: Your reinsurance share:
Adjustment premium Adjusted reinstatement premium Technical balance Balance
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Marine â&#x20AC;&#x201D; 1996 USD 100% Treaty year 1996 1996
Debit
22 509.00 22 509.00
Credit 14 522.00 7 987.00
The calculations for the adjustment premium and the adjusted reinstatement premium are explained in the following example.
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Calculation example for annual statement of account for 1996, excess of loss
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.1.1997
Our reinsurance treaty: Marine Hull per risk WXL, cover 150 000 XS 50 000
Class of business: Due date: Accounting period: Accounting currency: Your reinsurance share: Calculation of the adjustment premium GNPI Fixed percentage Annual premium calculated Deposit premium paid Adjustment premium
Marine — 1996 USD 100%
1 150 736.00 3% 34 522.00 – 20 000.00 14 522.00
Calculation of the reinstatement adjustment Premium 34 522.00 Cover 150 000.00 Loss 82 500.00 Calculation 82 500/150 000 x 34 522 Reinstatement premium paid Adjusted reinstatement premium
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18 987.00 – 11 000.00 7 987.00
The annual statement of account, excess of loss, and the calculations for the adjustment premium are explained on the following two pages.
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Annual statement of account for 1997, excess of loss
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 10.2.1998
Our reinsurance treaty: Marine Hull per risk WXL, cover 150 000 XS 50 000
Class of business: Due date: Accounting period: Accounting currency: Your reinsurance share:
Marine â&#x20AC;&#x201D; 1997 USD 100% Treaty year 1997
Adjustment premium Technical balance Balance
Debit 14 768.00 14 768.00
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Credit 14 768.00
Calculation example annual statement of account for 1997, excess of loss
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 3.1.1998
Our reinsurance treaty: Marine Hull per risk WXL, 150 000 XS 50 000
Class of business: Due date: Accounting period: Accounting currency: Your reinsurance share:
Marine â&#x20AC;&#x201D; 1997 USD 100%
Calculation of adjustment premium GNPI Fixed percentage
1 225 600.00 3%
Annual premium calculated Deposit premium paid
36 768.00 â&#x20AC;&#x201C; 22 000.00 14 768.00
Adjustment premium
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3.
Facultative acceptances
3.1
Specialities
Facultative business increases the information needed by the reinsurer on each risk. This need for information must also be met on the accounting side, ie it must be clear to both parties which premiums per risk and which individual losses have already been entered in the accounts and paid, and which ones have not. This means that there are two possible types of statements of account: • quarterly statements of account with detailed bordereaux, see section 3.2 • individual statements per risk premium and per individual loss, see section 3.3.
3.2
Quarterly statements of account
Where there are a lot of individual facultative acceptances between the primary insurance company and its reinsurers, the quarterly statement of account is the simplest method. This basically looks like the quarterly statements of account found with proportional treaties. The difference lies in the structure. On the premium side, all the premiums written in the relevant quarter are entered. The associated commission and other costs must be charged for the original amounts and cannot therefore correspond to a flat rate. So that the reinsurer knows which acceptances are actually being entered in the accounts here, the ceding company must provide a detailed bordereau containing the following information: • name of the risk, risk number, policy period • gross premium and costs.
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On the loss side, all the losses which the ceding company has paid to the policyholder during this period (covered in accordance with the acceptance) are entered. So that the reinsurer knows which losses have actually been settled here, the ceding company must provide a detailed bordereau containing the following information: • name of the loss and the relevant risk, including the policy period • amount of loss • date of loss. The total on the quarterly statement of account must match the total as per the bordereau. The respective balance is paid within an agreed period.
3.3
Individual statements of account
Where there are only a few individual facultative acceptances, or in the case of high amounts, the quarterly statement of account is normally dispensed with and a statement is presented for each individual premium or for each individual loss. The information required is then exactly the same as for the quarterly statements. The administrative expense of individual statements is accordingly higher for primary insurers and reinsurers alike. An example of a quarterly statement of account is given below:
Quarterly statement of account
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 6.5.1996
Collective accounting number 78495-90-3
Name Our Fire cessions
Risk
Risk number
Your reference number
Period
Gross amount
Commission share
Commission
Net amount
DR/CR
Premiums HM Gmbh Rege Industrial Germa Electronics
AN64511AM AN64511AR AN6497PAC
FS000553 FS14111880 FS26804377
5.3.96 –12.3.96 15.1.96 –15.2.96 1.2.96 –28.2.96
180 000 450 000 600 000
10% 15% 25%
18 000 67 500 150 000
162 000 382 500 450 000
CR CR CR
Losses Steph & Partners
AN6463WAO FS15692
300 000 TOTAL
—
—
300 000 694 500
DR CR
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Date of loss 15.2.96
Accounting period 1.1.96–31.3.96
Currency USD
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4.
Financial aspects
4.1
Payments and outstanding balances
Example Marine Quota Share 4th Quarter 1996:
For both sides involved, the operation of a high-quality current account is just as important as the points mentioned in sections 2 and 3, attention being paid here to the following: Payments All payments effected must be provided with sufficient information (details of classes of business, type of treaties, quarters etc). It is even better for the reinsurer to be advised of the payment by letter or fax. Example We have today given instructions for the following payment to be effected: Marine Quota Share Engineering Surplus Fac Fire premium
4th quarter 96 3rd quarter 96 March 96
USD USD USD USD
25 17 5 47
000.00 000.00 000.00 000.00
Where balances in different original currencies are converted into a single payment currency, the rates of exchange must also be indicated. Balances outstanding As already indicated in the previous examples, each statement of account should contain the precise balance outstanding. This consists of the final balance for the previous quarter, the payments effected in the meantime, the balance of the present quarter and the final balance, which can be calculated.
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Balance as per previous quarter Payment at 12.4.1996 Balance on statement Balance as of 31.12.1996
USD USD USD USD
35 (28 25 32
000.00 000.00) 000.00 000.00
Where a current account statement relates to several treaties, the balances for all the treaties should be recorded. Current account balances which do not agree must be squared with each other without delay. Carrying forward incorrect balances or previous balances leads to ever greater problems. Full information about every financial transaction is very useful for both parties to a treaty and can save a lot of time and effort besides.
4.2
Cash calls
A typical cash loss clause included in a proportional treaty would read as follows: “The Reinsurer shall remit to the primary insurance company its share of any loss payment due by the primary insurance company immediately on demand if the cash loss figure as stipulated in the annexes to this agreement has been reached or exceeded. The Reinsurer shall, however, be entitled to deduct from its share any balance due to it and arising out of any of its accounts with the primary insurance company.” (Source: Gerathewohl, Reinsurance Principles and Practice) The purpose of this stipulation is to make a sum of money available to the primary insurance company as quickly as possible in order to increase its liquidity. From the reinsurer’s point of view, the possibility of calling for a cash call payment is seen as a service to its clients which obliges it to always have substantial liquid funds at its disposal.
Loss advices, cash calls, payments It is up to the primary insurer to decide whether and when it wishes to call for a cash call payment which exceeds the treaty limit. This can be done by letter or fax containing the necessary information such as the name of risk, sum insured, type of loss, date of loss, expected amount of loss, amount of cash call, remittance instructions etc.
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For reasons of clarity, upcoming cash calls should not automatically be deducted from payments or from the total balances of quarterly statements. The possibility of settlement can be taken into consideration by mutual agreement. An example of a cash loss statement follows.
Cash call statement
Any Insurance Co.
Any Insurance Co. 11, Any Street Anytown, Anyshire United Kingdom
Swiss Re Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland
Anytown, 23.12.1996
Cash call statement
We advise you of the following loss under our â&#x20AC;&#x153;Fire Quota Share Europeâ&#x20AC;? reinsurance treaty and request payment by return.
Loss number: Policy number: Assured: Cause of loss: Date of loss: Place: Currency: Date of payment:
004114513382 N023932 San Miguel beer brewery Fire in warehouse 15 December 1996 Alicante, Spain ESP 21 December 1996
Total
Amount of loss 10 000 000.00 10 000 000.00
Your 10% reinsurance share
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1 000 000.00
Reinsurance share 5 000 000.00 5 000 000.00 500 000.00
Crediting payments in a subsequent statement/debiting losses Every transaction outside the quarterly statement should of course be taken into consideration again in the next statement of account, and the same also applies to cash calls. The payment must be taken into account again in the total of the next financial statement as a payment by the reinsurer. Where the loss is actually paid, it must be shown as a technical entry in the statement, separately and with a note wherever possible, as a loss debit. At the same time, this debit must appear as a credit again, since the relevant loss will already have been dealt with financially. A payment credit entry under the normal accounting procedure compared to that under the accounting procedure for a cash call is illustrated below: Normal accounting procedure: loss in quarterly statement of account ESP
Currency Loss San Miguel beer brewery
500 000.00
4th quarter 1996 Losses total (incl. loss San Miguel beer brewery) Balance Payment
–1 000 000.00 –1 000 000.00 +1 000 000.00
With this the loss San Miguel beer brewery is fully entered in the accounts both technically and financially.
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Accounting procedure for a cash loss Currency Loss San Miguel beer brewery (cash loss limit 400 000) Cash call Cash loss payment 1st quarter 1997 Total losses (excl. San Miguel) Loss San Miguel beer brewery Total Credit entry for payment made Losses still to be paid
ESP 500 000.00
500 000.00 – 500 000.00
– 600 000.00 – –1 + –
500 100 500 600
000.00 000.00 000.00 000.00
With this the loss San Miguel beer brewery is fully entered in the accounts both technically and financially. The other losses in the quarter are settled separately with the next payment.
Closing remarks
We have tried to present the abstract subject of reinsurance accounting in a way that is easy to follow. We hope that it will become clear to you which calculation steps need to be carried out and how, when you do the calculation exercises. As already mentioned, this publication is not intended to be entirely self-explanatory but rather as an accompaniment to various training events. Our â&#x20AC;&#x153;Service to Clientsâ&#x20AC;? team will also be happy to provide you with individual support. Should you need any further assistance, we can be contacted at telephone number +41 1 285 26 20 or fax +41 1 285 36 63. Swiss Reinsurance Company Reinsurance Accounting The authors
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Selected brochures
Introduction to Reinsurance This teaching aid explains the system of reinsurance to would-be underwriters and uses examples and graphs to introduce them to the methods involved. The publication does not claim to be exhaustive, however, but is intended as a support for teachers and trainees. Available in German, English and Portuguese. Order number: 96-82 Proportional and Non-Proportional Reinsurance This publication explains the essential differences between the two types of reinsurance cover using a number of clear examples. It was recently completely revised and is aimed at trainee underwriters and anyone else with an interest in the subject. Available in German, English and Spanish Order number: 96-85 A Reinsurance Manual of the Non-Life Branches This practical manual of casualty reinsurance is designed for primary insurers. It concentrates on the technical details of the subject and deals only briefly with historical, economic, legal and political aspects. Available in English, French, Portuguese and Spanish. Order number: 78-58
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You can order these brochures, additional copies of this publication and a catalogue of other Swiss Re publications (â&#x20AC;&#x153;Publicationsâ&#x20AC;?) from: Swiss Re Public Relations Mythenquai 50/60 P. O. Box CH-8022 Zurich Fax +41 1 285 20 23 E-mail publications@swissre.com
Glossary
Acceptance Document containing the most important details relating to an accepted risk in the facultative sector.
Deposit premium Calculated premium in the non-proportional sector which is payable at the start of a treaty year (see also subsequent premium).
Accounting system System laying down how the figures in the portfolio are to be entered in the reinsurance accounts.
Earned premium Sum of the paid premium and the change in the unearned premium reserve in any year.
Adjustment premium That portion of the non-proportional premium which is still owing from the annual premium after the deposit premium payments already made have been deducted. Annual premium Calculated premium resulting from the calculation of the GNPI multiplied by a premium rate which is normally fixed in advance. Back office The department in a reinsurance company which takes care of all the business once the treaty has been signed. Bordereau Detailed list of risks, premiums and losses per class of business. Claims incurred Sum of claims payments and the change in the loss reserve in a year. Commission Remuneration paid by the reinsurer to the primary insurer for the acquisition and administrative costs of insurance contracts.
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GNPI Original premiums written for the entire business covered. Expenses are not taken into account here and are not deducted from the original premiums. What does have to be deducted though is the premium ceded under proportional reinsurance in cases where the excess of loss covers the primary insurerâ&#x20AC;&#x2122;s own liability under proportional reinsurance. The amount of premium remaining is known as the â&#x20AC;&#x153;gross net premium incomeâ&#x20AC;?, or GNPI for short. Loss advice Information which the insurer supplies to the reinsurer about a loss affecting the reinsurance. Loss ratio Claims incurred in relation to earned premiums. Loss statement Statement in respect of an individual loss which has already been notified earlier to the reinsurer. Where the loss is accepted, a remittance is made on the basis of this statement.
Portfolio The totality of the risks assumed by an insurer or reinsurer. Profit and loss statement Type of calculation in the proportional sector which provides for a possible partial refund of the profit in a reinsurance treaty. Reinstatement Reinstatement premium in the nonproportional sector which the primary insurer has to pay to buy further cover. Sliding scale commission Method of calculation in the proportional sector under which the commission varies depending on the performance of the reinsurance treaty. Technical balance Result of all accounting items which are effective from both the financial and the reinsurance point of view. Underwriting result Technical balance corrected by the reserves.
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Marcel Hegglin has worked since 1988 in Swiss Re’s Accounting department, where he has been involved above all with internal and external training in reinsurance accounting. On the career development side, he successfully completed a course of study leading to the Swiss insurance industry’s professional qualification. As a member of management, he has run various accounting groups and projects since 1995.
René Geiger has worked in Swiss Re’s Accounting department since 1989. After spending a year working abroad in Asia, he became responsible for internal and external training in reinsurance accounting. On the career development side, he successfully completed a course of study leading to the Swiss insurance industry’s professional qualification. He is currently running projects in connection with the accounts side of the business handled.
© 1997 Swiss Reinsurance Company Title: Introduction to reinsurance accounting Authors: Marcel Hegglin and René Geiger, Swiss Re Produced by: Public Relations and Language Services, Swiss Re Graphic design: Markus Galizinski, Zurich Photos: Markus Galizinski, Keystone, Zurich Further copies and a list of other Swiss Re publications (“Publications”) may be obtained from: Swiss Reinsurance Company Public Relations Mythenquai 50/60 P. O. Box CH-8022 Zurich Telephone +41 1 285 21 21 Fax +41 1 285 20 23 e-mail publications@swissre.com (1/98, 2 500 en)
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