REINSURANCE ACCOUNTINGIn broad terms, an account can be broken down into of three main sections: - it provides a technical overview, i.e., it summarizes all items that contribute to the underwriting profit or loss, such as premiums, losses, commissions and other deductions; - it gives a financial picture, i.e., it summarizes all items that affect the amounts due to or from the parties. In addition to the technical picture which gives the underwriting result such items as deposits withheld and released and interest and tax on interest are included; - it summarizes the settlement picture, i.e., includes balances due from current and previous accounts and cash movements. 

REINSURANCE ACCOUNTING

The accounting procedures are different for proportional and non-proportional treaties because of the differences in their nature.•Accounts are issued at regular intervals and these intervals are stated in the contract. For proportional treaties, quarterly accounts tend to be the norm but half-yearly accounts are not unusual. •From a reinsurer’s perspective, quarterly accounts are preferred because cash flow is better than with half-yearly accounts.

REINSURANCE ACCOUNTINGThe accounting chain

 •The accounting procedures follow a pattern where various forms have to be prepared at regular intervals and where information has to be transmitted to reinsurers within a period stipulated in the reinsurance contract. •It is essential that an administrative routine is developed whereby all the steps in the chain are followed. The steps are linked to each other in such a way that a delay in one part will lead to a delay of the whole process.

 

REINSURANCE ACCOUNTINGThe Accounting Chain

  Reinsurers monitor their ceding companies’ accounting and payment practice. If acceptable accounting and settlement standards were not maintained, many reinsurers would decline a continued participation in the business even if it were technically profitable.

REINSURANCE ACCOUNTING Proportional business With proportional treaties, many individual policies or risks are

covered by reinsurers and this necessitates the transfer of a share of the premiums under each risk ceded and the collection of the corresponding part of any loss arising on the same risk. Thus the ceding company will be obliged to maintain records of all cessions made to the treaty.

  This record is referred to as a:  - premium bordereau. A premium bordereau is sometimes

provided to the leading reinsurer. In a similar way a:

- claims bordereau - records each claim to be recovered from the reinsurance treaty.

The reinsurance treaty would also stipulate that a:- loss notification is provided to reinsurers if a loss exceeds or is expected to exceed an amount specified in the treaty.

REINSURANCE ACCOUNTING

At regular intervals, a:  - treaty account will be dispatched to all

reinsurers. As previously stated, the account will contain technical and financial items and forms a statement of amounts due to or from the reinsurer.

 Upon receipt of the account and within a

stipulated time period, reinsurers will:  - confirm the account.

REINSURANCE ACCOUNTING

Following the confirmation:  - payment of amounts due will take place. In addition to the flat treaty commission, the

reinsured may be entitled to a profit commission as an incentive to promote good underwriting. Thus, should the treaty earn a profit based on an agreed formula, reinsurers are charged an additional commission. The profit commission is calculated and charged in a profit commission statement  that is usually prepared annually when the year-end result is known.