new rule entitled "Accounting and Reporting for Reinsurance of Short-duration and Long-duration Contracts," which requires the insurance company to report all assets and liabilities relating to reinsurance contracts on its financial statements on a gross basis rather than on the net of the influence of reinsurance, as had been the historical reporting method. This rule establishes parameters for the determination of whether or not a specific risk has actually been transferred under a reinsurance contract. In order to be classified as a reinsurance contract-that is, one of a risk-transferring nature-the rule requires a reasonable possibility that the reinsurer may assume significant loss for accepting the insurance risk.
Thus, this rule established new generally accepted accounting principles for reinsurance to include the following: (1) reinsurance is defined for accounting purposes to exclude transactions that do not subject the reinsurer to the reasonable possibility of a substantial loss from the insurance risk assumed or does not transfer the underwriting risk; (2) retroactive and prospective provisions within the same reinsurance contract must be separately accounted-if the separate accounting is not possible, the total reinsurance contract must be accounted for on a retroactive basis; (3) reinsurance recoverables must be reported as an asset on the balance sheet and the total reinsured claim liability to include the Incurred But Not Reported losses (IBNR) reserves and recoverables on outstanding claims must be reported; (4) the ceding company must defer gains on retroactive contracts and amortize these gains over the expected period of time necessary to settle the claims; and (5) insurer must disclose concentrations of credit risk resulting from reinsurance recoverables, and receivables.
