Introduction to

Reinsurance accounting
Introduction
to reinsurance accounting
Table of contents

Foreword 5

1. Prerequisites/Basics 6
1.1 Portfolio 6
1.2 Treaties 8
1.2.1 Quota share reinsurance 8
1.2.2 Surplus reinsurance 8
1.2.3 Excess of loss reinsurance 8
1.3 Accounting systems 9

2. Accounting procedures 11
2.1 Proportional reinsurance 11
2.1.1 Quota share reinsurance 11
– Statement of account
– Profit and loss statement
2.1.2 Surplus reinsurance 22
– Statement of account
– Profit and loss statement/
– sliding scale commission statement

2.2 Non-proportional reinsurance 34

2.2.1 Excess of loss reinsurance 34
– Deposit premium statement
– Loss advice, reinstatement
– and annual statement of account

3. Facultative acceptances 49
3.1 Specialities 49
3.2 Quarterly statements of account 49
3.3 Individual statements of account 49

4. Financial aspects 52
4.1 Payments and outstanding balances 52
4.2 Cash calls 53

Closing remarks 56
Selected brochures 57
Glossary 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 statis-
tical 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 comple-
ment 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 busi-
ness 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 1.1 Portfolio

statements and statistics?
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
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.
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:
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.
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.
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.

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
Portfolio Names of Sum insured Period Due date/ Date/Losses Date of
the vessels Premiums payment

Tallinn 20 000.– 1.1.96 – 30.6.97 a) 1.1.96 500.– none

b) 1.10.96 500.–

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 a) 1.7.96 2 500.– 5.10.96 2 000.– 11.10.96
b) 1.10.96 2 500.–

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.– 3.3.98

Bombay 200 000.– 1.1.97 – 31.12.97 a) 1.1.97 4 000.– none

b) 1.7.97 1 000.–

Manila 200 000.– 1.1.97 – 31.12.98 a) 1.1.97 1 000.– 4.3.97 4 000.– 7.7.97
b) 1.7.97 4 000.–

7
1.2 Treaties
The accounting and statistical methods and
procedures vary depending on the type of rein-
surance 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 Quota share reinsurance
1.2.2 Surplus reinsurance
1.2.3 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”.
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 cost-
effective. When preparing the reinsurance
accounts, it is sufficient just to calculate each
item in proportion to the quota share.
8
1.2.2 Surplus reinsurance
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 appor-
tioning 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 reinsur-
ance results in considerably more expense than
quota share reinsurance.
1.2.3 Excess of loss reinsurance
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 reinsur-
ance 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
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).
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.
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
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 presen-
tation 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:
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).
Result using accounting year system:
1 000 – 250 = 750
Result using underwriting year system:
1 000 – 300 = 700
These differences can arise with all the arrange-
ments 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 Any Insurance Co.
1st half year 1996,
quota share,
underwriting year
system

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 3.7.1996

Our reinsurance treaty: Marine Quota Share

Class of business: Marine

Accounting period: 1st half year 1996
Accounting system: Underwriting year
Accounting currency: USD
100% figures

Treaty year Debit Credit

Premiums 1996 6 250.00
Commission 22.5% 1996 1 406.25
Paid claims —
Technical balance 4 843.75
6 250.00 6 250.00

Your 40% reinsurance share 1 937.50

14
Statement of
account for Any Insurance Co.
2nd half year 1996,
quota share,
underwriting year
system

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 3.1.1997

Our reinsurance treaty: Marine Quota Share

Class of business: Marine

Accounting period: 2nd half year 1996
Accounting system: Underwriting year
Accounting currency: USD
100% figures

Treaty year Debit Credit

Premiums 1996 8 300.00
Commission 22.5% 1996 1 867.50
Paid claims 1996 2 500.00
Technical balance 3 932.50
8 300.00 8 300.00

Your 40% reinsurance share 1 573.00

15
Statement of
account for Any Insurance Co.
1st half year 1997,
quota share,
underwriting year
system

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 3.7.1997

Our reinsurance treaty: Marine Quota Share

Class of business: Marine

Accounting period: 1st half year 1997
Accounting system: Underwriting year
Accounting currency: USD
100% figures

Treaty year Debit Credit

Premiums 1997 8 600.00
Commission 22.5% 1997 1 935.00
Paid claims 1996 750.00
Technical balance 5 915.00
8 600.00 8 600.00

Your 40% reinsurance share 2 366.00

16
Statement of
account for Any Insurance Co.
2nd half year 1997,
quota share,
underwriting year
system

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 3.1.1998

Our reinsurance treaty: Marine Quota Share

Class of business: Marine

Accounting period: 2nd half year 1997
Accounting system: Underwriting year
Accounting currency: USD
100% figures

Treaty year Debit Credit

Premiums 1997 5 000.00
Commission 22.50% 1997 1 125.00
Paid claims 1997 4 000.00
Technical balance 125.00
5 125.00 5 125.00

Your 40% reinsurance share 50.00

17
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 Any Insurance Co.
share, accounting
year 1996,
underwriting year
system

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 3.2.1997

Our reinsurance treaty: Marine Quota Share

Class of business: Marine

Accounting period: Profit and loss statement as at 31.12.1996
Accounting system: Underwriting year
Treaty year: 1996
Accounting currency: USD
100% figures

Treaty result Debit Credit

Premiums 14 550.00
Commission 3 273.75
Paid claims 2 500.00
Loss reserves for 100% 750.00
Management expenses 5% 727.50
Profit/loss 7 298.75
14 550.00 14 550.00

Calculation of profit commission 100% Debit Credit

30% profit commission: up to 10% of premium 1 455.00 436.50
40% profit commission: for further 10% of premium 1 455.00 582.00
50% profit commission: for the balance remaining 4 388.75 2 194.40
Profit commission (7 298.75) 3 212.90
3 212.90 3 212.90

Balance situation Debit Credit

Profit commission 31.12.1996 3 212.90
Profit commission already debited —
Balance 3 212.90
3 212.90 3 212.90

Your 40% reinsurance share 1 285.15

19 19 19
Profit and loss
statement, quota Any Insurance Co.
share, accounting
year 1997,
underwriting year
system

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 3.2.1998

Our reinsurance treaty: Marine Quota Share

Class of business: Marine

Accounting period: Profit and loss statement as at 31.12.1997
Accounting system: Underwriting year
Treaty year: 1996
Accounting currency: USD
100% figures

As the claims Treaty result Debit Credit

for the 1996 treaty Premiums 14 550.00
year paid in the Commission 3 273.75
1st half year 1997 Paid claims 3 250.00
correspond exactly Loss reserves for 100% —
to the loss reserves Management expenses 5% 727.50
as of 31.12.1996 Profit/loss 7 298.75
and there was 14 550.00 14 550.00
otherwise no
change for the 1996 Calculation of profit commission 100% Debit Credit
treaty year, the 30% profit commission: up to 10% of premium 1 455.00 436.50
profit remains the 40% profit commission: for further 10% of premium 1 455.00 582.00
same as it was 50% profit commission: for the balance remaining 4 388.75 2 194.40
on 31.12.1996. Profit commission 3 212.90
3 212.90 3 212.90

Balance situation Debit Credit

Profit commission 31.12.1997 3 212.90
Profit commission already debited 3 212.90
Balance 0.00
3 212.90 3 212.90

Your 40% reinsurance share 0.00

20 20
Profit and loss
statement, quota Any Insurance Co.
share, accounting
year 1997,
underwriting year
system

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 3.2.1998

Our reinsurance treaty: Marine Quota Share

Class of business: Marine

Accounting period: Profit and loss statement as at 31.12.1997
Accounting system: Underwriting year
Treaty year: 1997
Accounting currency: USD
100% figures

No profit sharing. Treaty result Debit Credit

The loss is to Premiums 13 600.00
be carried forward Commission 3 060.00
to the following Paid claims 4 000.00
year or years Loss reserves for 100% 15 000.00
(underwriting Management expenses 5% 680.00
years). Profit/loss 9 140.00
22 740.00 22 740.00

21 21
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 Insurance share Reinsurance share

Tallinn 100.00% 0.00%
Madrid 100.00% 0.00%
São Paolo 66.67% 33.33%
Tel Aviv 50.00% 50.00%
Singapore 35.71% 64.29%
Hong Kong 27.78% 72.22%
Bombay 25.00% 75.00%
Manila 25.00% 75.00%

For surplus treaties the accounting is done in

accordance with the accounting year system.

22
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 Any Insurance Co.
1st half year 1996,
surplus, accounting
year system

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 3.7.1996

Our reinsurance treaty: Marine Surplus

Class of business: Marine

Accounting period: 1st half year 1996
Accounting system: Accounting year 1996
Accounting currency: USD
100% reinsurance cession

Debit Credit
Premiums 1 250.00
Commission 32.5% 406.25
Paid claims —
Technical balance 843.75
1 250.00 1 250.00

Your 20% reinsurance share 168.75

25 25
Statement of
account for Any Insurance Co.
2nd half year 1996,
surplus, accounting
year system

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 3.1.1997

Our reinsurance treaty: Marine Surplus

Class of business: Marine

Accounting period: 2nd half year 1996
Accounting system: Accounting year 1996
Accounting currency: USD
100% reinsurance cession

Debit Credit
Premiums 4 300.00
Commission 32.5% 1 397.50
Paid claims 1 000.00
Technical balance 1 902.50
4 300.00 4 300.00

Your 20% reinsurance share 380.50

26 26
Statement of
account for Any Insurance Co.
1st half year 1997,
surplus, accounting
year system

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 3.7.1997

Our reinsurance treaty: Marine Surplus

Class of business: Marine

Accounting period: 1st half year 1997
Accounting system: Accounting year 1997
Accounting currency: USD
100% reinsurance cession

Debit Credit
Premiums 6 350.00
Commission 32.5% 2 063.75
Paid claims 250.00
Technical balance 4 036.25
6 350.00 6 350.00

Your 20% reinsurance share 807.25

27
Statement of
account for Any Insurance Co.
2nd half year 1997,
surplus, accounting
year system

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 3.1.1998

Our reinsurance treaty: Marine Surplus

Class of business: Marine

Accounting period: 2nd half year 1997
Accounting system: Accounting year 1997
Accounting currency: USD
100% reinsurance cession

Debit Credit
Premiums 3 750.00
Commission 32.5% 1 218.75
Paid claims 3 000.00
Technical balance 468.75
4 218.75 4 218.75

Your 20% reinsurance share 93.75

28
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 Any Insurance Co.
scale commission
statement for 1996,
surplus, accounting
year system

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 3.2.1997

Our reinsurance treaty: Marine Surplus

Calculation Class of business: Marine

of loss ratio Accounting period: Profit and loss statement/
Loss ratio: sliding scale commission statement as at 31.12.1996
1250 u 100 = 37.54 % Accounting system: Accounting year 1996
3 330 Accounting currency: USD
100% reinsurance cession
Calculation
of sliding scale
Treaty result Debit Credit
commission
Premiums 5 550.00
Sliding scale
Commission 1 803.75
commission:
Sliding scale commission —
• Current commis-
Paid claims 1 000.00
sion 32.50%
Unearned premium reserve 40% 2 220.00
• Provisional
Loss reserves for 100% 250.00
commission
Management expenses 3% 166.50
32.50%
Profit/loss 109.75
• Sliding scale
5 550.00 5 550.00
commission
0.00% = 0.00
Your 20% reinsurance share 21.95
in the reinsurer’s
favour

No adjustment of
the commission as
a result of calcu-
lation of the sliding
scale commission,
since according to
the following table
the sliding scale
commission rate is
the same as the
provisional
commission.

31
Table for calculating the sliding scale commission rate

Loss ratio in % Sliding scale commission in %

00.00 – 28.49 37.50 Minimum
28.50 – 29.49 37.00
29.50 – 30.49 36.50
30.50 – 31.49 36.00
31.50 – 32.49 35.50
32.50 – 33.49 35.00
33.50 – 34.49 34.50
34.50 – 35.49 34.00
35.50 – 36.49 33.50
36.50 – 37.49 33.00
37.50 – 38.49 32.50 Applies for accounting year 1996
38.50 – 39.49 32.00
39.50 – 40.49 31.50
40.50 – 41.49 31.00
41.50 – 42.49 30.50
42.50 and over 30.00 Maximum (accounting year 1997)

32
Profit and loss
statement/sliding Any Insurance Co.
scale commission
statement 1997,
surplus, accounting
year system

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 3.2.1998

Our reinsurance treaty: Marine Surplus

Calculation Class of business: Marine

of loss ratio Accounting period: Profit and loss statement/
Loss ratio: sliding scale commission statement as of 31.12.1997
13 833
u 100 = 167.07 % Accounting system: Accounting year 1997
8 280
Accounting currency: USD
Calculation 100% reinsurance cession
of sliding scale
commission
Sliding scale Treaty result Debit Credit
commission: Premiums 10 100.00
• Current commis- Commission 3 282.50
sion 30.00% Sliding scale commission 252.50
• Provisional Claims paid 3 250.00
commission Unearned premium reserve entry 2 220.00
32.50% Loss reserve entry 250.00
• Sliding scale Unearned premium reserve
commission withdrawal 40% 4 040.00
2.50% = 252.50 Loss reserve withdrawal for 100% 10 833.00
in the reinsurer’s Management expenses 3% 303.00
favour Profit/loss 8 886.00
21 708.50 21 708.50
Commission is
adjusted to the Your 20% reinsurance share 1 777.20
contractually agreed
minimum sliding
scale commission as
per the table, which
is taken into account
financially in a half-
yearly statement of
account.
No profit-sharing.
The resulting
loss is to be carried
forward to the
following year or
years (accounting
years).

33
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:

• Per risk WXL, Marine Hull, deposit premium as at 1.1.1996

• 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, Any Insurance Co.
excess of loss,
due date
1 January 1996

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom 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: Marine

Due date: 1 January 1996
Accounting period: 1996
Accounting currency: USD
Your reinsurance share: 100%

Treaty year Debit Credit

Deposit premium 1996 20 000.00
Underwriting result 20 000.00
Financial balance 20 000.00

37
Deposit premium
statement, Any Insurance Co.
excess of loss,
due date
1 January 1997

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom 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: Marine

Due date: 1 January 1997
Accounting period: 1997
Accounting currency: USD
Your reinsurance share: 100%

Treaty year Debit Credit

Deposit premium 1997 22 000.00
Underwriting result 22 000.00
Financial balance 22 000.00

38
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. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom 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: Marine

Due date: —
Accounting period: Loss of 2 September 1996
Accounting currency: USD
Your reinsurance share 100%

Total loss Insurer’s Reinsurer’s

retention share of loss
Loss of 2 September 1996: 132 500.00 50 000.00 82 500.00

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

40
Loss statement
with reinstatement Any Insurance Co.
of cover, excess
of loss

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 10.9.1996

Our reinsurance treaty: Marine Hull per risk WXL, cover 150 000 XS 50 000

Calculation of Class of business: Marine

reinstatement: Due date: —
Accounting period: 9 September 1996
Loss u Premium
Cover Accounting currency: USD
Your reinsurance share: 100%

Premium
Treaty year Debit Credit
20 000
Loss 1996 82 500.00
Reinstatement premium 1996 11 000.00
Cover
Technical balance 71 500.00
150 000
Balance 71 500.00
Loss
82 500
82 500 u 20 000 = 11 000
150 000

41
Annual statement
of account for 1996, Any Insurance Co.
excess of loss

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom 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: Marine

Due date: —
Accounting period: 1996
Accounting currency: USD
Your reinsurance share: 100%

Treaty year Debit Credit

Adjustment premium 1996 14 522.00
Adjusted reinstatement premium 1996 7 987.00
Technical balance 22 509.00
Balance 22 509.00

42
The calculations for the adjustment premium and the
adjusted reinstatement premium are explained in the following
example.

43
Calculation
example for annual Any Insurance Co.
statement of
account for 1996,
excess of loss

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom 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: Marine

Due date: —
Accounting period: 1996
Accounting currency: USD
Your reinsurance share: 100%

Calculation of the adjustment premium

GNPI 1 150 736.00
Fixed percentage 3%

Annual premium calculated 34 522.00

Deposit premium paid – 20 000.00
Adjustment premium 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 18 987.00

Reinstatement premium paid – 11 000.00
Adjusted reinstatement premium 7 987.00

44
44
The annual statement of account, excess of loss, and
the calculations for the adjustment premium are explained
on the following two pages.

45
Annual statement
of account for 1997, Any Insurance Co.
excess of loss

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom 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: Marine

Due date: —
Accounting period: 1997
Accounting currency: USD
Your reinsurance share: 100%

Treaty year Debit Credit

Adjustment premium 1997 14 768.00
Technical balance 14 768.00
Balance 14 768.00

46
Calculation
example annual Any Insurance Co.
statement of
account for 1997,
excess of loss

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 3.1.1998

Our reinsurance treaty: Marine Hull per risk WXL, 150 000 XS 50 000

Class of business: Marine

Due date: —
Accounting period: 1997
Accounting currency: USD
Your reinsurance share: 100%

Calculation of adjustment premium

GNPI 1 225 600.00

Fixed percentage 3%

Annual premium calculated 36 768.00

Deposit premium paid – 22 000.00

Adjustment premium 14 768.00

47
48
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 state-
ment 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.
49
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 facul-
tative 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 indi-
vidual 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. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 6.5.1996

Collective accounting number Name Accounting period Currency

78495-90-3 Our Fire cessions 1.1.96–31.3.96 USD

Risk Risk Your Period Gross Commission Commission Net DR/CR

number reference amount share amount
number
Premiums
HM Gmbh AN64511AM FS000553 5.3.96 –12.3.96 180 000 10% 18 000 162 000 CR
Rege Industrial AN64511AR FS14111880 15.1.96 –15.2.96 450 000 15% 67 500 382 500 CR
Germa Electronics AN6497PAC FS26804377 1.2.96 –28.2.96 600 000 25% 150 000 450 000 CR

Losses Date of loss

Steph & Partners AN6463WAO FS15692 15.2.96 300 000 — — 300 000 DR
TOTAL 694 500 CR

50
51
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 Balance as per previous quarter USD 35 000.00
Payment at 12.4.1996 USD (28 000.00)
important as the points mentioned in sections
Balance on statement USD 25 000.00
2 and 3, attention being paid here to the Balance as of 31.12.1996 USD 32 000.00
following:

Payments Where a current account statement relates to

All payments effected must be provided with several treaties, the balances for all the treaties
sufficient information (details of classes of should be recorded.
business, type of treaties, quarters etc). It is
even better for the reinsurer to be advised Current account balances which do not agree
of the payment by letter or fax. must be squared with each other without delay.
Carrying forward incorrect balances or previous
Example balances leads to ever greater problems.
We have today given instructions for the
following payment to be effected: Full information about every financial trans-
action is very useful for both parties to a treaty
Marine Quota Share 4th quarter 96 USD 25 000.00 and can save a lot of time and effort besides.
Engineering Surplus 3rd quarter 96 USD 17 000.00
Fac Fire premium March 96 USD 5 000.00
USD 47 000.00

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.

52
4.2 Cash calls For reasons of clarity, upcoming cash calls
should not automatically be deducted
A typical cash loss clause included in a propor- from payments or from the total balances of
tional treaty would read as follows: quarterly statements. The possibility of
“The Reinsurer shall remit to the primary in- settlement can be taken into consideration
surance company its share of any loss by mutual agreement.
payment due by the primary insurance com-
pany immediately on demand if the cash An example of a cash loss statement follows.
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.

53
Cash call statement
Any Insurance Co.

Any Insurance Co. Swiss Re

11, Any Street Mythenquai 50/60
Anytown, Anyshire P. O. Box
United Kingdom CH-8022 Zurich
Switzerland

Anytown, 23.12.1996

Cash call statement

We advise you of the following loss under our “Fire Quota Share Europe” reinsurance treaty and request
payment by return.

Loss number: 004114513382

Policy number: N023932
Assured: San Miguel beer brewery
Cause of loss: Fire in warehouse
Date of loss: 15 December 1996
Place: Alicante, Spain
Currency: ESP
Date of payment: 21 December 1996

Amount of loss Reinsurance share

10 000 000.00 5 000 000.00
Total 10 000 000.00 5 000 000.00

Your 10% reinsurance share 1 000 000.00 500 000.00

54
Crediting payments in a subsequent Accounting procedure for a cash loss
statement/debiting losses Currency ESP
Every transaction outside the quarterly state- Loss San Miguel
beer brewery 500 000.00
ment should of course be taken into consid-
(cash loss limit 400 000)
eration again in the next statement of account,
and the same also applies to cash calls. Cash call 500 000.00
Cash loss payment – 500 000.00
The payment must be taken into account again
in the total of the next financial statement as 1st quarter 1997
a payment by the reinsurer. Total losses (excl. San Miguel) – 600 000.00
Loss San Miguel
beer brewery – 500 000.00
Where the loss is actually paid, it must be
Total –1 100 000.00
shown as a technical entry in the statement,
Credit entry for payment made + 500 000.00
separately and with a note wherever possible, as Losses still to be paid – 600 000.00
a loss debit. At the same time, this debit must
appear as a credit again, since the relevant loss With this the loss San Miguel beer brewery
will already have been dealt with financially. is fully entered in the accounts both technically
and financially. The other losses in the quarter
A payment credit entry under the normal are settled separately with the next payment.
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
Currency ESP
Loss San Miguel
beer brewery 500 000.00

4th quarter 1996

Losses total
(incl. loss San Miguel
beer brewery) –1 000 000.00
Balance –1 000 000.00
Payment +1 000 000.00

With this the loss San Miguel beer brewery

is fully entered in the accounts both technically
and financially.

55
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 “Service to Clients” 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

56
Selected brochures

Introduction to Reinsurance You can order these brochures, additional

This teaching aid explains the system of rein- copies of this publication and a catalogue
surance to would-be underwriters and uses of other Swiss Re publications (“Publications”)
examples and graphs to introduce them to the from:
methods involved. The publication does not Swiss Re
claim to be exhaustive, however, but is intended Public Relations
as a support for teachers and trainees. Mythenquai 50/60
Available in German, English and Portuguese. P. O. Box
Order number: 96-82 CH-8022 Zurich
Fax +41 1 285 20 23
Proportional and Non-Proportional Reinsurance E-mail publications@swissre.com
This publication explains the essential differ-
ences 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

57
Glossary
Acceptance
Document containing the most important
details relating to an accepted risk in the
facultative sector.
Accounting system
System laying down how the figures in the
portfolio are to be entered in the reinsurance
accounts.
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 calcu-
lation 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.
58
Deposit premium
Calculated premium in the non-proportional
sector which is payable at the start of a
treaty year (see also subsequent premium).
Earned premium
Sum of the paid premium and the change
in the unearned premium reserve in any year.
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 insurer’s
own liability under proportional reinsurance.
The amount of premium remaining is known
as the “gross net premium income”, 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 remit-
tance 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 non-
proportional 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.

59
 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 success-
fully 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.
60
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 rein-
surance 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
Internet http://www.swissre.com
(1/98, 2 500 en)