Introduction To Reinsurance Accounting

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 basis for all reinsurance accounts (with
The basic requirements are: the exception of facultative business, see section
• the reinsured portfolio, see section 1.1 3) is the portfolio specified in the contract.
• the underlying reinsurance treaties, This is covered under the reinsurance. The
see section 1.2 arrangements in the contract calculated from
• the accounting systems used, see section 1.3 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 Fictitious portfolio as basis for the following
uncertainties, discussions and differences of Quota Share and Surplus examples
opinion in the dealings between the party Eight vessels with name, sum insured, policy
preparing the accounts (the reinsurance accounts period, premiums and premium due dates
clerk at the primary insurer’s) and the party (assuming that all due premiums were actually
receiving them (the reinsurance accounts clerk paid), losses with date of occurrence and
at the reinsurer’s). This results in higher date of payment.
productivity and lower costs for both sides.
Assumptions: underwriting activity starts
It is worth mentioning here that, in the area on 1.1.1996. We have chosen a small portfolio
of reinsurance accounting operations, we have so as to be able to ensure an overview,
an odd situation in that it is the purchaser especially for the calculations. The premium
of the product (the primary insurer) who has to rates are therefore unrealistic, but this does
prepare the accounts and not the seller (the not matter for the purposes of the reinsurance
reinsurer), as the reinsurer does not have the accounting examples.
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
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 1.2.2 Surplus reinsurance
The accounting and statistical methods and Unlike with quota share treaties, with surplus
procedures vary depending on the type of rein- treaties the reinsurer does not participate in all
surance treaty. This means that all reinsurance risks. Instead, the primary insurer retains all
accounts clerks should also have in-depth risks up to a certain amount of liability (known
knowledge of the various types of reinsurance as the “line”). The surplus over and above this
treaty. To go into these in detail here would line is covered by the reinsurer. The amount of
exceed the scope of this publication. We would risk which the reinsurer is obliged to accept
therefore like to give just a few brief individual is limited by the formation of “surpluses”, which
definitions and explain the most important are defined as a certain number of lines.
effects these have on reinsurance accounts: The breakdown between the retention and the
portion ceded to reinsurance gives a ratio for
1.2.1 Quota share reinsurance each reinsured risk. This ratio is used for appor-
1.2.2 Surplus reinsurance tioning liability, premiums and all losses
1.2.3 Excess of loss reinsurance between the primary insurer and the reinsurer.
For further, more in-depth information, please Because the ratio has to be calculated separately
refer to three other Swiss Re publications: for each individual risk, this type of reinsur-
“Introduction to Reinsurance”, “Proportional ance results in considerably more expense than
and Non-Proportional Reinsurance” and quota share reinsurance.
“A Reinsurance Manual of the Non-Life
Branches”.
1.2.3 Excess of loss reinsurance
1.2.1 Quota share reinsurance With excess of loss (XL) reinsurance it is the
amount of a potential loss that counts. Here the
In quota share reinsurance, the reinsurer primary insurer retains for own account
accepts a freely agreed fixed percentage (quota all losses in the class of business specified in the
share) of all insurance policies written by treaty up to a specific limit (the excess point
the primary insurer in the classes of business or “priority”), irrespective of the size of the sum
specified in the treaty. This quota share insured. Losses above this limit are payable
is used as the basis for apportioning liability, by the reinsurer up to the agreed limit of cover.
premiums and losses between the primary
insurer and the reinsurer. Excess of loss reinsurance can be broken down
into per-risk covers (WXL) and catastrophe
This type of reinsurance is simple and cost- covers (CatXL). Where reinsurance accounting
effective. When preparing the reinsurance operations are concerned, this type of reinsur-
accounts, it is sufficient just to calculate each ance is completely different to quota share and
item in proportion to the quota share. surplus reinsurance. Here, special conditions
regarding payment of deposit premiums, losses,
reinstatement and adjustment premiums have
to be agreed in detail.
8
1.3 Accounting systems writing years (breakdown by underwriting year).
Premium and paid losses: according to the date
Before anyone can start preparing accounts and when the original policy was written.
statistics, they must consider which accounting
system is being used as a basis in a specific case. Importance of the accounting systems
Ideally, this should already be specified in the
reinsurance treaty. If this is not the case, an Accounting systems are used in the following
accounting system (one which is common in the areas:
relevant class of business) will then have to be • When preparing the accounts: “what
chosen. The important thing is not to change premiums/losses should go into the accounts,
the accounting system once it has been chosen. and according to which treaty criteria and
how?”
The three most important accounting systems • When preparing the statements required
are the accounting year system, the year of under the reinsurance treaty, such as profit
occurrence system and the underwriting year and loss statement, sliding scale commission,
system. loss participation: “what system of presen-
tation is used here?” (This is dependent on
Definition of accounting systems the preparation of the accounts.)
• For preparing reinsurance statistics: “what
Accounting year system system of presentation is used here?”
In the accounting year system, the premiums (This is dependent on the preparation of
and losses are entered in the accounts according the accounts.)
to the treaty criteria for the relevant accounting
year (no breakdown by year of occurrence It is therefore important to know that
or underwriting year). accounting systems are used not only to present
statistics but also initially to define what should
Premium: basically according to premium be included in the accounts and how. Depending
due date, sometimes also according to on the system chosen, the results can turn out
premiums paid. very differently, as the following example shows:
Paid losses: according to date of payment
Example
Year of occurrence system Treaty: Fire surplus treaty with commission rate
In the year of occurrence system the premiums of 30% (1996) and 25% (1997). In the first
and losses are entered in the accounts according quarter of 1997 a paid premium of CHF 1 000,
to the treaty criteria for the relevant year of amongst others, is entered in the accounts in
occurrence (breakdown by year of occurrence). respect of a premium under a 1996 policy (date
written).
Premium: Basically according to premium
due date, sometimes also according to Result using accounting year system:
premiums paid. 1 000 – 250 = 750
Paid losses: According to date of loss occurence, Result using underwriting year system:
which must be accurately defined for each 1 000 – 300 = 700
class of business.
These differences can arise with all the arrange-
Underwriting year system ments relating to the accounts, eg cover,
In the underwriting year system, the premiums commission, expenses, technical provision ratios
and losses are entered in the accounts according etc.
to the treaty criteria for the relevant under-
9
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
2nd half year 1996,
quota share,
underwriting year
system

Switzerland
Anytown, 3.1.1997

Accounting period: 2nd half year 1996
100% figures

Premiums 1996 8 300.00
Commission 22.5% 1996 1 867.50
Paid claims 1996 2 500.00
8 300.00 8 300.00
15
Statement of
1st half year 1997,
quota share,
underwriting year
system

Switzerland
Anytown, 3.7.1997

100% figures

Premiums 1997 8 600.00
Commission 22.5% 1997 1 935.00
Paid claims 1996 750.00
8 600.00 8 600.00
16
Statement of
2nd half year 1997,
quota share,
underwriting year
system

Switzerland
Anytown, 3.1.1998

100% figures

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

Switzerland
Anytown, 3.2.1997

Accounting period: Profit and loss statement as at 31.12.1996
Treaty year: 1996
100% figures
Treaty result Debit Credit

Premiums 14 550.00
Commission 3 273.75
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
19 19 19
Profit and loss
share, accounting
year 1997,
underwriting year
system

Switzerland
Anytown, 3.2.1998

Treaty year: 1996
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
20 20
Profit and loss
share, accounting
year 1997,
underwriting year
system

Switzerland
Anytown, 3.2.1998

Treaty year: 1997
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
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
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

Switzerland
Anytown, 3.7.1996
Our reinsurance treaty: Marine Surplus

Accounting system: Accounting year 1996
100% reinsurance cession
Debit Credit
Premiums 1 250.00
Commission 32.5% 406.25
Paid claims —
1 250.00 1 250.00
25 25
Statement of
2nd half year 1996,
surplus, accounting
year system

Switzerland
Anytown, 3.1.1997

Debit Credit
Premiums 4 300.00
Commission 32.5% 1 397.50
4 300.00 4 300.00
26 26
Statement of
1st half year 1997,
surplus, accounting
year system

Switzerland
Anytown, 3.7.1997

Debit Credit
Premiums 6 350.00
Paid claims 250.00
6 350.00 6 350.00
27
Statement of
2nd half year 1997,
surplus, accounting
year system

Switzerland
Anytown, 3.1.1998

Debit Credit
Premiums 3 750.00
4 218.75 4 218.75
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

Switzerland
Anytown, 3.2.1997
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
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-
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
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

Switzerland
Anytown, 3.2.1998
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
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
Reinsurance share 100% Swiss Re
Cover 150 000 XS 50 000

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

Switzerland
Anytown, 20.12.1995
Our reinsurance treaty: Marine Hull per risk WXL, cover 150 000 XS 50 000

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

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

Switzerland
Anytown, 20.12.1996

Due date: 1 January 1997

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.

Switzerland
Anytown, 10.9.1996
Detailed loss information in respect of our loss statement of 10.9.1996


Due date: —
Accounting period: Loss of 2 September 1996
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

Switzerland
Anytown, 10.9.1996
Calculation of Class of business: Marine

reinstatement: Due date: —
Accounting period: 9 September 1996
Loss u Premium
Cover Accounting currency: USD
Premium
20 000
Loss 1996 82 500.00
Reinstatement premium 1996 11 000.00
Cover
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

Switzerland
Anytown, 10.2.1997

Due date: —

Adjustment premium 1996 14 522.00
Adjusted reinstatement premium 1996 7 987.00
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

Switzerland
Anytown, 3.1.1997

Due date: —
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

Switzerland
Anytown, 10.2.1998

Due date: —

Adjustment premium 1997 14 768.00
Balance 14 768.00
46
Calculation
example annual Any Insurance Co.
statement of
account for 1997,
excess of loss

Switzerland
Anytown, 3.1.1998
Our reinsurance treaty: Marine Hull per risk WXL, 150 000 XS 50 000

Due date: —
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 On the loss side, all the losses which the ceding
company has paid to the policyholder during
Facultative business increases the information this period (covered in accordance with the
needed by the reinsurer on each risk. This acceptance) are entered. So that the reinsurer
need for information must also be met on the knows which losses have actually been settled
accounting side, ie it must be clear to both here, the ceding company must provide a
parties which premiums per risk and which detailed bordereau containing the following
individual losses have already been entered in information:
the accounts and paid, and which ones have • name of the loss and the relevant risk,
not. including the policy period
• amount of loss
This means that there are two possible types • date of loss.
of statements of account:
• quarterly statements of account with detailed The total on the quarterly statement of account
bordereaux, see section 3.2 must match the total as per the bordereau.
• individual statements per risk premium and The respective balance is paid within an agreed
per individual loss, see section 3.3. period.
3.2 Quarterly statements of account 3.3 Individual statements of account
Where there are a lot of individual facultative Where there are only a few individual facul-
acceptances between the primary insurance tative acceptances, or in the case of high
company and its reinsurers, the quarterly state- amounts, the quarterly statement of account
ment of account is the simplest method. This is normally dispensed with and a statement
basically looks like the quarterly statements of is presented for each individual premium or for
account found with proportional treaties. each individual loss. The information required
The difference lies in the structure. is then exactly the same as for the quarterly
statements. The administrative expense of indi-
On the premium side, all the premiums written vidual statements is accordingly higher for
in the relevant quarter are entered. The primary insurers and reinsurers alike.
associated commission and other costs must be
charged for the original amounts and cannot An example of a quarterly statement of account
therefore correspond to a flat rate. is given below:
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
Quarterly statement
of account Any Insurance Co.

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.

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.

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 Deposit premium

Document containing the most important Calculated premium in the non-proportional
details relating to an accepted risk in the sector which is payable at the start of a
facultative sector. treaty year (see also subsequent premium).
Accounting system Earned premium

System laying down how the figures in the Sum of the paid premium and the change
portfolio are to be entered in the reinsurance in the unearned premium reserve in any year.
accounts.
GNPI
Adjustment premium Original premiums written for the entire
That portion of the non-proportional premium business covered. Expenses are not taken into
which is still owing from the annual premium account here and are not deducted from
after the deposit premium payments already the original premiums. What does have to be
made have been deducted. deducted though is the premium ceded
under proportional reinsurance in cases where
Annual premium the excess of loss covers the primary insurer’s
Calculated premium resulting from the calcu- own liability under proportional reinsurance.
lation of the GNPI multiplied by a premium The amount of premium remaining is known
rate which is normally fixed in advance. as the “gross net premium income”, or
GNPI for short.
Back office
The department in a reinsurance company Loss advice
which takes care of all the business once Information which the insurer supplies to the
the treaty has been signed. reinsurer about a loss affecting the reinsurance.
Bordereau Loss ratio

Detailed list of risks, premiums and losses Claims incurred in relation to earned premiums.
per class of business.
Loss statement
Claims incurred Statement in respect of an individual loss
Sum of claims payments and the change in which has already been notified earlier to the
the loss reserve in a year. reinsurer. Where the loss is accepted, a remit-
tance is made on the basis of this statement.
Commission
Remuneration paid by the reinsurer to the
primary insurer for the acquisition and
administrative costs of insurance contracts.
58
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 René Geiger has worked in
since 1988 in Swiss Re’s Swiss Re’s Accounting
Accounting department, where department since 1989. After
he has been involved above spending a year working
all with internal and external abroad in Asia, he became
training in reinsurance responsible for internal
accounting. On the career and external training in rein-
development side, he success- surance accounting. On
fully completed a course the career development side,
of study leading to the Swiss he successfully completed a
insurance industry’s course of study leading to the
professional qualification. Swiss insurance industry’s
As a member of management, professional qualification. He
he has run various accounting is currently running projects
groups and projects since 1995. in connection with the
accounts side of the business
handled.
© 1997
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:
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)
60

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Introduction to

2.2 Non-proportional reinsurance 34

There are many publications dealing with

Our “Service to Clients” project is aimed at

This “Introduction to reinsurance accounting”

As to structure, Part 1 deals with the question

Swiss Reinsurance Company

What do we need for preparing reinsurance 1.1 Portfolio

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

Madrid 40 000.– 1.1.96 – 31.12.96 1.2.96 2 000.– 7.4.96 500.– 2.8.96

Singapore 140 000.– 1.9.96 – 31.8.97 1.9.96 2 800.– none

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

2.1 Proportional reinsurance

Let us now take a more in-depth look at the foregoing, using

2.1.1 Quota share reinsurance

The examples of quota share reinsurance accounting given

Portfolio Corresponds to the portfolio specified in section 1.1

Treaty inception 1.1.1996

Profit commission Management expenses 5%

Rendering of accounts Underwriting year system with half-yearly statements of account

Loss reserves Are entered at 100%

Based on the treaty extract and the portfolio (8 vessels), it is

Any Insurance Co. Swiss Re

Our reinsurance treaty: Marine Quota Share

Class of business: Marine

Treaty year Debit Credit

Your 40% reinsurance share 1 937.50

Any Insurance Co. Swiss Re

Our reinsurance treaty: Marine Quota Share

Class of business: Marine

Treaty year Debit Credit

Your 40% reinsurance share 1 573.00

Any Insurance Co. Swiss Re

Our reinsurance treaty: Marine Quota Share

Class of business: Marine

Treaty year Debit Credit

Your 40% reinsurance share 2 366.00

Any Insurance Co. Swiss Re

Our reinsurance treaty: Marine Quota Share

Class of business: Marine

Treaty year Debit Credit

Your 40% reinsurance share 50.00

From the half-yearly accounts already prepared, we can

Any Insurance Co. Swiss Re

Our reinsurance treaty: Marine Quota Share

Class of business: Marine

Treaty result Debit Credit

Calculation of profit commission 100% Debit Credit

Balance situation Debit Credit

Your 40% reinsurance share 1 285.15

Any Insurance Co. Swiss Re

Our reinsurance treaty: Marine Quota Share

Class of business: Marine

As the claims Treaty result Debit Credit

Balance situation Debit Credit

Your 40% reinsurance share 0.00

Any Insurance Co. Swiss Re

Our reinsurance treaty: Marine Quota Share

Class of business: Marine