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Accounting for reinsurance
published: Friday | December 6, 2002

THE INSTITUTE of Chartered Accountants of Jamaica (ICAJ) has issued an accounting standard - 3.32 which prescribes the appropriate accounting practice for transactions that are peculiar to the General Insurance Industry. This standard is effective for accounting periods beginning on or after January 1, 2002. There is no corresponding International Accounting Standard (IAS), therefore, the ICAJ standard will have to be adopted along with IAS.

The standard states that:

Reinsurance recoverable is to be recognised in a manner consistent with the liabilities that relate to the underlying reinsurance contracts. The assumptions used in estimating reinsurance recoverable are to be consistent with the assumptions used in estimating the related liabilities.

The unearned premium balance is not to be reduced by reinsurance premiums paid to reinsurers. The amount of premiums ceded and reinsurance recoveries are to be reported in the financial statements as separate items and may be deducted respectively from premiums earned and claim and incurred costs. Premiums ceded for reinsurance but remain unpaid at the reporting date are to be recognised in the financial statements as liabilities.

Changes in amounts of estimated reinsurance recoverable on outstanding claims are to be recognised as an increase or a reduction of gross claims liabilities and loss expenses incurred in the same accounting period. Reinsurance recoverable on paid claims is to be reported as an asset in the balance sheet. Reinsurance recoverable on unpaid claims and incurred but not reported claims and loss adjustment expenses. If the amounts paid are subject to adjustment that can be reasonably estimated, the basis for allocation is to be the estimated amount.

Inward commission, which is deducted from reinsurance premium payable by the ceding company, is to be deferred over the life of the insurance contract to which it relates.

The following are to be disclosed:

The nature and significance of reinsurance and retrocession transactions entered into during the accounting period.

A statement that insurance ceded does not relieve the ceding company of its primary obligation to the policyholder.

Premiums from direct business, reinsurance assumed and reinsurance ceded, on both a written and on an earned basis.

The accounting policies governing income recognition on reinsurance transactions.

The amount of significant concentrations of reinsurance coverage (20 per cent or more) including the credit risk associated with reinsurance receivables and prepaid reinsurance premiums for individual reinsurers and the extent to which there is reliance on reinsurers for settlement of claims.

The amount of earned premiums ceded and reinsurance recoveries recognised as separate line items in the income statement or in the notes to the financial statements.

Mr. Raphael E. Gordon is the managing partner of KPMG Peat Marwick, Past President of the Institute of Chartered Accountants of Jamaica, a member of the Public Accountancy Board, and Jamaica's representative on the Association of Chartered Certified Accountants International Assembly.

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