SSAP 62R: Accounting for P&C Insurance Contracts

The National Association of Insurance Commissioners (NAIC) issues guidance on accounting practices for insurance companies through its Statements of Statutory Accounting Principles (SSAP). SSAP 62R specifically addresses property and casualty reinsurance, standardizing how insurers report their financial activities. This uniformity allows regulators, investors, and policyholders to assess an insurer’s financial health and how it manages risk through reinsurance.

Scope and Applicability of the Standard

SSAP 62R applies to property and casualty (P&C) reinsurance agreements. These are contracts where one insurer (the reinsurer or assuming entity) agrees to indemnify another insurer (the ceding entity) against loss that the ceding entity may sustain under its insurance policies. The standard establishes the accounting and reporting rules for both parties in a reinsurance transaction.

A core principle of SSAP 62R is determining whether a contract transfers significant insurance risk. This means there must be a reasonable possibility that the reinsurer will realize a significant loss from the transaction. If a contract does not meet this requirement, it must be accounted for as a deposit, and no underwriting activity is reported. The guidance also provides specific accounting for retroactive reinsurance agreements, which cover past loss events.

SSAP 62R does not apply to life insurance or annuity contracts, which are addressed by other standards. It also excludes accident and health contracts, which have their own specific accounting guidance. The standard also details how to account for novations, which are agreements that substitute a new party in a reinsurance contract, and for runoff agreements, where a reinsurer only manages its existing obligations.

Core Accounting for Reinsurance

When a reinsurance agreement is executed, the ceding insurer records an asset for the reinsurance coverage it has purchased and reduces its liabilities for the risks that have been transferred. The premium paid to the reinsurer is treated as an expense. Conversely, the assuming insurer, or reinsurer, records the premium received as revenue and establishes corresponding liabilities for the obligations it has taken on, such as unearned premium reserves and loss reserves.

A significant portion of the premium received by a reinsurer is initially unearned. To account for this, the reinsurer establishes a liability known as the Unearned Premium Reserve (UPR). This reserve represents the portion of the premium that corresponds to the remaining, unexpired term of the reinsurance coverage. As the coverage period progresses, the reinsurer systematically reduces the UPR and recognizes the corresponding amount as earned premium revenue.

Required Financial Statement Disclosures

SSAP 62R mandates detailed disclosures in the notes to an insurer’s statutory financial statements to provide transparency into its reinsurance activities. A primary requirement is a clear description of the ceding insurer’s reinsurance program, outlining the nature, purpose, and effect of its reinsurance transactions.

Insurers must also disclose concentrations of credit risk associated with their reinsurance programs, including exposure to any single reinsurer that could materially impact the company’s financial condition. If any reinsurance agreements have been accounted for as deposits, the insurer must disclose the amounts paid and received under these contracts and where they are reported in the financial statements. These disclosures allow stakeholders to assess how an insurer is using reinsurance to manage risk.