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future profits with the reinsurer. In the case of surplus relief
reinsurance, the ceding company usually receives profits after
the reinsurer has recovered its ceding commission plus the
stipulated profit margin.
A ceding company may accept either a known current return on
reinsured policies through conventional reinsurance or a share of
the policies’ future profits through surplus relief reinsurance.
A reinsurer pays a smaller ceding commission for surplus relief
reinsurance than for conventional reinsurance because it has a
right to less than all of the reinsured business’ future profits.
In the case of either conventional reinsurance or surplus relief
reinsurance, risk is transferred if the reinsurer must reimburse
the ceding company for future claims, and the reinsurer receives
revenues generated by the reinsured policies regardless of
experience.
State regulations usually require that an insurance company
file annual statements with the insurance department of the State
in which it is domiciled. These reports must contain financial
statements that show the insurer’s operations as of December 31.
These financial statements must show a minimum amount of surplus.
Insurance companies typically enter into surplus relief
reinsurance agreements at the end of the year to increase their
surplus under statutory accounting principles, in order to meet
these minimum surplus requirements.6 Although insurance
6 A surplus relief reinsurance agreement usually increases
the ceding company's surplus under statutory accounting
(continued...)
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Last modified: May 25, 2011