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companies commonly enter into reinsurance agreements at the end
of the year, some reinsurance agreements are consummated at other
than yearend.
b. Experience Refund Provisions
The parties to a surplus relief reinsurance agreement
usually have a provision (the experience refund provision) that
controls the allocation of future profits between them. The
experience refund provision usually caps the amount of profits
that the reinsurer may retain from the reinsured business, which,
in turn, allows the ceding company to participate in favorable
experience.7 Experience refund provisions do not eliminate or
reduce the transfer of risk because, in part, the reinsurer is
liable for any loss on the reinsured policies. An experience
refund provision increases the risk to the reinsurer because a
refund is a return of profits to the ceding company, which, in
turn, lessens the reinsurer’s cushion for absorbing future
losses.
An experience account (EA) is used to account for the
reinsurer’s share of profits. The EA is a notional account that
tracks the profits or losses of the reinsured business. The EA
balance is referred to as the EAB.
(...continued)
principles. When the surplus is increased in this manner, the
reinsurer usually realizes a corresponding decrease.
7 In other words, the reinsurance agreement may require that
some of the profits must be paid (refunded) to the ceding
company, after the reinsurer has recovered its ceding commission
plus the stipulated profit margin.
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Last modified: May 25, 2011