Casualty Actuarial Society (CAS) Exam 6 Practice

Which statement about adjusted reinsurance premium due to a loss event is correct?

Accrue a Liability for the Additional Premium Due During the Period of the Loss Event Record as Revenue Defer the Premium Ignore the Change

Correct Answer:

Accrue a Liability for the Additional Premium Due During the Period of the Loss Event

Explanation:

When a loss event triggers a change in what’s owed under a reinsurance contract, the obligation to pay the extra premium arises in the current period. That extra amount is a cost of the reinsurance, not revenue, so it should be recorded as an accrued liability (and the corresponding expense) during the period the loss occurs. Deferring the premium or treating it as revenue would misstate both liabilities and income. For example, if the expected premium is 1,000,000 but the loss event creates an additional 150,000, you would recognize a 150,000 reinsurance expense and a 150,000 liability to the reinsurer in that period.

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