01.13. Deposit Accounting
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- The method of accounting for premium when the policy or reinsurance agreement does not qualify as insurance.
- The premium is not recognized as income but as a deposit to the insurer's surplus.
- Losses paid are not an expense but rather return of capital.
Deposit Accounting Rules
- contract with specific: no risk transfer, timing risk but negligible amount at risk, retro reinsurance
- typical deposit accounting: handled contract-by-contract; amount received recorded as a deposit liability (no effect on income); deposit = PV of future obligations
Approaches for Deposit Accounting
- bank deposit approach: initial deposit grows w interest; ending deposit does not depend on pattern of cash flows
- prospective approach: current value = PV of future payments, irrespective of initial deposit
- retrospective approach: deposit is a function of initial deposit, past payments, and current estimate of all future payments. Interest rate = IRR for past payment = initial deposit
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