For retroactive reinsurance, how are reserves recorded by the ceding company?

• A. Reserves are recorded on a gross basis.
• B. Reserves are recorded net of ceded reinsurance.
• C. Reserves are reversed.
• D. Reserves are not adjusted.

Answer: (A)

In retroactive reinsurance, the ceding company still carries the full loss reserves for the underlying business on its own books. The transfer of past liabilities to the reinsurer does not eliminate the ceding company’s obligation to pay claims, so the reserves are shown on a gross basis. The effect of the retroactive contract is captured separately as a reinsurance recoverable (an asset) representing the amount expected to be paid by the reinsurer, but this does not net against the gross reserves. For example, if gross reserves are 100 and the expected recoverable from the reinsurer is 60, the ceding company reports 100 as reserves and 60 as a reinsurance recoverable asset, keeping the gross reserve presentation intact.