Under prospective reinsurance accounting, what happens to amounts paid for reinsurance?

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Multiple Choice

Under prospective reinsurance accounting, what happens to amounts paid for reinsurance?

In prospective reinsurance accounting, the premium paid for reinsurance is treated as a cost of transferring risk rather than as revenue. Because part of the gross premium is ceded to the reinsurer, the ceding company nets that amount from its premium business, so both the written premium and the portion that has been earned are reduced. This reflects the fact that the insurer no longer bears the full amount of the premium income for those policies, since a share goes to the reinsurer. The effect is not to increase earned premium, and it isn’t merely a neutral item; it reduces the premium bases on which revenue is recognized.

In prospective reinsurance accounting, the premium paid for reinsurance is treated as a cost of transferring risk rather than as revenue. Because part of the gross premium is ceded to the reinsurer, the ceding company nets that amount from its premium business, so both the written premium and the portion that has been earned are reduced. This reflects the fact that the insurer no longer bears the full amount of the premium income for those policies, since a share goes to the reinsurer. The effect is not to increase earned premium, and it isn’t merely a neutral item; it reduces the premium bases on which revenue is recognized.

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