Which statement correctly describes the accounting treatment of retroactive reinsurance?

• A. Ceded reserves are recorded as a negative write in the balance sheet; Gains can be recorded as Other income or Special surplus
• B. Ceded reserves are recorded as a positive write; Gains as Interest income
• C. There is no effect on financial statements
• D. Gains are recorded as tax credits

Answer: (A)

Retroactive reinsurance transfers past liabilities to the reinsurer, so the ceding company records a reduction of those loss reserves on its balance sheet. This appears as a negative write, lowering the reserve balance because the reinsurer has assumed the liabilities. At the same time, the arrangement typically yields an immediate gain to the ceding company, recognized on the income statement as Other income or Special surplus, since it reflects a one-time settlement opportunity rather than ongoing operating results.

So the correct description is that ceded reserves are reduced (negative write) and the gain is recorded as Other income or Special surplus. It isn’t recorded as interest income or tax credits, and there is a definite effect on financial statements due to the liability transfer and the one-time gain.