Reinsurance Aspects of the NAIC Annual Statement

The National Association of Insurance Commissioners (NAIC) Annual Statement is a uniform financial report filed by primary insurers and reinsurers with state insurance departments.
It is prepared using Statutory Accounting Principles (SAP) and serves as the primary tool for regulators to monitor insurer solvency.
The document includes a balance sheet, statement of income, cash flow statement, and various supporting schedules and exhibits.

Admitted assets are approved for the balance sheet and typically have predictable market values. Nonadmitted assets are not readily marketable and reduce policyholders’ surplus.
Bonds are the largest invested asset category for property-casualty insurers and are valued at amortized value to insulate surplus from interest rate fluctuations.
Common stocks are valued at market value, meaning price shifts directly impact policyholders’ surplus.
Short-term investments include assets with a maturity of $1$ year or less, such as commercial paper and money market funds.
Liquidity is defined as the ease of converting an asset to cash with minimal value loss, which is essential for paying catastrophe claims.

Key reinsurance assets include "Amounts recoverable from reinsurers," "Funds held by or deposited with reinsured companies," and "Other amounts receivable under reinsurance contracts."
Primary liabilities for insurers consist of loss reserves, loss adjustment expense (LAE) reserves, and unearned premium reserves.
"Reinsurance payable on paid loss and loss adjustment expenses" is a liability for the reinsurer and the counterpart to the primary insurer's recoverable asset.
"Funds held by company under reinsurance treaties" allows primary insurers to take credit for reinsurance, particularly with unauthorized reinsurers.
The "Provision for reinsurance" is a liability representing overdue reinsurance and collateral deficiencies for unauthorized or certified reinsurers.

The Underwriting and Investment Exhibit supports the Statement of Income and provides data for the balance sheet.
Part 1 ( $Premiums Earned$ ): Calculated as $\text{Net Premiums Written (Current Year)} + \text{Unearned Premiums (Prior Year)} - \text{Unearned Premiums (Current Year)}$ .
Part 1B ( $Net Premiums Written$ ): Calculated as $\text{Direct Business} + \text{Reinsurance Assumed} - \text{Reinsurance Ceded}$ .
Part 2 and 2A: Detail losses paid, incurred, and unpaid (including Incurred But Not Reported or IBNR), which help determine the loss ratio and total unpaid liabilities.
Part 3: Allocates expenses to loss adjustment, underwriting, and investment functions.

Schedule F contains nine parts that detail assumed and ceded reinsurance and calculate the "Provision for Reinsurance."
Unauthorized reinsurers: Primary insurers must post a provision unless the reinsurer provides collateral (e.g., letters of credit or deposited funds).
Certified reinsurers: Rated on a scale of $1$ to $6$ , with collateral requirements ranging from $0\%$ to $100\%$ .
Slow-paying reinsurers: Defined by a benchmark where reinsurance recoverables more than $90$ days overdue exceed $20\%$ of the total due plus recent payments.
Part 9: Restates the balance sheet on a "gross" basis before reinsurance to show the program's overall effectiveness.

Schedule P provides supporting data for loss and LAE reserves across a $10$ -year historical period.
Part 1: Summarizes earned premiums, loss payments, and unpaid losses by line of business.
Part 2 and Part 3: Track net incurred loss development and cumulative net paid losses, respectively.
Part 4: Uses loss development triangles to track bulk and IBNR reserves, which are eventually replaced by case reserves and actual payments as claims mature.