For which contracts, increasing the liabilities typically would be the most appropriate method when recognizing the charge to current income.

Question

Options

• Aultimate inception
• Bretroactive
• Cretroactive reinsurance
• Daccounting reimbursement

• A
  5% (1)
• B
  14% (3)
• C
  71% (15)
• D
  10% (2)

Explanation

Retroactive reinsurance is the correct answer because these contracts cover losses from events that have already occurred, creating a unique accounting challenge: the reinsurance recoverable must be recognized immediately, but any gain cannot be recognized right away. Instead, GAAP (ASC 944) and statutory accounting require the insurer to increase a liability (deferred gain on retroactive reinsurance) to defer recognition, which is how the charge flows through current income-by adjusting the liability balance, not through a direct income entry.

Why the distractors are wrong:

• A. Ultimate inception - Not a recognized category of reinsurance or accounting contract type; a fabricated distractor.
• B. Retroactive - While it sounds similar, "retroactive" alone is not the defined contract type with specific accounting guidance; "retroactive reinsurance" is the term of art with codified treatment.
• D. Accounting reimbursement - Not a standard term in insurance or reinsurance accounting; another fabricated distractor.

Memory tip: Think "Retro = Rear-view = Deferred" - retroactive reinsurance looks backward at past losses, so the gain can't be recognized immediately; it gets parked in a liability (deferred gain) and amortized forward, making "increasing liabilities" the signature accounting move.

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