In GAAP, reserves for losses and loss adjustment expenses and unearned premiums ceded to reinsurers are reported as:

Question

Options

• Aexpense
• BLiability
• Cassets
• DTaxes

• A
  3% (1)
• B
  7% (2)
• C
  77% (23)
• D
  13% (4)

Explanation

Under GAAP, amounts ceded to reinsurers - including reserves for losses, loss adjustment expenses, and unearned premiums - are reported as assets (specifically, "reinsurance recoverables" or "amounts recoverable from reinsurers") because the ceding company has transferred risk and is owed reimbursement, creating a receivable on the balance sheet. Option B (Liability) is wrong because liabilities represent amounts owed by the company, whereas ceded reserves represent amounts owed to the company by the reinsurer. Option A (Expense) is incorrect because ceded reserves are a balance sheet item reflecting a future recovery right, not a period cost flowing through the income statement (though ceded premiums do affect the income statement separately). Option D (Taxes) is simply unrelated to reinsurance accounting treatment.

Memory tip: Think "cede = receive" - when you cede risk to a reinsurer, you receive the right to collect from them, making it an asset (a receivable), just like any other amount someone owes you.

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