Deposit premium is (1) In property and casualty insurance, the premium deposit required by an insurer under forms of insurance subject to periodic premium adjustments. Also called “pre-bonus”. (2) In reinsurance, the amount of the premium (usually for the excess of a loss reinsurance contract) that the ceding company pays periodically to the reinsurer during the term of the contract. This amount is generally determined as a percentage of the estimated amount of the premium that the contract will produce, based on the rate and the assumed premium. It often coincides with the minimum premium, but can be higher or lower. The deposit premium will be adjusted depending on which of these amounts is higher: the actual premium or the minimum premium after the actual insurance premium has been determined by auditing or reporting the actual insured risks during the coverage period.
Insurance is a contractual relationship that arises when one party (the insurer), for a fee (premium), agrees to compensate the other party (the insured) for losses caused to a certain subject (risk) caused by certain unforeseen circumstances (hazards or dangers). The term ‘guarantee’, commonly used in England, is considered synonymous with ‘insurance’.
The 10/10 Rule is a matter of analyzing and demonstrating the transfer of risk as a precondition for the use of reinsurance accounting, which was codified in the early 1990s with the adoption of Financial Accounting Standard (FAS) 113 (and its statutory counterpart, SSAP 62). FAS 113 itself was a response to alleged abuses and set the standard for testing whether something should be called an insurance contract. FAS 113 required that the transfer of risk be demonstrated by comparing the present value of the cash flows associated with the contract and, in particular, by exceeding certain thresholds of “significance” of risk. The thresholds, often referred to as the 9a and 9b tests, are: 9a. The reinsurer assumes significant insurance risk under the reinsured parts of the underlying insurance contracts. 9b. It is possible that the reinsurer could suffer a significant loss from the transaction. While neither “significant” nor “reasonably possible” was defined in this context, standard rules of thumb quickly emerged in the implementation of FAS 113. The most commonly cited is the “10/10 Rule”. This rule states that a contract reaches a threshold if there is at least a 10 percent chance that it will suffer a loss of 10 percent or more in present value (expressed as a percentage of the contract premium ceded).