Facts
Entity A has a reinsurance contract that has these elements to it: A policyholder under a insurance contract pays premiums of $200 every year for 10 years. The entity sets up an experience account equal to 80% of the cumulative premiums less 80% of the cumulative claims under the policy. If the balance in the experience account ever becomes negative, the policyholder has to pay an additional premium based on the balance on the experience account divided by the number of years the policy has left to run. At the end of the contract, if the balance on the experience account is positive, it is refunded to the policyholder. If the balance is negative, the policyholder has to pay the amount as an additional premium. The policy is not able to be cancelled before the end of the contract, and the maximum loss that the policyholder is required to pay in any year is $300.
Required
Discuss how the reinsurance contract should be accounted for in the financial statements of the insurer.