For the six month reporting period ending on 30 June 2022, there were claims incurred of £424 including a risk
adjustment for non-financial risk related to those claims of £24. During the period claims of £800 were paid.
At 30 June 2022 the total liability for incurred claims and the risk adjustment for future risk is £260 (i.e.
£636+£400+£24-£800). The total incurred claims recognised in profit or loss as insurance service expense
for the six month reporting period ending on 30 June 2022 is £424 (i.e. £400+£24).
IFRS 17 does not state whether the discounting election above is irrevocable. There may
be circumstances in which groups of claims that were expected originally to be settled
within one year (and hence not discounted) subsequently turn out to take much longer
to settle. In those circumstances, we believe that an entity should start discounting the
claims in the period in which it identifies such change and account for it prospectively
(as this is a change in estimate).
10
MEASUREMENT – REINSURANCE CONTRACTS HELD
A reinsurance contract is an insurance contract issued by one entity (the reinsurer) to
compensate another entity for claims arising from one or more insurance contracts
issued by that other entity (underlying contracts). [IFRS 17 Appendix A].
Insurer
Policyholders
Reinsurer
(cendant)
Underlying direct
Reinsurance
insurance contracts
contracts
IFRS 17 requires a reinsurance contract held to be accounted for separately from the
underlying insurance contracts to which it relates. This is because an entity that holds a
reinsurance contract does not normally have a right to reduce the amounts it owes to
the underlying policyholder by amounts it expects to receive from the reinsurer. It is
acknowledged in the Basis for Conclusions that separate accounting for the reinsurance
contracts and their underlying insurance contracts might create mismatches that some
regard as purely accounting, for example on the timing of recognition, the measurement
of the reinsurance contracts and the recognition of profit. However, the Board
concluded that accounting for a reinsurance contract held separately from the
underlying insurance contracts gives a faithful representation of the entity’s rights and
obligations and the related income and expenses from both contracts. [IFRS 17.BC298].
Examples of potential accounting mismatches are:
• Reinsurance held cannot be accounted for under the variable fee approach even if
the underlying direct insurance contracts are accounted for under the variable fee
approach (see 10.8 below).
Insurance contracts (IFRS 17) 4531
• Contract boundaries for reinsurance held may differ from those of the underlying
direct insurance contracts as the accounting for reinsurance held requires the
insurer to estimate cash flows for underlying direct contracts that have not been
issued yet but are within the boundary of the reinsurance contract (see 10.2 below).
• For an underlying direct insurance contract which is onerous at initial recognition,
the cedant must recognise a loss component through profit or loss whereas the
contractual service margin on the related reinsurance contracts must be deferred
and amortised over the coverage period (see 10.4 below).
A modified version of the general model is applied by cedants for reinsurance contracts
held. This is to reflect that: [IFRS 17.BC302]
• groups of reinsurance contracts held are usually assets rather than liabilities; and
• entities holding reinsurance contracts generally pay a margin to the reinsurer on an
implicit part of the premium rather than making profits from the reinsurance contracts.
A further consideration in requiring modification to the general model is that most
reinsurance contracts held will be ‘loss making’ if the underlying insurance contracts to
which they relate are profitable. Given that IFRS 17 does not permit gains on initial
recognition of insurance contracts issued, it would seem inappropriate to require
anticipated losses on related reinsurance contracts held to be expensed on initial
recognition. This would create an accounting mismatch.
Consequently, the overall result of the modifications of the general model for
reinsurance contracts held are that:
• both day 1 gains and day 1 losses are initially recognised in the statement of
financial position as a contractual service margin and recognised in profit or loss
as the reinsurer renders services except for any portion of a day 1 loss that relates
to events before initial recognition. In contrast, for insurance and reinsurance
contracts issued all day 1 losses are recognised in profit or loss immediately;
• assumptions used for measurement should be consistent with the assumptions
used for measurement of the underlying insurance contracts issued;
• non-performance risk of the reinsurer should be included in the measurement of
the fulfilment cash flows of the reinsurance asset (as this would not have been
included within the measurement of the underlying insurance contracts issued);
• the risk adjustment for non-financial risk reflects the amount of the risk transferred
from the insurer to the reinsurer; and
• changes in the fulfilment cash flows adjust the contractual service margin if they relate
to future coverage and other future services. However, changes in fulfilment cash
flows are recognised in profit or loss if the related changes in the underlying contracts
are also recognised in profit or loss when the underlying contracts are onerous.
A key consideration arising for insurers will be the extent of any accounting mismatches
arising from the different treatment of reinsurance contracts held with underlying
insurance contracts and whether the model used by the underlying insurance contracts
can be used by the related reinsurance contracts held (see 10.5 and 10.6 below).
4532 Chapter 52
10.1 Level of aggregation
An entity should divide portfolios of reinsurance contracts held by applying the same
criteria as the general model (see 8 above) except that references to onerous contracts
(see 8.8 above) should be replaced with a reference to contracts on which there is a net
gain on initial recognition. [IFRS 17.61]. This appears to mean that a portfolio of
reinsurance contracts held should be divided into a minimum of:
• a group of contracts on which there is a net gain on initial recognition, if any;
• a group of contracts that have no significant possibility of a net gain arising
subsequent to initial recognition, if any; and
• a group of the remaining contracts in the portfolio.
An entity is not allowed to group contracts purchased more than a year apart. A group
of contracts is not reassessed after initial recognition. It is acknowledged by IFRS 17 that
for some reinsurance contracts held, applying the general model, as modified, will result
in a group that comprises a single contract. [IFRS 17.61].
A reinsurance contract held cannot be onerous. Therefore, the requirements for
onerous contracts in the general model (see 8.8 above) do not apply. [IFRS 17.68].
10.2 The boundary of a reinsur
ance contract held
The contract boundary requirements of IFRS 17 (see 8.1 above) apply also to
reinsurance contracts held. Many aspects below apply also to reinsurance contracts
issued (see 8.9 above).
In some cases, reinsurance contracts held will offer protection for underlying contracts
that an entity has not yet issued. The question therefore arises as to whether the
boundary of a reinsurance contract held should include those anticipated cash flows
from unissued underlying contracts (which will not have been recognised as underlying
insurance contracts by the entity). In February 2018, this issue was discussed by the TRG
who agreed with the IASB staff’s conclusion that the application of the contract
boundary requirements to reinsurance contracts held means that cash flows within the
boundary of a reinsurance contract held arise from substantive rights and obligations of
the entity, i.e. the holder of the contract. Therefore:
• A substantive right to receive services from the reinsurer ends when the reinsurer
has the practical ability to reassess the risks transferred to the reinsurer and can set
a price or level of benefits for the contract to fully reflect the reassessed risk or the
reinsurer has a substantive right to terminate the contract.
• Accordingly, the boundary of a reinsurance contract held could include cash flows
from underlying contracts covered by the reinsurance contract that are expected
to be issued by the cedant in the future.27
This means that an entity will need to estimate the fulfilment cash flows of contracts it
expects to issue that will give rise to cash flows within the boundary of the reinsurance
contracts that it holds. Potentially, this will result in a measurement mismatch between
the direct insurance contracts issued and the reinsurance contracts held. The TRG
members observed that applying this requirement is likely to result in operational
complexity because it is a change from existing practice under IFRS 4.
Insurance contracts (IFRS 17) 4533
Additionally, some reinsurance contracts may contain break clauses which allow either
party to cancel the contract at any time following a specified notice period. In
February 2018, the TRG members observed that, in an example of a reinsurance contract
where the reinsurer can terminate coverage at any time with a three month notice period,
the initial contract boundary would exclude cash flows related to premiums outside of
that three month notice period.28 The TRG did not discuss the subsequent movement of
the contract boundary, for example whether on day 2, if the three month notice period
had not been invoked, there was a new contract with a boundary of one day or whether
the boundary of the original contract had increased by one day.
In May 2018, the TRG discussed an IASB staff paper concerning the determination of
the boundary of a reinsurance contract held when the reinsurer has the right to reprice
remaining coverage prospectively. In the fact pattern provided, the reinsurer can adjust
premium rates at any time, subject to a minimum three month notice period and could
choose either (i) not to exercise the right to reprice, in which case the holder of the
reinsurance contract is committed to continue paying premiums to the reinsurer, or (ii)
to exercise the right to reprice in which case the entity has the right to terminate
coverage. The TRG members observed that:
• For reinsurance contracts held, cash flows are within the contract boundary if they
arise from substantive rights and obligations that exist during the reporting period
in which the entity is compelled to pay amounts to the reinsurer or in which the
entity has a substantive right to receive services from the reinsurer.
• A right to terminate coverage that is triggered by the reinsurer’s decision to reprice the
reinsurance contract is not relevant when considering whether a substantive obligation
to pay premiums exists. Such a right is not within the entity’s control and therefore the
entity would continue to be compelled to pay premiums for the entire contractual term.
• The entity’s expectations about the amount and timing of future cash flows,
including with respect to the probability of the reinsurer repricing the contract,
would be reflected in the fulfilment cash flows.
The TRG members also observed that although the fact pattern in this example was
limited in scope, it demonstrates the principle that both rights and obligations need to
be considered when assessing the boundary of a contract.29
10.3 Initial
recognition
Instead of applying the recognition requirements for an insurance contract (discussed
at 6 above), an entity should recognise a group of reinsurance contracts held: [IFRS 17.62]
• if the reinsurance contracts provide proportionate coverage at the later of:
• the beginning of the coverage period of the group; or
• the initial recognition of any underlying contract; and
• in all other cases from the beginning of the coverage period of the group.
The Basis for Conclusions explains that the first category above is meant to include
reinsurance contracts held to cover the losses of separate contracts on a proportionate
basis. [IFRS 17.BC304]. Therefore, this refers to reinsurance contracts held where the cash
flows paid or received are a proportion of the cash flows from the underlying insurance
4534 Chapter 52
contracts that are covered by the reinsurance arrangement. An example of such a
contract would be a quota share contract where a fixed percentage of all premiums and
claims from certain insurance contracts (for example, all term life contracts) are paid to
or received from the reinsurer. Proportionate reinsurance contracts could be written on
a treaty basis where a reinsurer accepts a share of all policies written over a specified
time period or they could be facultative where they cover a specified risk or contract.
Although most reinsurance contracts that provide proportionate coverage are likely to
be proportional reinsurance (i.e. contracts in which premiums and claims ceded are a
proportion of the premiums and claims on the underlying insurance contracts) the
definition does not appear to be restricted to proportional reinsurance.
In contrast, it is stated in the Basis for Conclusions that the ‘other cases’ (i.e. reinsurance
contracts that do not provide proportionate cover) are intended to include contracts
that cover aggregate losses from a group of underlying contracts that exceed a specified
amount. [IFRS 17.BC304]. In the Board’s view, the coverage benefits the entity from the
beginning of the coverage period of the group of reinsurance contracts held because
such losses accumulate throughout the coverage period. [IFRS 17.BC305(b)]. An example of
such a contract is one which provides cover for losses in the aggregate from a single
event excess of a predetermined limit and with a fixed premium payable.
When a reinsurance contract held provides proportionate coverage, the initial
recognition of the (group of) reinsurance contract(s) will, as a simplification, be later
than the beginning of the coverage period if no underlying contracts have been
recognised as at that date. [IFRS 17.BC305(a)].
&nb
sp; The following examples illustrate application of the recognition criteria for reinsurance
contracts when the general model is used.
Example 52.39: Recognition of reinsurance contract held providing proportionate
coverage
An entity holds a reinsurance contract in respect of a term life insurance portfolio on a quota share basis
whereby 20% of all premiums and all claims from the underlying insurance contracts are ceded to the
reinsurer. The reinsurance contract is considered to be a group for the purpose of aggregation and incepts on
1 January 2021. The first underlying insurance contract is recognised on 1 February 2021.
As the reinsurance contract held provides proportionate coverage the contract is recognised at the later of the
beginning of the coverage period of the contract and the initial recognition of any underlying contract, i.e.
1 February 2021.
Contracts that do not provide proportionate coverage (often referred to as non-
proportional or excess of loss) usually provide insurance for claim events exceeding a
certain underlying limit. A non-proportional contract is illustrated in the following example.
Example 52.40: Recognition of reinsurance contract held which does not provide
proportionate coverage
An entity holds a reinsurance contract which provides excess of loss protection for a motor insurance
portfolio. In exchange for a fixed premium of €100 the reinsurance contract provides cover for claims arising
from individual events in the portfolio in excess of €500 up to a limit of €200. The reinsurance contract is
considered to be a group for the purpose of aggregation and incepts on 1 January 2021. The first underlying
motor insurance contract is recognised on 1 February 2021.
Insurance contracts (IFRS 17) 4535
As the reinsurance contract held does not provide proportionate coverage (because neither the premiums nor
the claims are a proportion of the premiums and claims from the underlying insurance contracts) the contract
is recognised at the beginning of the coverage period of the contract, i.e. 1 January 2021.
10.4 Measurement – initial recognition
A reinsurance contract held should be measured using the same criteria for fulfilment
cash flows and contractual service margin as an insurance contract issued to the extent
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 896
