IFRS 17 Flashcards
What is an onerous vs a non onerous contract?
In the context of insurance and reinsurance contracts, an onerous contract refers to a contract where the expected costs of fulfilling the contract exceed the expected benefits or revenues to be received from the contract. In other words, an onerous contract is expected to result in a loss for the insurer or reinsurer.
A non-onerous contract, on the other hand, is a contract where the expected benefits or revenues exceed the expected costs associated with fulfilling the contract. In this case, the insurer or reinsurer expects to generate a profit from the contract.
How are onerous and non-onerous contracts treated?
Under IFRS 17, onerous and non-onerous contracts are treated differently for financial reporting purposes. For onerous contracts, a loss must be recognized immediately by the insurer or reinsurer, while the Contractual Service Margin (CSM) is not calculated for these contracts. Instead, a loss component is established, which is subsequently released over the coverage period in a similar manner to the CSM for non-onerous contracts. This ensures that the financial statements accurately reflect the financial performance and risk exposure of the insurer or reinsurer.
What does CSM stand for?
CSM stands for Contractual Service Margin in the context of reinsurance contracts. It is a component of the insurance contract liability measurement under the International Financial Reporting Standard 17 (IFRS 17), which is a financial reporting standard for insurance contracts issued by the International Accounting Standards Board (IASB). IFRS 17 aims to standardize the accounting treatment for insurance contracts globally.
What does the CSM represent?
The CSM represents the unearned profit that the insurer or reinsurer expects to recognize as they provide coverage and related services over the life of an insurance or reinsurance contract. The CSM is calculated at the inception of the contract and is updated and released over time in a systematic manner as the insurer fulfills its contractual obligations.
What is the purpose of CSM?
The purpose of CSM is to reflect the profitability of insurance and reinsurance contracts and provide a more transparent and consistent view of the insurer’s financial position. By incorporating the CSM into financial reporting, stakeholders can better understand the insurer’s performance, risk exposure, and financial stability.
Reinsurance Contract Classification
Key Difference: US GAAP vs. IFRS 17
US GAAP:
Reinsurance contracts are classified as prospective or retroactive.
Accounting treatment depends on the classification.
IFRS 17:
No distinction between prospective and retroactive reinsurance contracts.
All reinsurance contracts follow the IFRS 17 general model or the premium allocation approach (PAA).
Reinsurance Ceded Gains and Losses
Key Difference: US GAAP vs. IFRS 17
US GAAP:
Immediate recognition of gains and losses from ceding reinsurance.
Gains and losses are reported in the income statement.
IFRS 17:
Gains and losses from ceding reinsurance are generally deferred.
The amounts are recognized in the income statement over the coverage period.
Gains and Losses on Reinsurance Contracts
Key Difference: US GAAP vs. IFRS 17
US GAAP:
Immediate recognition of gains or losses on the purchase of reinsurance contracts.
IFRS 17:
Gains or losses on the purchase of reinsurance contracts are recognized over the coverage period.
Ceded Premiums and Reinsurance Recoveries
Key Difference: US GAAP vs. IFRS 17
US GAAP:
Ceded premiums and reinsurance recoveries are reported as a reduction in insurance revenue and claims expense, respectively.
IFRS 17:
Ceded premiums are presented as a separate component of insurance revenue.
Reinsurance recoveries are presented as a separate component of insurance claims expense.
Reinsurance Assets and Liabilities
Key Difference: US GAAP vs. IFRS 17
US GAAP:
Presents reinsurance recoverables as separate assets on the balance sheet.
Reinsurance liabilities are reported net of any reinsurance recoverables.
IFRS 17:
Requires a gross presentation of reinsurance assets and liabilities.
Reinsurance contracts held are reported separately from the underlying insurance contracts.
What is a reinsurance recoverable
A reinsurance recoverable is an asset that represents the amount an insurance company expects to recover from its reinsurance arrangements for paid or outstanding claims. When an insurance company cedes a portion of its risk to a reinsurer, the reinsurer assumes responsibility for a portion of the losses associated with the ceded policies. In the event of a claim, the reinsurer is obligated to reimburse the ceding insurer for its share of the claim, based on the reinsurance agreement.
Reinsurance recoverables can be related to paid claims (amounts already paid by the ceding insurer and waiting for reimbursement from the reinsurer) or to unpaid claims (the reinsurer’s share of the estimated claim liability that has not yet been paid by the ceding insurer). These recoverables are reported as assets on the ceding insurer’s balance sheet, reflecting the expected cash inflows from the reinsurer to cover the agreed-upon portion of the insurance liabilities.
What is indemnity reinsurance?
Indemnity reinsurance is a type of reinsurance arrangement where the reinsurer agrees to indemnify, or reimburse, the ceding insurance company for a specified portion of the losses that the ceding company incurs on its insurance policies. In other words, the reinsurer compensates the ceding insurer for claims paid or payable under the covered policies, based on the terms and conditions of the reinsurance contract.
The primary purpose of indemnity reinsurance is to help insurance companies manage their risk exposure, spread their risks more broadly, and maintain financial stability. By ceding a portion of their risks to a reinsurer, insurance companies can reduce the potential impact of large or catastrophic losses, stabilize their underwriting results, and maintain their solvency.
Indemnity reinsurance can take various forms, including:
Proportional reinsurance: The reinsurer assumes a fixed percentage of the ceding insurer’s premiums and claims. The reinsurer and ceding insurer share the premiums, losses, and expenses in a predetermined proportion.
Non-proportional reinsurance: The reinsurer’s liability is based on an agreed threshold, typically a specific loss amount or a loss ratio. The reinsurer only compensates the ceding insurer for losses exceeding this threshold, up to a specified limit.
Common types of non-proportional reinsurance include excess-of-loss reinsurance (covering losses above a specified amount) and stop-loss reinsurance (providing coverage when the ceding insurer’s overall loss ratio exceeds a predetermined level).
What is non-indemnity reinsurance?
Non-indemnity reinsurance, also known as financial reinsurance or finite reinsurance, is a type of reinsurance arrangement that does not strictly provide indemnification for the ceding insurer’s losses based on the underlying insured risks. Instead, it focuses on transferring financial risk, offering financial benefits, or assisting with the ceding insurer’s balance sheet, income statement, or solvency position. Non-indemnity reinsurance may not have a direct correlation with the ceding insurer’s actual loss experience.
Non-indemnity reinsurance often includes customized contracts designed to address specific financial objectives or regulatory requirements. These objectives may include:
Enhancing capital management: Non-indemnity reinsurance can help insurers optimize their capital structure, improve solvency ratios, or release trapped capital.
Stabilizing underwriting results: Finite reinsurance can help smooth fluctuations in the insurer’s underwriting results, providing more predictable financial outcomes.
Managing financial volatility: Reinsurance arrangements that help protect the insurer against fluctuations in financial markets, interest rates, or exchange rates can be considered non-indemnity reinsurance.
Managing reserve risk: Non-indemnity reinsurance can provide a form of reserve protection, where the reinsurer assumes responsibility for losses arising from adverse reserve development on specified policies or lines of business.
While non-indemnity reinsurance can offer valuable financial benefits, it has come under increased regulatory scrutiny due to concerns about transparency, financial reporting, and potential abuse. Regulators may scrutinize such arrangements to ensure they comply with applicable accounting standards and solvency requirements.
IFRS 17 - Life Reinsurance Overview
Key Points:
IFRS 17 provides a comprehensive framework for accounting for insurance and reinsurance contracts.
Life reinsurance refers to reinsurance contracts covering life insurance policies.
Reinsurers assume a portion of the risks and associated cash flows from the ceding insurer.
FRS 17 - Reinsurance Contracts Held
Reinsurance contracts held are measured separately from the underlying insurance contracts.
The contractual service margin (CSM) is determined for reinsurance contracts held, representing the unearned profit on the reinsurance contract.
The CSM is adjusted over time to reflect changes in estimates and risk adjustments related to the reinsurance contract.
