IFRS 17IE Measurement of groups of reinsurances

Last Updated on 10/02/2020 by 75385885

IFRS 17IE Measurement of groups of reinsurances

Measurement of groups of reinsurance contracts held

Example 11—Measurement on initial recognition of groups of reinsurance contracts held (paragraphs 63–65)

IE124 This example illustrates the measurement on initial recognition of a group of reinsurance contracts that an entity holds.

Assumptions

IE125 An entity enters into a reinsurance contract that in return for a fixed premium covers 30 per cent of each claim from the underlying insurance contracts.

IE126 The entity measures the underlying group of insurance contracts on initial recognition as follows:

The entity measures the underlying group of insurance contracts on initial recognition

IE127 Applying paragraph 23, the entity establishes a group comprising a single reinsurance contract held. In relation to this reinsurance contract held:

  1. applying paragraph 63, the entity measures the estimates of the present value of the future cash flows for the group of reinsurance contracts held using assumptions consistent with those used to measure the estimates of the present value of the future cash flows for the group of the underlying insurance contracts. Consequently, the estimates of the present value of the future cash inflows are CU270 (recovery of 30 per cent of the estimates of the present value of the future cash outflows for the underlying group of insurance contracts of CU900);
  2. applying paragraph 64, the entity determines the risk adjustment for non-financial risk to represent the amount of risk being transferred by the holder of the reinsurance contract to the issuer of this contract. Consequently, the entity estimates the risk adjustment for non-financial risk to be CU18 because the entity expects that it can transfer 30 per cent of the risk from underlying contracts to the reinsurer (30 per cent × CU60); and
  3. the single reinsurance premium paid to the reinsurer is:
    1. in Example 11A—CU260; and
    2. in Example 11B—CU300.

IE128 In this example the risk of non-performance of the reinsurer and all other amounts are ignored, for simplicity.

Analysis

IE129 The measurement of the reinsurance contract held is as follows:

The measurement of the reinsurance contract held

(a) Applying paragraph 65, the entity measures the contractual service margin of the reinsurance contract held at an amount equal to the sum of the fulfilment cash flows and any cash flows arising at that date. For reinsurance contracts held there is no unearned profit as there would be for insurance contracts but instead there is a net cost or net gain on purchasing the reinsurance contract.

Example 12—Measurement subsequent to initial recognition of groups of reinsurance contracts held (paragraph 66)

IE130 This example illustrates the subsequent measurement of the contractual service margin arising from a reinsurance contract held, when the underlying group of insurance contracts is not onerous and, separately, when the underlying group of insurance contracts is onerous.

IE131 This example is not a continuation of Example 11.

Assumptions

IE132 An entity enters into a reinsurance contract that in return for a fixed premium covers 30 per cent of each claim from the underlying insurance contracts (the entity assumes that it could transfer 30 per cent of non-financial risk from the underlying insurance contracts to the reinsurer).

IE133 In this example the effect of discounting, the risk of non-performance of the reinsurer and other amounts are ignored, for simplicity.

IE134 Applying paragraph 23, the entity establishes a group comprising a single reinsurance contract held.

IE135 Immediately before the end of Year 1, the entity measures the group of insurance contracts and the reinsurance contract held as follows:

the group of insurance contracts and the reinsurance contract held

(a) In this example, the difference between the contractual service margin for the reinsurance contract held of CU(25) and 30 per cent of the underlying group of insurance contracts of CU30 (30% × CU100) arises because of a different pricing policy between the underlying group of insurance contracts and the reinsurance contract held.

IE136 At the end of Year 1 the entity revises its estimate of the fulfilment cash outflows of the underlying group of insurance contracts as follows:

  1. in Example 12A—the entity estimates there is an increase in the fulfilment cash flows of the underlying group of insurance contracts of CU50 and a decrease in the contractual service margin by the same amount (the group of underlying insurance contracts is not onerous).
  2. in Example 12B—the entity estimates there is an increase in the fulfilment cash flows of the underlying group of insurance contracts of CU160. This change makes the group of underlying insurance contracts onerous and the entity decreases the contractual service margin by CU100 to zero and recognises the remaining CU60 as a loss in profit or loss.

Analysis

Example 12A—Underlying group of insurance contracts is not onerous

IE137 At the end of Year 1 the entity measures the insurance contract liability and the reinsurance contract asset as follows:

the insurance contract liability and the reinsurance contract asset as follows
  1. The entity increases the fulfilment cash flows of the reinsurance contract held by 30 per cent of the change in fulfilment cash flows of the underlying group of insurance contracts (CU15 = 30% of CU50).
  2. Applying paragraph 66, the entity adjusts the contractual service margin of the reinsurance contract held by the whole amount of the change in the fulfilment cash flows of this reinsurance contract held of CU15 from CU(25) to CU(10). This is because the whole change in the fulfilment cash flows allocated to the group of underlying insurance contracts adjusts the contractual service margin of those underlying insurance contracts.

Example 12B—Underlying group of insurance contracts is onerous

IE138 At the end of Year 1 the entity measures the insurance contract liability and the reinsurance contract asset as follows:

the insurance contract liability and the reinsurance contract asset
  1. The entity increases the fulfilment cash flows of the reinsurance contract held by CU48, which equals 30 per cent of the change in fulfilment cash flows of the underlying group of insurance contracts (CU48 = 30% of CU160).
  2. Applying paragraph 66, the entity adjusts the contractual service margin of the reinsurance contract held for change in fulfilment cash flows that relate to future service to the extent this change results from a change in fulfilment cash flows of the group of underlying insurance contracts that adjusts the contractual service margin for that group. Consequently, the entity recognises the change in fulfilment cash flows of the reinsurance contract held of CU48 as follows:
    1. by adjusting the contractual service margin of the reinsurance contract held for CU30 of the change in the fulfilment cash flows. That CU30 is equivalent to the change in the fulfillment cash flows that adjusts the contractual service margin of the underlying contracts of CU100 (CU30 = 30% × CU100). Consequently, the contractual service margin of the reinsurance contract held of CU5 equals the contractual service margin on initial recognition of CU25 adjusted for the part of the change in the fulfilment cash flows of CU30 (CU5 = CU(25) + CU30).
    2. by recognising the remaining change in the fulfilment cash flows of the reinsurance contract held of CU18 immediately in profit or loss.

 

 

Last Updated on 10/02/2020 by 75385885

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