Reinsurance contracts held (IFRS 17)
Reinsurance the insurer buys is measured separately from the contracts it issues, with no onerous-contract notion; a loss-recovery component reflects cover of loss-making underlying contracts.
An insurer cedes 30% of a portfolio on a quota share basis. Should the reinsurance be netted against the contracts it covers? IFRS 17 says no: reinsurance contracts held are recognized and measured separately from the issued contracts they cover, at paragraphs 60 to 70A. The same principles apply, fulfilment cash flows, risk adjustment, margin, with three differences. Assumptions must stay consistent with those of the underlying contracts, but they include the reinsurer's risk of default. The risk adjustment represents the risk transferred to the reinsurer and not the risk the insurer carries. And the contractual service margin can be a net cost: if the reinsurer asks for more than the amount of expected recoveries, the difference is a cost of buying protection, spread over the coverage period, instead of a profit. There is no onerous contract in reinsurance held. On the other hand, since the June 2020 amendments, when a treaty covers underlying contracts that are loss-making from the outset, the insurer immediately recognizes the corresponding gain, in a loss-recovery component, which offsets the loss recorded on the issued contracts. The premium allocation approach is open, the VFA is not. In presentation, reinsurance income and expense are isolated from the rest, which makes the net cost of protection readable.
Underlying group onerous from the outset: a loss of 40 recognized on the issued contracts. The quota share treaty cedes 30% of the group, proportional cover. Loss-recovery component: 30% × 40 = 12, recognized in profit at the treaty's recognition, if it is entered into before or at the same time as the contracts. Net loss for the insurer: 28. If the treaty is bought a year later, the gain of 12 is no longer booked at once, but spread like a reinsurance margin.
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