IAN – Reinsurance

This International Actuarial Note (IAN) is promulgated under the authority of the
international Actuarial Association. It is an educational document on an actuarial
subject that has been adopted by the IAA in order to advance the understanding of the
subject by readers of the IAN, including actuaries and others, who use or rely upon the
work of actuaries. It is not an International Standard of Actuarial Practice ("ISAP") and
is not intended to convey in any manner that it is authoritative guidance.

This International Actuarial Note (IAN) provides background and suggested

practice on the treatment of reinsurance under IFRS 17. The note covers both
reinsurance ceded (referred to as reinsurance “held” in IFRS 17) and
reinsurance assumed (referred to as reinsurance “issued” in IFRS 17). For
consistency with IFRS 17 terminology, reinsurance “held” and “issued” will
be used in this note..

This note is structured in the form of a series of questions and answers. It is not
applicable to reinsurance contracts that are considered to be Financial Instruments
under IFRS.

1 When is IFRS 17 used to value account for reinsurance contracts ?

A Reinsurance contract is an insurance contractthe process where by which

one entity (the reinsurer) takes on all or part of the insurance risks issued by
another entity. When an entity sends risks to another entity it is known as
reinsurance ceded.is considered to have reinsurance held. When an entity
receives risks from another entity it is known as reinsurance
assumed.considered to have reinsurance issued.
Where there is significant insurance risk transfer, the reinsurance contract
is considered as an insurance contract under IFRS, and IFRS 17 is applicable .
The applies to both reinsurance held (the IFRS 17 terminology for a
reinsurance ceded contract) and reinsurance issued (the IFRS 17
terminology for a reinsurance assumed contract). Where there is not
sufficient insurance risk transfer, IFRS 17 does not apply, and the
reinsurance is treated as a financial instrument.

When IFRS 17 is applicable, for reinsurance issued, all references in IFRS 17

that refer to insurance contracts also apply to reinsurance issued contracts
unless otherwise indicated by specific reference to reinsurance issued or
held. . For reinsurance held, all references in IFRS 17 to insurance contracts
also apply except for specific references to insurance contracts issued, and
for situations described in paragraphs 60-70 of the IFRS 17 standard contain
specific criteria only applicable to reinsurance held. (see para 4 IFRS 17 ).

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2 What constitutes significant insurance risk transfer for reinsurance?

For IFRS purposes to determine if IFRS 17 is applicable, for each reinsurance

transaction that a company has in place, an assessment must be made as to
whether there is significant insurance risk transfer under the contract. The
criteria are covered in detail in paragraphs B7-B23 of the IFRS 17 standard.
There is also a general IAN on classification.

Under IFRS , an insurance contract is one under which one party accepts
significant risk, other than financial risk, from another party by agreeing to
compensate the other party if a specified uncertain future event (the insured
event) adversely affects the other party.

Under IFRS, the insurance risk is significant whenever an insured event could
cause the insurer to pay significant additional benefits in any scenario,
excluding scenarios that lack commercial substance (i.e. have no discernible
effect on the economics of the transaction). IFRS specifically says this
condition may be met even if the insured event is extremely unlikely or even
if the expected (i.e. probability-weighted) present value of contingent cash
flows is a small proportion of the expected present value of all the remaining
contractual cash flows

For reinsurance, there are two specific exceptions to the above general
principles

 Lapse, persistency or expense risk would not normally meet the

criteria for insurance risk outlined above. However, where this risk is
mitigated by an entity by using a contract to transfer some of all of
these risks to another party, this second contract is considered as
insurance risk to the assuming entity (para b15). Therefore they can
be considered as insurance risk for the entity that has assumed the
risk and has reinsurance issued issuing the reinsurance but but not
for the entity that has ceded the risks of underlying contracts and has
reinsurance held.olds the reinsurance.
 Even if a reinsurance contract does not expose the issuer of the
contract to the possibility of a significant insurance loss, the contract
is still deemed to transfer significant insurance risk if it transfers
substantially all of the insurance risk relating to the reinsured
portions of the underlying insurance contracts (para b19). Therefore
they can be considered as insurance contracts for both the entity
issuing the contract and the entity that holds the reinsurance.

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 .

THE BALANCE OF THIS NOTE IS APPLICABLE ONLY TO REINSURANCE

CLASSIFIED AS INSURANCE CONTRACTS UNDER IFRS

Reinsurance Held (Questions 3 – 12)

3 How is reinsurance held presentedshown on the IFRS balance sheet ?

Where an entity has entered into reinsurance contracts to cede insurance

risk associated with underlying insurance contracts (either direct insurance
contracts or reinsurance contracts issued)gross insurance liabilities, the
value of these contracts is recognized and presentedshown on the balance
sheet as a separate reinsurance contracts held asset or liability.

4 Does reinsuring insurance contractsliabilities impact the valuation of the

underlying gross insurance contractsliabilities on the IFRS balance sheet ?

In principle, under IFRS 17, the accountingvaluation of insurance contracts

issued by an entity is done independently of the accounting valuation of
reinsurance contracts heldheld contracts it has entered into to mitigate risks
in the contracts issued.

The insurance contractsliabilities continue to be valued on a gross basis.

Therefore the estimates of future cash flows of a group of underlying
insurance contracts in the gross insurance liability cash flows should be the
same regardless of whether there is reinsurance held associated with these
obligationsliabilities. This also applies to the entirety of the fulfilment cash
flows and the CSM.
The risk adjustment for non financial risk for a group of insurance contracts
issued is also not directly impacted by specific reinsurance held against the
risks of these contracts. However, the risk adjustment may reflect the
potential use of reinsurance to diversify risk be indirectly impacted by the
use of reinsurance as under paragraph B88 (a) in IFRS 17 it states that the
risk adjustment for non-financial risk also reflects “the degree of
diversification benefit the entity includes when determining the
compensation it requires for bearing the risk”. Therefore, an entity’s
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 approach to diversifying its risk exposure, including potential use of
reinsurance, may impact the gross risk adjustment. However this would be
an indirect impact based on the entity’s approach to risk diversification
rather than direct linkage for a specific reinsurance held treaty.

5 How are reinsurance contracts held measured ?is the value of reinsurance
contracts held determined ?

The measurementvalue of reinsurance held is represented byreflects the

fulfilment cash flows associated with the reinsurance held contract. It is
separately determined and de-linked from the valuation of the fulfilment
cash flows of the gross insurance liabilities.
This introduces the possibility of an accounting mismatch between the
valuation of reinsurance held and the valuation of the underlying insurance
contracts whose risk is being reinsured. For example, the underlying
insurance contracts may qualify as insurance contracts with direct
participation features, whereas reinsurance contracts do not qualify. This
would lead to differences in the accounting model approach to the CSM be
valued using the variable fee approach, whereas reinsurance held is not
eligible to use the variable fee approach for valuation and would use the
general model. This would introduce potential differences related to
treatment of changes in the discount rate due to changes in financial
assumptions, and the accretion of interest.
In addition there may be differences in grouping of contracts and contract
boundaries .

6 Does the asset or liability for reinsurance held asset have a CSM ?

Yes, a CSM is determined for a reinsurance contracts held using a similar

approach as for other insurance contracts. However, there is a key difference
thatwith the difference that the CSM can both reduce the reinsurance held
asset (i.e. present value of reimbursements from the reinsurance contract
exceed the present value of reinsurance premiums) and therefore defer
recognition of profit from the reinsurance contract, or increase the
reinsurance held asset (i.e. present value of reinsurance premiums exceeds
the present value of reimbursements from the reinsurance contract) and
therefore defer recognition of losses from the reinsurance contract).
This means that the concept of an ‘onerous’ reinsurance held contract does
not exist (see paragraphs 29 (b) and 61 in IFRS 17). The rationale is that a
net loss from the reinsurance contract would usually represent a commercial

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 expense of purchasing reinsurance and should be spread over the period in
which the service is received.

However, where there is a change in the fulfilment cash flows of a group of

underlying insurance contracts in the gross insurance liabilities that does not
adjust the CSM for this group for this group , the insurer should similarly
does not adjust the CSM on the reinsurance held asset for changes in
fulfilment cash flows associated with these same underlying insurance
contracts (see paragraph 66 (c) (ii) in IFRS 17). This applies only for
subsequent measurement, not for initial measurement.

This means that where an entity has transferred risk to a reinsurer, there is
an attempt to ensure consistency in how changes in the fulfilment cash flows
associated with the risks transferred is treated in the CSM of the reinsurance
held and the gross insurance liabilities, even in the situation where a group of
contracts in the gross insurance liabilities is onerous.

In other respects, because the principal of IFRS is to de-link reinsurance

contracts held from associated underlying gross liabilities, the determination
of CSM is independent of the CSM on any underlying insurance contracts.

7 Does the existence of reinsurance held impact the determination of the CSM
and onerous contract testing of the gross insurance liabilities ?

Because the principle of IFRS is to de-link reinsurance held from any

associated underlying gross liabilities, the determination of CSM as well as
onerous contract testing of the gross insurance liabilities is, with the two
exceptions noted below, unimpacted by reinsurance held.
 As covered in question 6, where there is a change in the fulfilment
cash flows of a group of insurance contracts in the gross insurance
liabilities that does not adjust the CSM for this group , the insurer
should similarly not adjust the CSM on the reinsurance held for
changes in fulfilment cash flows associated with same underlying
insurance contract. A result of this requirement is that where
underlying gross insurance contract(s) are onerous, but there is
reinsurance held in place that has transferred the risk creating the
onerous condition to a reinsurer, the change in the value of the gross
insurance liabilities will be offset by a change in the value of
reinsurance held

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  As covered in question 4, an entity’s approach to diversifying its risk
exposure, including reinsurance, may impact the risk adjustment for a
group of insurance contracts in the gross insurance liabilities.
However this would be an indirect rather than direct linkage for a
specific reinsurance held treaty.

8 How is counter party risk of non-performance by the issuer of reinsurance

contracts reflected in reinsurance contracts held ?

In determining the fulfillment cashflows, the estimates of future cash flows

for the reinsurance contracts held should be reduced by an best estimate
allowance for reinsurance counter party failure to fulfill the contractual
obligations (para 63). This would include allowances for disputes resulting in
reduced payments as well as for potential reinsurance counter party failure
due to defaults (i.e. credit events).

The allowance should reflect the current financial condition and credit
standing of the reinsurance counter party, as well as the potential for these
conditions to change over time.

Further, non-performance risk should also be considered in the risk

adjustment

It should be noted that, if the allowance for non-performance in the

fulfillment cash flows is changed, then the change does not adjust the
contractual service margin (para 67).

9 Would the future cash flow assumptions for business covered by

reinsurance held be the same as the future cash flow assumptions used for
the same business in the gross insurance liabilities ?

The assumptions used for the estimates of future cash flows for business
ceded and reflected in the reinsurance held would normally be logically
aligned with those used for the gross insurance liabilities on the same
business. That is to say, assumptions related to policyholder behavior or
insured decrements (e.g. mortality rates, morbidity rates) on the underlying
gross insurance liabilities would normally be consistent between the gross
insurance liabilities and where these assumptions are used to help determine
the reinsurance held asset. Other assumptions, such as expenses as
expenses, may be different.

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 In addition, other variables and determinants of the cash flows, including the
contract boundary, may be different depending on the terms of the
reinsurance.

10 Would grouping of business for reinsurance held be the same as contract

grouping used for the same business in the gross insurance liabilities

The grouping for business covered by reinsurance held may be different than
the contract grouping for the same underlying business business in the gross
insurance liabilities.

Under IFRS 17, contracts are required to be grouped. In addition, under IFRS
17 the general approach is that unless a contract contains components that
would be within the scope of another standard if they were separate contracts,
the contract is contemplated as the most basic unit of account.

A reinsurance contract is a single contract, even though it may consist of

cessions of many underlying insurance contracts.

Because reinsurance contracts already aggregate risk and consolidate

underlying contract exposures, it may often make sense to make use of the
permission to have one (reinsurance) contract in a group.

Where a reinsurance held contract is a proportionate contract that is open to

accepting new cessions for more than 12 months, under the standard separate
groups would need to be established for each 12 month period that the
contract is open (discussed in more detail in questions 11 and 12).

This is true not only where the risks covered are different, but, even where the
reinsurance is proportional reinsurance on underlying gross insurance
liabilities. This is because the reinsurance held and the gross insurance
liabilities, are de-linked.

11 How is the reinsurance held risk adjustment for non financial risk
determined ?

Normally a risk adjustment would intuitively be thought of as increasing a

liability and decreasing an asset. However for reinsurance, to eliminate the
mismatch with the underlying insurance contract valuation, the risk
adjustment The risk adjustment for for reinsurance held increases the
absolute value of the reinsurance held amount. If this is an asset, then it
increases the value of the asset.

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 A specific definition for the determination of the risk adjustment for
reinsurance contracts held is provided in IFRS 17 that replaces the general
definition used for insurance and reinsurance contracts issued in paragraph
37 of the standard. Under the definition for reinsurance held, the quantum of
the risk adjustment for non financial risk represents the amount of risk being
transferred by the holder of a group of reinsurance contracts to the issuer of
those contracts (para B64 IFRS 17|).
The risk adjustment for the reinsurance held can therefore conceptually be
thought of as the difference in the risk position of the entity with (i.e. net
position) and without (i.e. gross position) the reinsurance held. As a result,
the appropriate risk adjustment for the reinsurance held can usually be
determined most easily based on the difference between these amounts.

12 What are the considerations when a reinsurance held contract may cover
multiple years of underlying insurance contracts or risk attachments?

For reinsurance, a single reinsurance held contract may typically cover

multiple years of underlying contractpolicy sessions or risk attachments.
Under IFRS 17, the general approach is that unless a contract contains
components that would be within the scope of another standard if they were
separate contracts, the contract is contemplated as the most basic unit of
account with recognition at the beginning of the coverage period of the
reinsurance contract (or group of reinsurance contracts to which the contract
is allocated).
However, there is an exception in para 62 (a), which states that, in the case of
proportionate reinsurance coverages, recognition occurs at the later of the
beginning of the coverage period of the reinsurance contract (or group of
reinsurance contracts to which it is allocated) and the initial recognition of the
underlying contract.
This essentially means that for proportionate reinsurance held coverages that
recognition is based on underlying insurance coverage recognition date (and
therefore would need to be grouped into at least annual buckets for contract
grouping for CSM and other CSM purposes), while for non- proportional
reinsurance held coverages, that recognition would be based on the initial
recognition date of the reinsurance contract (and therefore would be in a
single bucket for contract grouping for CSM and other purposes).

This has several practical implications.

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  Grouping of proportionate reinsurance held coverages based on
underlying cession date can better align with groupings for the
underlying insurance coverages since the latter cannot group contracts
issued over more than a 12 month period. This alignment is difficult for
other multiple year reinsurance held coverages.
 Proportionate reinsurance held contracts that are open for new risk
attachments for one year, where each risk attachment has a one year
coverage period, are eligible to be considered for the PAA (Premium
Allocation Approach) which is limited to contracts with coverage
periods of one year or less. Other multiple year reinsurance held
contracts would not fall into this eligibility criteria.
 Grouping of proportionate reinsurance held coverages based on
underlying cession date can help avoid CSM discount rate mismatches
with respect to discount rates. The IFRS 17 application guidance states
that, when determining the discount rates for initial recognition, “an
entity may use weighted-average discount rates over the period that
contracts in the group are issued, which applying paragraph 22 cannot
exceed one year” [para B73 IFRS 17]. |Other multiple year reinsurance
held contracts would not be able to avoid mismatch using this
paragraphin this manner.
 For non proportionate reinsurance held, the cash flows would need to
include estimates of the future new business over the full expected
duration of the contract. Therefore a projection of new cessions to be
added and / or other future risk attachments would need to be
included, even though cash flows from these items would not be
included in the underlying insurance contract valuation

13 What is a proportionate reinsurance coverage ?

Proportionate reinsurance is not a defined term in IFRS 17. In the Basis for
conclusions there is a reference to the distinction between proportionate
versus non proportionate reinsurance [Para BC304] . “In some cases, the
reinsurance contract held covers the losses of separate contracts on a
proportionate basis. In other cases, the reinsurance contract held covers
aggregate losses from a group of underlying contracts that exceed a specified
amount” . BC 305 then goes on to discuss the different treatment based on the
classification into one of these two categories.

The inference is that all reinsurance held is covered by these two

classifications, and that proportionate reinsurance held can be defined
relatively broadly in principal to include any reinsurance contract, other than
contracts that cover aggregate losses from a group of underlying contracts
that exceed a specified amount. For example, for life insurance, standard

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 individual life YRT coverages may be considered a proportionate coverage
under this definition.

Reinsurance Held and Reinsurance Issued (Questions 13 – 154)

14 Would the contract boundary used for reinsurance issued and reinsurance
held for the same contract necessarily be the same |?

The contract boundary would not necessarily be the same. Provisions in the
reinsurance treaty concerning rate adjustment, recapture etc may lead to
different contract boundaries. As an example, if a contract allows the entity
issuing the reinsurance an annual full and unilateral right to adjust
reinsurance premiums without restriction, it is likely to be considered a one
year contract by the issuing entity. However, for the assuming entity, it likely
would be modelled as a longer duration contract reflecting the best estimate
of the behaviour of the issuing company with respect to future rate
adjustments.

15 How are contractual options such as recapture, cancellation, or

commutation treated in developing reinsurance cash flows ?

The cash flows would reflect characteristics of the reinsurance contract.

Frequently reinsurance treaties contain options that may be exercised at the
discretion of the party holding or issuing the contract. The cash flows the
impact of contractual options, and would assume that the entities issuing and
holding the reinsurance contract each exercises its control over such options to
its advantage taking into account any other considerations with respect to
expected behaviour. Advantage would be determined based on the best
estimate assumptions used in the valuation.

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16 Can Reinsurance contracts qualify as insurance contracts with direct
participation features ?

Reinsurance contracts, including both reinsurance held and reinsurance

cannot qualify as insurance contracts with direct participation features (para
B109 IFRS 17). Therefore, they cannot use the CSM approach outlined for
contracts with direct participation features.

How is Reinsurance Issued (Questions 165 – 187)

17 How is reinsurance issued presentedshown on the IFRS balance sheet ?

Where an entity has entered into reinsurance contracts to assume risk and
obligations, the value of these contracts is shown on the balance sheet as
part of the gross insurance liabilities or assets, the differentiation whether
asset or liability decided on the level of the grouping of insurance contracts..

18 Are there special considerations for reinsurance issued liabilities ?

In general, reinsurance issued business, once classified as insurance risk, is

treated consistently in approach with all other gross insurance liabilities
issued. One exception is that reinsurance issued business is not eligible to
use the Variable Fee income approach for valuation [note reference needed].

Data issues are frequently more prevalent for reinsurance issued business, as
the reinsuring entity is further removed from the underlying risks, and is
reliant on ceding company for underlying data on insured risks. This means
that there is frequently more use of approximations both in terms of data and
modeling approach. Actuaries performing such valuations should therefore
ensure that techniques used are appropriate and produce reasonable
approximations.

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19 What are the considerations when a reinsurance issued contract may cover
multiple years of underlying insurance contracts or risk attachments?

20 How is the grouping of contracts for CSM reinsurance issued impacted by

the fact that reinsurance contracts may cover multiple years of underlying
policies or attaching risks?

For reinsurance issued , a single reinsurance held contract may frequently

cover multiple years of underlying contractpolicy sessions or risk attachments
on a proportionate or non- proportionate basis.
Under IFRS 17, the general approach is that unless a contract contains
components that would be within the scope of another standard if they were
separate contracts, the contract is contemplated as the most basic unit of
account with recognition at the beginning of the coverage period of the
reinsurance contract (or group of reinsurance contracts to which the contract
is allocated). Of importance, the exception in para 62 (a), which allows
recognition in the case of proportionate reinsurance coverages to be adjusted
to reflect underlying contract inception, is explictely mentioned only in
relation to reinsurance held.
It is outside the scope of this note to provide guidance on whether para 62 (a)
can also be applied for reinsurance issued. In the absence of 62 (a) being
applicable, a single recognition date at initial inception would apply for all
cash flows under a reinsurance contract issued.

The treatment of reinsurance issued as a single contract covering multiple

years of cessions / risk attachments has several implications.

 The cash flows would need to include estimates of the future new business
over the full expected duration of the contract. Therefore a projection of
new cessions to be added and / or other future risk attachments would
need to be included
 The IFRS 17 application guidance states that, when determining the
discount rates for initial recognition, “an entity may use weighted-average
discount rates over the period that contracts in the group are issued, which
applying paragraph 22 cannot exceed one year” [para B73 IFRS 17]. When
a reinsurance contract covers multiple session years, determining how to
apply the discount rate guidance will require interpretation. A strict
interpretation that discount rates may only be averaged taking into
account the initial year that a contract is inforce may produce an economic
mismatch when a reinsurance contract is open for multiple years and new
sessions are added in subsequent years after the initial contract year.
Techniques to address this could include using discount rates better
matched to when new cessions / risks are added to a reinsurance treaty. It
is outside the scope of this note to provide guidance on whether use of

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 such techniques may be appropriate in the specific circumstances being
considered .
 THE PAA may be difficult to apply for contracts where the coverage period
is only 1 year, but new risks attach after the inception date (since PAA is
limited to one year contracts)

Other Questions

21 What additional explanations and disclosures should be included in the

actuary’s report related to reinsurance ?

The objective of additional disclosure requirements is to enable the Board

and management to better understand the way in which the actuary has
undertaken his or her work. Key elements of this related to reinsurance ,
may include:
 discussion of the impact of reinsurance as part of risk mitigation
considerations to determine the company’s risk profile ;
 discussion of any uncertainty in relation to recoverability of reinsured
amounts;
 discussion of the insurer’s net risk profile and how this is
appropriately reflected as the difference between the gross and
reinsurance risk adjustments.

22 What other references are relevant to this topic?

An actuary who assesses risk adjustments may find it useful to be familiar

with
 IFRS 17, including Appendices, Basis for Conclusions and Examples;
 any associated IASB and related guidance;
 ISAPs 4,1

Other Possible Topics that have been suggested for the IAN

- Specific considerations with respect to cat bonds(eg multi year cat bonds
that attach on rolling basis for underlying risks
- treatment of contract features such as deposits, premium payment in arrears,
cash flows only on settlement dates once a year
-
- Considerations with respect to ‘true up’ of reinsurance contract cash flows
and CSM recognized at inception for actual versus expected differences (eg

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 differences in actual versus future projected cession additions in periods
subsequent to initial contract reporting)
- Presentation issues(eg ceding commissions netted against ceded premium,
showing reinsurance contracts held revenue as net in the P&L)
- special considerations with respect to determining reinsurance contract
boundary

What are specific considerations with respect to cat bonds ?

[ note, one or more Q&A need to be drafted to address specific cat bond issues..one
issue is approach for multi year cat bonds that attach on rolling basis for underlying

23 presentation issues ?

[note, one or more Q&A need to be drafted to address presentation issues…one item
is the presentation of ceding commissions which are netted against ceded premium]
1 year contract years]]

24 How are Initial CSM determination and CSM amortization impacted by

reflecting multiple years of risk cessions/risk attachment in a single
reinsurance contract ?

[note, probably need to co-ordinate with CSM general text]

Possible Topics to Review with IASB

- Reflection (or not) of reinsurance programs in risk diversification when

determining gross liability compensation for bearing risk
- Application of 62 A to reinsurance assumed
- Limitations on averaging of discount rates to 1 year when reinsurance
contract may include risks that attach over several years

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