C34 CIA IFRS 1

Insurance Contracts → Level of Aggregation

Portfolios (ex: corresponding to provinces)

• Further divided into Groups

  • Ex: based on whether contract is onerous

Contract is onerous @ initial recognition if:

If the sum of the following is a net outflow:

• Fulfilment CFs (FCFs)

• Acquisition CFs

• CFs arising from contract @ initial recognition

Group Composition

• Established at initial recognition ONLY

  • Shall not be reassessed

  • i.e. set of contracts in each group cannot change!

• But group can change betwen onerous & non-onerous

Can reinsurance contracts held be onerous?

No

IFRS 17 smallest unit of account

Insurance/reinsurance contract

• In most cases, can’t disaggregate further

Multi-line Reinsurance Contracts → Options for Aggregating

• Based on predominant exposure

• Create a portfolio/group for multi-line contracts

• Separate reinsurance contracts into sub-contracts

  • Assign sub-contracts to separate portfolios/groups

CSM for Reinsurance held

Net cost/gain of purchasing reinsurance

• Can be pos or neg!

FCF is calculated as:

• Unbiased estimate of future CFs

• Adj for TVM

• RA for non-financial risk

Loss Component (LC)

• Component of LRC

• Net outflow of onerous group of contracts issued

• Results in:

  • Carrying amt of LRC = FCFs

  • CSM = 0

Contractual Service Margin (CSM)

Unearned profit from a group of insurance contracts

Considerations for estimating Non-Performance Risk of Reinsurers

• Financial strength of reinsurers

• History of claim/covg disputes

• Delays in payment

• Concentration risk

RA for reinsurance held

Amt of risk being transferred by holder to issuer of reinsurance contracts

Ways to determine:

• Diff in risk position with vs without reinsurance held

• Cost of reinsurance

Calculating FCFs w/ Reinsurance → 3 Options for Grouping

Gross = Net + Ceded (of reinsurance)

• Estimate two separately, then calculate the last one

3 Options for Grouping:

1. Estimate gross & net

2. Estimate gross & ceded

3. Estimate net & ceded

Diff between Insurance Revenue for Reinsurance issued vs EP

• Revenue recognition requirements if applying PAA

• Treatment of reinsurance CFs that are contingent on claims of underlying contracts

• Treatment of amts paid to purchaser of reinsurance contract that NOT contingent on claims of underlying contracts

PAA Eligibility for Reinsurance (held or issued)

Loss occurring reinsurance

• Eligible if covg period <= 1 yr

Risk attaching reinsurance

• <=1 yr term NOT automatically eligible

• Determine eligibility by comparing diff between GMA & PAA

Reinsurance arrangements where uniform revenue recognition may not be applicable:

• Risk attaching proportional treaties

• Cat treaties w/ material seasonality

PAA Eligibility for risk-attaching reinsurance held

• Covg period extends beyond term of treaty

  • 12 month contract usually has covg period of 2 years

• PAA eligibility

  • Not automatically eligible if covg period < 1 yr

  • Determine eligibility by comparing diff between GMA & PAA

PAA Eligibility for reinsurance issued

Same as primary insurance

Why might FCF differ from revenue when estimating reinsurance held ARC using GMA?

Projected FCFs extends to entire covg period

Revenue recognized as they’re earned

Ex: at end of Q1

• FCFs include 100% of CFs from policies expected to be written in year

• Revenue only recognizes 25%

If group becomes onerous, when do losses have to be recognized?!

Immediately when group becomes onerous

When are onerous groups LC recognized in f/s?

Onerous groups recognized when BOUND

• Even if it’s before contract’s effective date

Where is onerous group’s LC recognized in f/s?

Statement of Financial Position

• LRC

Statement of Financial Performance

• Insurance service expense

IFRS17 Accounting Treatment of FA’s Residual Market Mechanisms

UAF

• Functions more like a levy → IFRS17 doesn’t apply

FARM

• Members account for their share of FARM contracts as direct business

RSPs

• Treated like reinsurance

  • Ceded contracts → reinsurance held

  • Assumed contracts → reinsurance issued

Reinsurance Held → LRECC

Gain on reinsurance held that’s related to LC of underlying contracts

• Does NOT depend on whether reinsurance results in net gain or loss

  • Identical either way!

• Reinsurance effect on LC proportional to claims recovered

Non-distinct Investment Component (NDIC)

Prem received from reinsurance holder that’s projected to be repaid back

• Regardless of incurred event occurring

Contract provision that indicate need to report NDIC

• Contingency fee

• Sliding scale commissions

• Profit sharing

Adjustments to Claims Data

• Loss trends

• Change in mix of business

• Seasonality

• Cat loading

• Impact of legislative changes