reinsurance
_Losses or reversals of losses on a group of underlying contracts at subsequent measurement:
- At subsequent measurement, where changes in the fulfilment cash flows do not adjust the CSM on underlying contracts because they are onerous, then the entity similarly does not adjust the CSM on the reinsurance held for changes in FCFs associated with these same contracts.
- When an entity groups together onerous underlying contracts covered by reinsurance contracts held and other insurance contracts not covered by the reinsurance contracts held, then the entity is to use a systematic and rational method to determine the portion of the losses arising on the group of underlying insurance contracts which are covered by the reinsurance contracts held._
1) What does reversals of losses mean?
2) For first bullet point,
"where changes in the fulfilment cash flows do not adjust the CSM on underlying contracts because they are onerous"
If the underlying contracts are onerous, won't there be no CSM?
Does this mean
At initial recognition, we adjust CSM of the reinsurance contracts held when contracts are onerous.
At subsequent measurement, we do not adjust CSM of the reinsurance contracts even though contracts are onerous.
?
Comments
1) your contract can switch from being onerous to being profitable -> This represents a reversal of losses
2) Yes, exactly. There won't be any CSM on onerous contracts and therefore any changes in the underlying contract will not affect the CSM. At subsequent measurement, if the underlying contracts become more or less onerous, then there will be no change to the CSM of the ARC. Any gain or loss goes into P&L. This is a specific application of paragraph 66(c)
what if the underlying contract actually becomes non-onerous in the subsequent measurement and have a CSM? Are there still no changes to the CSM of reinsurance held?
Yes there would be a change in CSM of reinsurance held then. The underlying just went from having a CSM of 0 to > 0.
maybe a dumb question, what does it mean at subsequent measurement? Does it mean like at renewal of the group of contracts?
Also concerning the second bullet point, it says if we group together onerous underlying contracts covered by reinsurance contracts held and other insurance contracts not covered by the reinsurance contracts held; does those other insurance contracts need to be onerous? since I thought you could not group onerous contracts with non-onerous contracts
Subsequent measurement is usually when reserve analysis are done (i.e. every quarter but it could vary from firm to firm).
For your second query, that is a good point to note. I think they are referring to grouping onerous contracts together where only of the portion of onerous contracts are covered by reinsurance and the other portion are not.
Okay this clears it up, thanks!