pg16 reinsurance contract asset and reinsurance contract liability

piupiupiupiupiupiu
in CIA.IFRS17-2

On page16 from the text, there's a paragraph that I'm having a hard time to understand:

"For reinsurance held, because the risk adjustment for reinsurance held is defined
based on the amount of risk transferred to the reinsurer, the risk adjustment for
reinsurance held will either increase the reinsurance contract asset or reduce the
reinsurance contract liability. This has the opposite effect from the risk
adjustment on insurance contracts issued. For example, the release of the risk
adjustment on reinsurance contracts held in a reporting period will reduce
reported profit rather than increase"

I want to know how should I understand the concept of reinsurance contract asset and liability. I also don't understand how the release of RA will reduce the profit.

Please kindly advise!

Comments

  • Staff-T1Staff-T1

    reinsurance contract asset is simply the expected recoveries from the reinsurer such as losses and commissions, while the reinsurance contract liability is the amount of payables owed to the reinsurer.

    The RA increases the ARC. For example, let's say we have an ARC without RA of 1000. When coverage is provided, the ARC will be 0 and profit would be reduced by 1000. However, with an RA of 200, when coverage is provided, we would now have reduced profit by (1000 + 200) rather than just 1000

  • piupiupiupiupiupiu

    @Staff-T1 Thanks for your reply!

    I have 2 follow up questions:
    1. why would RA increase the reinsurance contract asset(ARC) or reduce the liability?
    2. In general, even without RA, why does the ARC reduce the profit when coverage is provided?

    Thanks!

  • Staff-T1Staff-T1
    1. This is because the RA is meant to reflect the difference in capital position before and after reinsurance for the ARC. With reinsurance, your capital position would be lower after reinsurance, which is a net benefit. Thus, the RA will increase the ARC.
    2. Your ARC is higher with the RA, thus when coverage is provided the amount of ARC released will be higher with a RA. This leads to a greater profit reduction compared to releasing the ARC without a RA
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