Sample-10

ShimiReen

In the solution of the IFRS 17 Sample question-10, they give the following formula:
Net expenses from reinsurance = Allocation of reinsurance premiums + Amounts recoverable from reinsurers for incurred claims + Effect of changes in non-performance risk of reinsurers

And the given Allocation of reinsurance premiums = 10000
Amounts recoverable from reinsurers for incurred claims = 20000
Effect of changes in non-performance risk of reinsurers = 2500
Which gives Net expenses from reinsurance = 32500

However, how do we explain a positive number for the 'Allocation of reinsurance premiums'? I thought that that would always be negative as the entity giving that amount to the reinsurers.

Wouldn't the Net expenses from reinsurance = -10000+20000+2500 = 12500?

Staff-T1

No, this is correct if you check on page 70.50. Its an asset cause you've already prepaid the reinsurance premium, its only being recognized now

cornedov

I have a similar confusion as ShimiReen. It is as if the allocation of reinsurance premiums is actually a benefit to the insurer.

Even, if you prepay the reinsurance premium and hold an asset, as you amortize the asset wouldn't you decrease your NRE and thus decrease insurance service result? This wouldn't explain why the allocation of reinsurance premiums actually benefits the insurer as in this example.

Is it possible that typically allocation of reinsurance premiums is a negative amount (expense to the insurer), but we have a ceding commission that is greater than the allocation reinsurance premiums for the period (leading to a positive amount)?

Ex: Reinsurance premium paid = 5K
Ceding commission treated as an offset to premium = 10K

Allocation of reinsurance premiums = -5K

I found the following from the source on IFRS17 Reinsurance Contracts held which leads me to believe this may be the case:

"For example, for a proportional treaty with a sliding scale commission, the maximum
commission would be deemed not contingent on claims and it would be booked as an offset to the insurance revenue of the reinsurer. For the cedant, it would represent a reduction to the “allocation of reinsurance premium paid”."

Does my understanding make sense or am I missing something here?

Staff-T1

When you prepay your reinsurance premium, your ISR at time 0 decreases as you have a cash outflow. Assuming your premium is 100, your ISR at time 0 decreases by 100, while you book an asset on the BS for 100 with a net impact of 0. As the reinsurance provides coverage you decrease the asset which is an expense and therefore positive.

A correction to the above: Increasing the NRE reduces your ISR.

I don't think you can explain it away through the use of a ceding commission. Think of it from a business perspective. How would it be possible for ceding commission to be greater than the entire premium paid? What is being implied is that the reinsurer is paying the insurer money to provide coverage

sidkiriya

Sorry not following. ISR = TIR - ISE + NRE, so increasing NRE should increase ISR, right ?

From 20.18 perspective, looking at Intact's roll forward as of 2023, it seems like the sign of Allocation of RI premium should be opposite of Amounts recoverable and Changes in Non-performance. Also, the opposite sign compared to the premium paid in the period. I am hoping the same sign of all the 3 items would be carried into 70.50 as well, or do they change in FS pages ?

Attaching the screenshots of Insurance liabilities/ assets roll forward for reference.

cornedov

To add to sidkiriyas comment if allocations of reinsurance premiums is an expense wouldnt we expect it to be a different sign than recoveries which are an inflow?

Staff-T1

I have thought about this and checked a couple of things:

• Looking at the OSFI validation spreadsheet, you can see that for page 70.50, 59 = 50 + 52 + 54 so the formula for calculation of net expenses from reinsurance contracts held is correct.
• I do not see any problem with the intact roll forward regarding non-performance risk. A negative amount here just means that the non-performance risk has increased, reducing the AIC. This is the** change** in non-performance risk so it doesn't necessarily have to be in the opposite sign of any one of the other two items.
• Let's take a step-back. Any increase in expenses would reduce your ISR. The only way this can be true is for that amount to be negative. Allocation of reinsurance premiums is the portion of premiums paid to reinsurers that is allocated to a given reporting period. In short yes, I'd have to say that you're correct. It would probably make more sense for the allocation of reinsurance premiums to always be a negative amount and for the recoverables to be a positive amount. Also, this seems to be the case when looking at Intact's income statement.