IFRS17-1

actuaryp24

Question: under IFRS 17, how might insurance revenue for reinsurance contracts issued differ from earned premium
seasonality
→ if the release of risk differs from the passage of time
reinstatement premiums
→ reinsurer would apply this against insurance service expenses
ceding commissions on proportional reinsurance treaties
→ ceding insurer could classify this as any of insurance revenue, insurance service expense, investment component (depends on other considerations)

Can you please elaborate on the above? Is the revenue referring to the revenue earned by the reinsurer (in the form of premium payments from the ceding insurer?)

Staff-T1

Yes, you are correct

oxalis

Hi,

Can you please elaborate on the 3 points above mentioned? I have no clue what these points mean...

Staff-T1

Seasonality:
Consider catastrophe reinsurance on a book of business in Florida. We know Hurricane season is in June - November. The release of risk to the reinsurer is not the same from Dec - June vs June - November. This is because June - November is clearly way riskier for the reinsurer. Therefore, a uniform earning of premium with the passage of time may not be appropriate.

Reinstatement premiums:
Reinstatement premiums are additional premiums that the ceding insurer needs to pay to restore coverage if a layer has been breached. i.e. If we have a 2M XS 1M per risk XOL contract and we have a 3M claim, the reinsurer would pay out 2M and cover would have been exhausted. To restore coverage for the remainder of the term, the ceding insurer has to pay a reinstatement premium. Under IFRS 17, this reinstatement premium would be accounted for as a reduction to the insurance service expense for the reinsurer.

Ceding commissions on proportional reinsurance treaties:
For point 3, I think it should be reinsurer* based on the educational note. Anyways, what it means is that

• Ceding commission paid by the reinsurer that does not depend on the underlying performance of the book (Think a contract where the reinsurer would always return 5% of the ceded premium) would reduce the insurance revenue in their financial statement.
• Ceding commission paid by the reinsurer that depends on the performance of the underlying book of business (profit sharing or sliding scale commission) needs to be accounted for as an insurance service expense or an investment component ( If they are paid after the initial premium is received and if they are repaid to the cedant in all circumstances)

There's a lot of reinsurance terminology here and it can be difficult if you do not work in reinsurance or have yet to take Exam 8

oxalis

Thank you so much @Staff-T1 this is very helpful!!

ThrowGrow

Thanks very much for the explanations on each points! It's really helpful for me to better understand the answers and makes it easier to remember it!!

Staff-T1

No problem Always glad to help ~

mearora

How might insurance revenue for reinsurance contracts issued differ from earned premium

The seasonality point also applies to earned premium for insurance contracts. The example that you discussed, for an insurance contract the uniform earning of premium wouldn't be appropriate either. So isn't is similar for reinsurance revenue and earned premium?

Staff-T1

Seasonality is more prominent for reinsurance contracts so this was why it appeared in the reinsurance section. However, if there is significant seasonality in a direct insurance contract then you would not earn revenue based on the passage of time also, just as with cat reinsurance for example

mearora

Thank you!

exam6passer

how come is different than what is listed in the wiki?

Staff-T1

Both of these are correct -> I believe the question above was from an older version of the paper, but would still be an accepted answer during the exam