5.3.2.Potential Timing Mismatch: Reinsurance Contract Held Evaluated under the GMA

valeriyak18valeriyak18
in CIA.IFRS17-1

Hello,

I am having a hard time understanding the potential mismatch discussed in paragraph 5.3.2 in the text.
Could someone explain it to me?

Thanks

Comments

  • Staff-T1Staff-T1
    edited March 2022

    Hi,
    Let's assume we will write 2 contracts this year, one in March and one in September just for simplicity's sake. Assume:

    • Each contract has a premium of $100
    • Expenses and Losses of $40
    • Reinsurance recovery of $20 per contract
    • Annual reinsurance premium: $50
      Let's say we are calculating the FCF for this cohort on April. We then have:

    FCF = -$100 (Note: We have not written the second policy yet) + $40 +$50 - $20*2 (We need to consider ALL expected reinsurance recoveries within the contract boundary the moment we enter into a reinsurance agreement, even for those contracts we have not written yet i.e. the September one.)

    Here you can see the mismatch. We are considering future reinsurance recovery in our FCF from a policy that we EXPECT to write, but we haven't actually written it yet. This is because the reinsurance agreement covers a policy that is not actually in force yet. This is common for risk attaching reinsurance agreements. (i.e. the reinsurer promises to cover all risks written from Jan 1 xxxx- Dec 31 xxx beginning Jan 1 xxxx)

  • valeriyak18valeriyak18

    Makes sense, thank you!

  • grahamgraham

    I have also linked to this discussion from the wiki here:

  • adipelinoadipelino
    edited September 2022

    I have a follow-up question though:
    The source discusses how the FCF of the underlying contracts wouldn't match those from reinsurance held, because (from what I understand) we'd always calculate FCF of underlying contracts and reinsurance held contracts separately. This example combines them. Was that just to illustrate the point?

    I understood the text to be explaining that the FCF of the underlying contracts obviously wouldn't exist for contracts not yet written (and the revenue only recognized for the portion of them that is earned), but the FCF of a risk-attaching reinsurance treaty would recognize the entire coverage period and that of any contracts issued within the reinsurance's coverage period. Is this understanding correct?

    Thanks!

  • Staff-T1Staff-T1

    Yeah you are right - This is just meant to illustrate the point about the mismatch. I personally find it easier to try to visualize the concepts using numbers else it'll be very abstract and convoluted
    Your understanding is also right for the second part :)

  • shiv13shiv13

    Hi! I have a follow up question regarding the calculation above. Should the RI recovery component be negative while the RI premium be negative here? Considering the fact that by taking the contract premium to be negative, we have set inflows as -ve and outflows as +ve? If not, I'd really appreciate some clarification as I am very confused about the signs!

  • Staff-T1Staff-T1

    We have the reinsurance recovery as a -ve (-20) and the reinsurance premium to be +ve(50). This is consistent with inflows being a negative amount and outflows being positive

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