potential mismatch between revenues & FCFs when an entity uses GMA for LRC for Reinsurance Held

wilsonchan18wilsonchan18
in CIA.IFRS17

Hi,

The battle card answer as below:

  • revenues are recognized as they are earned
  • FCF projections include projected cash flows for policies to the end of the year
    → For example, at the end of the first quarter of a year, 25% of annual revenues would be recognized (assuming uniform writings) but FCFs at the same quarter-end must include projected cash flows for 100% of the policies expected to be written throughout the year.

Yet, how can this actually relate to Reinsurance Contract held? Uniform writing is for the issued portion... And FCF is for Insurance Liab. Net of Reinsurance?

Can you pleas elaborate this further?

Thanks and Warm Regards,
Wilson

Comments

  • grahamgraham
    edited October 2021

    I think the key statement from the source text is:

    • When estimating the LRC for reinsurance contracts held valued under the GMA, the ceding company would include all projected cash flows

    The implication here seems to be that for LRC contracts other than reinsurance contracts held, the cash flows do not have to include all projected cash flows so there would be no mismatch in that case.

    The way I understood this for the example is that a company may recognize 25% of annual revenues on its income statement, which would flow into the balance sheets as retained earnings. The FCFs however would include 100% of the projected cash flows which would flow into the liabilities side of the balance sheet. So the retained earnings wouldn't match the associated liabilities (until the end of the year.)

  • wilsonchan18wilsonchan18

    ummmm, a bit tricky here. So basically there is a mismatch because GMA LRC Requirement of including all Projected Cashflow for Reinsurance held....

  • grahamgraham

    Yup, that's how I interpreted it.

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