Mismatch Section

The wiki states:

Question: describe a potential mismatch between revenues & FCFs when an entity uses GMA for LRC for reinsurance contracts held

• 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. There is another example in this forum discussion.

My understanding of the mismatch is a little different as it is not between revenue recognized and FCF. My understanding is that the mismatch is between ARC for reinsurance contracts held and LRC for the underlying insurance contracts issued.

If we are a cedant then we have two groups of contracts we need to measure:
1) Underlying contracts issued (LIC/LRC)
2) Reinsurance contracts held (AIC/ARC)

For LRC we would only recognize a contracts that:
a) Have been written/issued and,
b) Are effective non-onerous and have incepted for onerous contracts.

We would not recognize any contracts that have not yet incepted.

For ARC (unless there are unilateral cancellation conditions which may shorten the contract boundary) we would recognize all cash flows expected to attach under the reinsurance contract regardless of whether or not the contract cash flows have already been recognized in LRC.

This means we would include cash flows from contracts that may not have even incepted yet if we anticipate them to result in reinsurance recoveries under a current reinsurance contract.

So there is a mismatch in cash flows considered in LRC and ARC, as ARC will include cash flows on contracts not yet recognized in LRC.

This is unique to IFRS17 because we require separate measurement of underlying insurance contracts and reinsurance contracts held.

Is my understanding here correct?