Reinsurance Contract Liabilities

Study guide: Exam 6C

Reinsurance Contract Liabilities are the obligations of an insurer under reinsurance contracts it has issued — that is, the liabilities of an assuming reinsurer, or of a primary insurer that assumes business inwards. Under IFRS 17 they are measured exactly like any other insurance contract issued: LRC plus LIC, with fulfilment cash flows, a risk adjustment, and a CSM where the GMM applies.

• Do not confuse the two directions. Reinsurance contracts held (Reinsurance Contracts Held) are an asset — reinsurance bought. Reinsurance contract liabilities are what an insurer owes on reinsurance sold. The measurement rules differ in several respects, and the distinction is examined regularly.
• Assumed reinsurance is measured as insurance issued. There is no separate model: the assuming entity applies the same LRC/LIC framework, the same onerous test, and the same presentation as it would to direct business.
• PAA eligibility must be assessed on its own terms. A treaty's coverage period — often one underwriting year, sometimes longer — determines eligibility, and the long claim payout of assumed excess-of-loss business affects the LIC rather than the model choice.
• Reporting lag is the assuming reinsurer's defining problem. Cedant reports arrive quarterly or later, so at any valuation date a material part of the exposure is not yet reported by the cedant, let alone by the underlying claimant. Estimation is therefore heavily dependent on exposure-based methods and cedant-supplied data of variable quality.
• Data quality and its consequences. Where cedant data are late, incomplete or inconsistent, the Standards of Practice require the actuary to say so and to consider whether the data are sufficient for the purpose — this is one of the clearest practical applications of the data-quality standard.
• Higher uncertainty means a higher risk adjustment, and a reinsurer's disclosed confidence level is typically above a primary insurer's for exactly this reason.

Both Directions on One Balance Sheet An insurer writes direct business, cedes 25\% of it under a quota share, and also assumes reinsurance from other insurers. At year end: gross direct LIC \$300 million; reinsurance recoverable on that LIC \$75 million; LIC on assumed business \$110 million.

Present the balance sheet items.

Answer Three separate figures, and none of them are netted:

• Insurance contract liabilities: \$410 million — the gross direct LIC of \$300M plus the assumed LIC of \$110M. Assumed reinsurance is insurance issued, so it belongs with the direct liabilities, not with the reinsurance asset.
• Reinsurance contract assets: \$75 million (plus its risk adjustment, less non-performance risk) — reinsurance held, presented on the asset side.

The single most common error is to combine the \$110M of assumed business with the \$75M recoverable because both are labelled "reinsurance." They point in opposite directions: one is an obligation the insurer owes, the other a recovery it expects.

The test that resolves it every time: am I the one who pays, or the one who gets paid? Assumed business — the insurer pays a cedant — is a liability. Ceded business — a reinsurer pays this insurer — is an asset.