Actuarial Notes

IFRS 17 – Actuarial Considerations Related to Reinsurance Contracts Issued and Held

By Canadian Institute of Actuaries · 2025 · 225060

Study guide: Exam 6C

A CIA educational note summarizing the accounting and actuarial implications of IFRS 17 for reinsurance contracts issued and reinsurance contracts held. It was prepared by the Committee on Property and Casualty Insurance Financial Reporting and dated June 17, 2025 (document 225060); it offers possible interpretations of the Standard "without advocating any particular approach", and adapts the CIA's 2007 Task Force Report on the Appropriate Treatment of Reinsurance as an appendix on risk transfer.

On the syllabus

  • Exam 6C — objectives C1–C3; the June 2025 note, with no sections excluded.

Preamble

  • Process
  • Your feedback
  • Prepared with P&C reinsurance contracts in mind, much of the content could also apply to Life reinsurance contracts.

1 Introduction

  • Reinsurance contracts held are recognized and presented in the statements of financial position and financial performance separately from the underlying insurance contracts (IFRS 17.78 and IFRS 17.82).
  • The note supplements Chapter 9 – Reinsurance of the CIA's Application of IFRS 17 Insurance Contracts and the PCFRC's notes on the LRC, the risk adjustment, discounting and PAA eligibility.

2 Level of aggregation

  • 2.1 Portfolios and groups
    • The level of aggregation for reinsurance contracts held is assessed independently from the underlying contracts, and a portfolio or group of reinsurance held may reasonably consist of a single contract.
    • Reinsurance contracts held cannot be onerous (IFRS 17.68): for them, references to onerous contracts are replaced by contracts on which there is a net gain on initial recognition.
  • 2.2 The insurance/reinsurance contract as the smallest unit of account
    • A multi-line reinsurance contract may be aggregated by its predominant exposure, placed in a hybrid or multi-line group, or separated into sub-contracts — the last only if a single legal contract was bound solely for administrative convenience.
  • 2.3 Onerous contracts: initial recognition
  • 2.4 Onerous contracts: subsequent measurement
    • Under the PAA, a group deemed non-onerous at initial recognition may be found onerous at subsequent measurement as facts and circumstances change, and vice versa.

3 FCF projections

  • The FCF are an unbiased current estimate of future cash flows, an adjustment for the time value of money, and a risk adjustment for non-financial risk.
  • 3.1 Discounting and cash flows considerations
    • Assumptions for reinsurance contracts held and for the underlying contracts would normally be consistent, which does not necessarily mean identical (IFRS 17.63).
    • 3.1.1 Liquidity of the insurance/reinsurance contracts issued and held
      • The LIC for a group of reinsurance contracts held is likely illiquid, since the purchaser of reinsurance cannot influence the timing of claim payments.
    • 3.1.2 Risk of non-performance by the issuer of the reinsurance contracts held
      • Reinsurer default, coverage disputes and other non-performance are reflected as a decrease in the expected cash inflows from reinsurance held, not as a separate provision as under IFRS 4; changes in that risk go to profit or loss and do not adjust the CSM (IFRS 17.67).
  • 3.2 The RA associated with reinsurance contracts held
    • The risk adjustment for reinsurance held represents the risk transferred to the reinsurer (IFRS 17.64), so it increases the reinsurance asset and its release reduces reported profit.
    • Reinsurer non-performance risk affects the cash flows of reinsurance held, not its risk adjustment.

4 Insurance service result considerations

  • Income or expenses from reinsurance contracts held may be presented as a single amount or separately as amounts recovered and an allocation of premiums paid (IFRS 17.86); the allocation of premiums paid must not be presented as a reduction in revenue.
  • 4.1 Insurance revenue accruals – reinsurance contracts issued
  • 4.2 Insurance revenue recognition pattern
    • Recognition by the passage of time may not suit risk-attaching proportional treaties, catastrophe treaties with material seasonality, or retrospective reinsurance.
  • 4.3 Income or expenses presentation requirements
    • 4.3.1 Reinstatement premiums
      • 4.3.1.1 Reinstatements contemplated in the original reinsurance contract
      • 4.3.1.2 Additional negotiated reinstatements
      • Where amounts recovered and premiums paid are presented separately, mandatory reinstatement premiums offset the amounts recovered; an additional negotiated reinstatement is a separate contract, accounted for as an allocation of premiums paid.
    • 4.3.2 Commissions for reinsurance contracts
      • Under the same presentation, commission not contingent on claims reduces the allocation of premiums paid, and commission contingent on claims offsets the amounts recovered; under a sliding scale, the maximum commission is deemed not contingent on claims.
    • 4.3.3 Non-distinct investment component
    • 4.3.4 Premium adjustments reflecting an adjusted exposure base

5 LRC/ARC: PAA and GMA considerations

  • 5.1 Estimation of the LRC/ARC for reinsurance contracts issued/held
    • The GMA is the default approach; the PAA is a simplified measurement approach.
  • 5.2 PAA eligibility
    • The PAA eligibility of reinsurance contracts held is assessed separately from that of the underlying insurance contracts.
    • 5.2.1 Considerations related to risk-attaching reinsurance contracts issued or held
      • A 12-month risk-attaching contract over 12-month policies usually spans two loss occurrence years, so its eligibility must be demonstrated — even when the contract term is under one year.
    • 5.2.2 Determination of coverage period and contract boundary for reinsurance contracts issued and held
  • 5.3 GMA considerations
    • 5.3.1 Coverage units and the CSM
      • The CSM on reinsurance held is the net cost or net gain on purchasing it (IFRS 17.65), so it can be positive or negative.
    • 5.3.2 Business combinations and retrospective reinsurance contracts
    • 5.3.3 Boundary of reinsurance contracts
      • Without unilateral cancellation provisions, the ARC under the GMA includes projected cash flows for underlying contracts not yet issued.
  • 5.4 Accounting for groups deemed onerous
    • 5.4.1 Recognition of LC on onerous groups (insurance/reinsurance contracts issued)
    • 5.4.2 Reinsurance contracts held – LRECC
      • The loss-recovery component is the loss recognized on the underlying contracts times the percentage of their claims expected to be recovered (IFRS 17.B119D), and it may only be recognized if the reinsurance held was entered into before or at the same time as the onerous contracts are recognized.

6 Accounting treatment of residual market mechanisms (automobile insurance)

  • The Facility Association's residual market (FARM), its Risk Sharing Pools and Quebec's Plan de Répartition des Risques involve insurance contracts, so IFRS 17 applies; the Uninsured Automobile Funds function more like a levy, and it does not.
  • Members account for their share of the FARM as direct business; contracts ceded to the RSPs are reinsurance contracts held and those assumed from them reinsurance contracts issued.

Appendix: Principles of Risk Transfer in Reinsurance

  • Background
  • Definitions
  • The concept of risk transfer for reinsurance contracts
    • Key principles of risk transfer
      • Risk transfer is assessed on the entire agreement, including written and verbal side agreements, at inception and whenever a change significantly alters the contract's expected future cash flows.
  • Assessing the "existence" of risk transfer
    • A. Qualitative Assessment
      • Risk transfer is "reasonably self-evident" for contracts on arm's-length terms with no potentially limiting features, such as casualty excess of loss or natural catastrophe covers.
    • B. Quantitative Testing
      • The 10-10 rule asks for at least a 10% chance of at least a 10% loss relative to premium; risk transfer by Expected Reinsurer Deficit is achieved if the ERD is above 1%.
  • Limitations of risk transfer
    • Assessing the "Extent" of Risk Transfer
      • A. Terms set in advance
      • B. Experience-based renewals
      • C. Side agreements
  • Mirroring and communication

Related readings

  • CIA Reinsurance Treatment — the 2007 Task Force Report on the Appropriate Treatment of Reinsurance, adapted as this note's appendix
  • CIA IFRS 17 - LRC — the PCFRC LRC educational note this note supplements and quotes in §§2.3, 5.3 and 5.4
  • CIA PAA — the PAA Eligibility educational note this note supplements and quotes in §5.2
  • CIA IFRS 2 — the PCFRC Risk Adjustment educational note this note supplements and quotes in §3.2
  • CIA IFRS 17 - Comparison — listed in §1 among the notes this one supplements
  • OSFI Reinsurance — Guideline B-3, cited in the appendix for its risk-transfer assurances
  • OSFI Memorandum — the 2024 P&C Memorandum to the Appointed Actuary, cited in the appendix for reporting on reinsurance arrangements

Sources