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Date: 030220 - 1 -
IFRS/IAS Consequences for Reinsurance
Lars Ek
Date: 031027
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IAS/IFRS Consequences for Reinsurance
What is the objective with
IFRS
What does ED5 say about Reinsurance
What will the impact be?
Some open issues
Questions and discussion
Date: 031027
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The objective
Ta make limited improvements
to accounting practices for insurance contracts, without requiring major
changes (phase II)
To require an entity issuing
insurance contracts (an insurer) to disclose information about those
contracts
Date: 031027
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Features
Applies to all insurance contracts
including reinsurance contracts
Significant Insurance risk
Embedded derivatives
Unbundling of deposit components
Ceded reinsurance
Loss recognition test
Reinsurance in Phase II
Date: 031027
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(Re)-Insurance contract
Significant risk
Insurable interest
Changes in the level of insurance
risks during the lifetime of the contract
Date: 031027
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Ceded reinsurance
Not allowed to change the
measurement basis for insurance liabilities
No early recognition of gains
Acquisition costs
Gains deferred over the life
of the contract
Losses as above
A CEDENT SHALL APPLY IAS 36
IMPAIRMENT OF ASSETS UNDER A REINSURANCE CONTRACT
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Reinsurance transfer to discounting
Cedant 100 in liability
Cover of 100 for a premium
of 80
5% interest on paid premiums
Cedant can not recognise the
difference between 80 and 100 immediately
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No early recognition of profit
Assume the following:
Premium 200
Loss reserve 210
50% reinsurance
Ceded Premium 100
Ceded Loss reserve 100
5 to be recognized over the lifetime
of the contract.
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Unbundling-reinsurance contract
Five year contract with 10
in premium per year
Experience account of 90%
of cumulative premiums less 90% of cumulative claims
Additional premiums if balance
negative
At the end 100% profit commission
of the experience fund
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Acquisition costs
The cedant shall recognise
receipts from the reinsurer at inception as income to the extent that
they compensate the cedant for the reinsurer麓s portion of acquisition
costs that the cedant recognised as an expense in the current or past
period. All other receipts from the reinsurer at inception reduce the
initial carrying amount of the cedants right under the reinsurance contract.
Date: 031027
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A CEDENT SHALL APPLY IAS 36 IMPAIRMENT
OF ASSETS UNDER A REINSURANCE CONTRACT
Fair value
Discounting of Reinsurers
share of technical reserves!
Deferred acquisition costs
Impairment test of assets
Phase I not Phase II
Date: 031027
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Impacts
Insurance risk 00Financial
reinsurance
Accounting arbitrage -covers
based on discounting
Excessive prudence
DAC 00cost or asset ?
No off setting reinsurance
assets- Gross-Ceded & Net
Unbundling reinsurance and
deposit component
Embedded derivatives option
to buy a reinsurance cover
Disclosure fair value 00eded
reinsurance, loss development
Cat/equalisation provisions
no liability
Captive
IAS 36 Impairment of assets
Date: 031027
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Issues
Mismatch ceded reinsurance
assets and insurance liabilities
Reinsurance of non-insurance
contracts still not insurance
OLW-ILW are they insurance
contracts?
Reinstatement premiums a derivative?
Same rules for assumed reinsurance?
Captive IAS 8?
Date: 031027
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Questions- Discussions
What is unclear
What are the benefits?
Timing
Date: 031027
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THE END
download IFRS/IAS Consequences for Reinsurance
