What's the issue?
IFRS 17’s contract boundary requirements – which determine which cash flows are included in the measurement of contracts – appear to use terminology specific to insurance contracts issued by insurers.
This raises a question over how the requirements should be applied to reinsurance contracts held by insurers.
What did the TRG discuss?
TRG members appeared to agree that these requirements should be adapted in an appropriate way for determining the contract boundaries of reinsurance contracts held. Therefore, cash flows are within the boundary of a reinsurance contract held when the entity has a substantive right to receive services from the reinsurer.
This substantive right ends when the reinsurer:
What's the impact?
Many reinsurance contracts provide coverage for claims that occur on underlying contracts that are issued during a period of time.
Currently, most insurers holding these reinsurance contracts recognise and measure them to the extent the underlying contracts are written – i.e. without reflecting expectations of future underlying contracts that will be covered by the reinsurance contract held.
This may change under IFRS 17, because the initial and subsequent measurement of the reinsurance contract held can include cash flows from underlying contracts that are expected to be issued in the future if they are considered to be inside the boundaries of the reinsurance contract.
Consequently, the recognition pattern for reinsurance costs could change for many insurers. The processes and systems that are used to measure reinsurance contracts held might also need to change.
Insurers should analyse the terms and conditions of the reinsurance contracts they hold. For example, a term that provides the reinsurer with the ability to stop covering future underlying contracts with a few months’ notice, which is common in practice, might shorten the contract boundary.
This topic page is part of our Insurance – Transition to IFRS 17 series, which covers the discussions of the IASB's Transition Resource Group (TRG) for Insurance Contracts.
You can also find more insight and analysis on the new insurance contracts standard at kpmg.com/ifrs17.