It’s Q4 2019 and many insurers are writing their methodology papers for IFRS17 (or reviewing ones handed down from group) – discussing what level-of-aggregation to apply to insurance contracts written. This seemingly trivial task elicits lots of debate – will I work out onerousness at a policy level, or group level? Will I group business by sales channel, or just by product type? What data have I modelled expected cashflows at, and how do I currently group/report my actual cashflows? As you pull the thread more and more you see “huh, there’s actually quite a bit in this one”… and then you get to the question “what about the reinsurance cashflows, where do they go?”… well they go into their own cohort, and that thread is insurance cohorts ^2!! Accounting and management for reinsurance contracts held under IFRS17 is extremely complex – I can’t encourage strongly enough, read up on IFRS17 for reinsurance and review your treaties sooner rather than later.
Here’s a bird’s eye look at what we’re on about:
- Reinsurance contracts held need to be accounted for separately to the insurance contracts to which they relate.
- Similar to the onerous test for insurance contracts, insurers need to determine if reinsurance contracts are a net gain on initial recognition.
- A single treaty may be broken into sub-treaties – either due to reviewability/break clauses, or because they cover multiple lines of business (different risks) that can be priced and lapsed separately.
Points for consideration is this:
Reinsurance requires the same elements as insurance – Measurement Model, CSM, Risk Adjustment, and Coverage Units. However, these elements don’t interact on a like-for-like basis with their insurance counterparts – for example there is no VFA for reinsurance, and PAA may not be appropriate for reinsurance contracts held against PAA insurance contracts. Likewise, for cohorts and coverage units – completely different groupings may apply. The result is negative insurance cashflows and positive reinsurance cashflows that no longer ‘net off’ – resulting in day 1 P&L losses. Once again – I urge you read up on this one today if you haven’t done so already.
One way to approach this situation would be:
- Agree quickly a suggested framework for Insurance Contracts.
- Determine cohort rules and apply this to your business written over the last two years.
- Then agree a framework for Reinsurance Contracts.
- Again apply the framework to two years past business and determine groups of contracts.
- Gather expected and actual cashflows for at least two quarters worth of business – create and release CSM for insurance and reinsurance to understand the new dynamic under IFRS17.
Should you want to a complimentary 2hour session exploring a framework and series of hacks that could lessen the load by 420+ hours and up to 12months of man power, this hackathon may be an ideal next step.