Accounting For Reinsurance Contracts Under International-Books Pdf

Accounting for Reinsurance Contracts under International
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Memorandum, To Members in the Life Insurance and Property and Casualty Insurance Practice. From Tyrone G Faulds Chairperson,CIA Practice Council. Date December 11 2009, Subject Educational Note Accounting for Reinsurance Contracts under. International Financial Reporting Standards,Document 209125. International Financial Reporting Standards IFRS will be effective in Canada for interim and. financial statements relating to fiscal years starting on or after January 1 2011. In preparation for this conversion the Practice Council has examined the International Actuarial. Standards of Practice IASPs that have been issued by the International Actuarial Association. IAA and has decided to release selected IASPs as either Educational Notes or Research. Papers to assist CIA members in the application of IFRS Since the IASPs were originally. published by the IAA they are presented in a different format and may use somewhat different. terminology than that used in the Standards of Practice and Educational Notes developed by the. CIA Nevertheless the Practice Council has decided to release the documents without. modification, This Educational Note addresses professional services related to the classification recognition.
and measurement of reinsurance contracts for purposes of preparation or review of financial. statements in accordance with IFRS It was originally published by the IAA as IASP 9. In accordance with the CIA s Policy on Due Process for the Approval of Guidance Material. Other than Standards of Practice this Educational Note has received final approval for. distribution by the Practice Council on November 26 2009. As outlined in subsection 1220 of the Standards of Practice The actuary should be familiar with. relevant Educational Notes and other designated educational material That subsection explains. further that a practice which the Educational Notes describe for a situation is not necessarily the. only accepted practice for that situation and is not necessarily accepted actuarial practice for a. different situation As well Educational Notes are intended to illustrate the application but not. necessarily the only application of the standards so there should be no conflict between them. If you have any questions or comments regarding this Educational Note please contact. Tyrone G Faulds Practice Council Chair at his CIA Online Directory address. ty faulds londonlife com,Educational Note December 2009. This Practice Guideline applies to an actuary only under one or more of the following circumstances. If the Practice Guideline has been endorsed by one or more IAA Full Member associations of. which the actuary is a member for use in connection with relevant International Financial. Reporting Standards IFRSs, If the Practice Guideline has been formally adopted by one or more IAA Full Member. associations of which the actuary is a member for use in connection with local accounting. standards or other financial reporting requirements. If the actuary is required by statute regulation or other binding legal authority to consider the. Practice Guideline for use in connection with IFRS or other relevant financial reporting. requirements, If the actuary represents to a principal or other interested party that the actuary will consider. the Practice Guideline for use in connection with IFRS or other relevant financial reporting. requirements or, If the actuary s principal or other relevant party requires the actuary to consider the Practice. Guideline for use in connection with IFRS or other relevant financial reporting requirements. Educational Note December 2009,Table of Contents,2 Publication Date 3.
3 Background 3,4 Practice Guideline 3,4 1 Definition of a reinsurance contract 3. 4 1 1 Classification of reinsurance contracts 4, 4 1 2 Determining whether reinsurance contracts have significant insurance risk 5. 4 2 Separate reporting of ceded reinsurance 6,4 2 1 Prudence in ceded reinsurance 7. 4 3 Measuring the impairment of ceded reinsurance assets 9. 4 4 Performing liability adequacy testing with ceded reinsurance 12. 4 5 Identifying embedded derivatives in reinsurance contracts 12. 4 6 Identifying when unbundling applies to reinsurance 13. 4 7 Evaluating retroactive reinsurance 14, 4 8 Disclosure associated with buying reinsurance 15. 4 9 Disclosure of reinsurance used for risk mitigation 16. 4 10 Disclosure of reinsurance claims development information 16. 4 11 Transition to first time application of IFRS 4 17. Appendix A Excerpts from IFRS 4 concerning reinsurance 18. Appendix B Ceded reinsurance 26,Appendix C Relevant IFRSs 29.
Appendix D List of terms defined in the Glossary 30. Educational Note December 2009, The purpose of this PRACTICE GUIDELINE PG is to give advisory non binding guidance to. ACTUARIES or other PRACTITIONERS that they may wish to take into account when providing. PROFESSIONAL SERVICES in accordance with INTERNATIONAL FINANCIAL REPORTING STANDARDS. IFRSs concerning specific classification recognition and measurement issues arising for. REINSURANCE CONTRACTS It is a class 4 INTERNATIONAL ACTUARIAL STANDARD OF PRACTICE. Reliance on information in this PG is not a substitute for meeting the requirements of the relevant. IFRSs Practitioners are therefore directed to the relevant IFRSs see Appendix C for authoritative. requirements The PG refers to IFRSs that are effective for annual periods beginning on or after 1. January 2007 If IFRSs are amended after that date actuaries should refer to the most recent version. of the IFRS,2 Publication Date, This PG was published on 26 January 2007 the date approved by the Council of the INTERNATIONAL. ACTUARIAL ASSOCIATION IAA,3 Background, This PG relates to both the treatment of reinsurance from the perspective of the ceding company and. the assuming company which is directly applicable to INSURANCE CONTRACTS that are the focus of. IFRS 4 Appendix A contains references from IFRS 4 related to reinsurance. IFRS 4 and INTERNATIONAL ACCOUNTING STANDARD IAS 39 provide guidance for the recognition. and measurement of insurance and INVESTMENT CONTRACTS while IFRS 7 provides guidance for the. disclosure of these contracts IAS 1 provides overall guidance regarding the presentation of general. purpose FINANCIAL STATEMENTS for these instruments. 4 Practice Guideline,4 1 Definition of a reinsurance contract. The IFRS 4 definition of a reinsurance contract is An insurance contract issued by one INSURER the. REINSURER to compensate another insurer the CEDANT for losses on one or more CONTRACTS issued. by the cedant, This definition describes the contract issued by an insurer to compensate another insurer IFRS 4.
defines an insurer in terms of a party to an insurance contract as The party that has an obligation. under an insurance contract to compensate a POLICYHOLDER if an INSURED EVENT occurs. The IFRS 4 definition of a reinsurer is very similar The party that has an obligation under a. reinsurance contract to compensate a cedant if an insured event occurs. IFRS 4 defines a reinsurance contract as a type of insurance contract between two insurers Common. usage generally applies the term reinsurance contract to a contract for which the purchaser of. reinsurance is a company that issues insurance contracts and the provider is a company that issues. reinsurance contracts insurance contracts or both The purchaser of reinsurance is also referred to as. the reinsured cedant or ceding company The provider of reinsurance is also referred to as the. reinsurer or assuming company Assumed reinsurance contracts are also known as inward. Educational Note December 2009, reinsurance Ceded reinsurance contracts are also known as purchased reinsurance or outward. reinsurance, When a reinsurer issues reinsurance contracts related to the reinsurance business of another company. such contracts are also referred to as retrocessions the issuing company is also referred to as the. retrocessionaire and the reinsured company is also referred to as the retrocedant. The legal form of a reinsurance contract can be a contract between two parties the reinsurer and the. reinsured or a multi party contract between several reinsurers and one or more reinsureds. In general the treatment of insurance contracts and assumed reinsurance contracts is the same for. FINANCIAL REPORTING under IFRS 4 However the financial reporting of ceded reinsurance contracts. differs from insurance contracts and assumed reinsurance contracts in several respects This PG. discusses the provisions of IFRS 4 affecting the financial reporting of ceded reinsurance contracts. 4 1 1 Classification of reinsurance contracts, The definition of insurance according to IFRS 4 will apply to the classification of assumed. reinsurance contracts The same definition also applies to the classification of ceded reinsurance. contracts In order to determine the financial reporting for reinsurance for an entity each of the. entity s reinsurance contracts has to be properly classified in one of the following categories a. insurance contracts b FINANCIAL INSTRUMENTS which are sometimes referred to as investment. contracts or c SERVICE CONTRACTS according to the IFRSs IFRS 4 applies only to those. reinsurance contracts that are classified as insurance The guidance provided in IASP 3. Classification of Contracts under IFRS applies to both assumed and ceded reinsurance contracts. Because reinsurance has a wide variety of contract terms features and practices the appropriate. classification of ceded reinsurance contracts may involve detailed procedures to establish which. contracts meet the IFRS 4 definition of insurance particularly the IFRS 4 requirement to have. significant INSURANCE RISK in the contract, Reinsurance contracts can be complex and may contain features that could affect the classification of. the contract under the IFRSs IASP 3 provides guidance regarding whether a single insurance. contract might be separated into COMPONENT parts for accounting purposes and whether several. insurance contracts might be combined into one insurance contract for accounting purposes IFRSs. require the consideration of substance over form and therefore in the classification of reinsurance. transactions all agreements between the reinsurer and reinsured whether formal written contracts or. not should be considered even if they are not part of the main contract between the parties. Reinsurance contracts may also be subject to such separation or combination in determining whether. such a contract or components of a contract meets the IFRS 4 definition of insurance which also. applies to reinsurance contracts There may be some situations where two companies have two or. more reinsurance contracts where one company is the reinsurer on one reinsurance contract with the. second company but is the reinsured under another reinsurance contract with the same second. company If these contracts affect the economic relationship between the two companies then the. IFRS 4 definition of insurance would need to be applied to the combination of the reinsurance. contracts taken as one economic contract for accounting purposes rather than two or more separate. contracts IFRS 4 B25 refers to contracts that are entered into simultaneously with a single. counterparty as forming a single contract for purposes of assessing the significance of insurance risk. for an individual contract,Educational Note December 2009.
An insurer or a reinsurer can issue both insurance and non insurance contracts which is consistent. with the various discussions within IFRS 4 The IFRS 4 criteria for whether there is significant. insurance risk under a ceded reinsurance contract are broad enough to permit the insurance definition. to be applied to the entire ceded reinsurance contract even if some of the cedant s underlying 1. contracts which do not meet the IFRS 4 definition of an insurance contract are also covered under. the ceded reinsurance contract A specific ceded reinsurance contract may not meet the IFRS 4. definition of insurance and therefore may be considered a financial instrument or a service contract. even if every underlying contract meets the definition of an insurance contract For example a. specific ceded reinsurance contract that transfers only FINANCIAL RISK associated with a block of. underlying insurance contracts e g guarantees an investment return on assets transferred linked to. an index would not normally meet the IFRS 4 definition even though the underlying contracts are. insurance contracts If however the specific ceded reinsurance contract transfers both financial risk. and significant insurance risk then the specific ceded reinsurance contract would be expected to meet. the IFRS definition of insurance, It may not be necessary for the cedant to evaluate all of its underlying contracts to determine whether. a specific ceded reinsurance contract meets the IFRS 4 insurance definition At least one of the. cedant s underlying contracts 2 is required to meet the IFRS 4 insurance definition See IFRS 4 IG. Example 1 paragraph 1 29 The REPORTING ENTITY is responsible for determining its evaluation of. the reinsurance contract For example the cedant is responsible for the evaluation regarding the. classification of its underlying contracts and its ceded reinsurance contracts i e the reinsurer is not. bound by the classification decision of the cedant In other words the reinsu. Educational Note December 2009 5 An insurer or a reinsurer can issue both insurance and noninsurance contracts which is consistent with the various discussions within IFRS 4 The IFRS 4 criteria for whether there is significant insurance risk under a ceded reinsurance contract are broad enough to permit the insurance definition to be applied to the entire ceded reinsurance contract

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