Thought Leadership

Reinsurance contract – Insurance for insurer

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Key highlights of the publication:

  • A reinsurance transaction is a contract agreed upon by two or more parties: the reinsured or ceding firm and the reinsurer(s). The reinsurer(s) agree to absorb a share of the reinsured’s risk according to the agreement’s terms and conditions. A reinsurer assumes a portion of the risk that an insurer has covered under the arrangement. Therefore, reinsurers work with professional corporate counterparties such as primary insurers, reinsurance brokers, or multinational organisations with their own insurance firms known as captive insurers.
  • Reinsurance is of two different fundamental types. The primitive type of reinsurance, facultative, transfers risks on a case-by-case basis. The alternative is the obligatory (treaty) reinsurance, when an insurer and reinsurer are required to cede and take on a predetermined portion of a portfolio of risks.
  • According to a ratio specified in their contract, the primary insurer and the reinsurer split the premiums and losses under proportional reinsurance. The reinsurer’s portion of the premiums directly relates to its responsibility to cover losses. By paying a reinsurance commission, the reinsurer also reimburses the primary insurer for a portion of its acquisition and management expenses.
  • The most common type of proportionate reinsurance coverage is surplus reinsurance. With surplus reinsurance, the primary insurer retains the ownership of all risks up to a predetermined amount, while the reinsurer only participates in a portion of the risks. Surplus reinsurance requires the reinsurer to absorb any surplus or sum in excess of the original insurer’s retention.
  • The reinsurance contract held is recognised either at the beginning of the coverage period of group reinsurance contacts or the initial recognition of any underlying insurance contract, whichever is later for a proportional treaty. And for a non-proportional treaty, it is recognised at the beginning of the coverage period of a group of insurance contracts.
  • Under IFRS 17, a reinsurance contract held cannot be deemed burdensome. As a result, for holding reinsurance contracts, the criteria for grouping a portfolio have changed. An insurer anticipates either incurring a net cost of obtaining the reinsurance for a group of contracts held, or occasionally experiencing a net gain from doing so.
  • By introducing a comprehensive framework for recognising, measuring, and disclosing reinsurance contracts, IFRS 17 provides stakeholders with more reliable and relevant information, facilitating better decision-making. Overall, IFRS 17 brings greater clarity and accountability to reinsurance contract reporting, benefiting both insurers and their stakeholders.