Reinsurance continues to be one of the most contentious aspects of the standard for our clients. The key question remains - will the standard setters finally resolve the issues highlighted by reinsurers and direct insurers in terms of the measurement model for reinsurance?

Whilst I sympathise with industry concerns, standard setters have so far only recommended narrow scope amendments to address accounting, rather than economic, mismatches. At the January meeting, the IASB did accept a proposed change to the standard, enabling cedants that hold proportionate reinsurance contracts to recognize a gain in profit or loss when they incur losses on onerous underlying insurance contracts. Whilst this was an obvious fix, it remains unclear if any of the remaining challenges will be address by the standard setters.

My advice to (re-)insurers is to therefore tackle the issue head on and find a way of resolving mismatches, rather than to anticipate further changes. The focus now should be on thinking through the methodology impacts and how this impacts things like the target architecture, financials and product design. The standard marches forward to an effective date of 1 January 2022 and (re-)insurers should avoid losing further time anticipating wholesale change.

Reminder of the challenges for reinsurance

Different measurement models

There is a risk that reinsurance contracts held may not be able to be measured in the same way as the underlying contracts covered. As the majority of treaty reinsurance contracts are likely to cover periods greater than one year, (re-)insurers will need to use the general measurement model to measure their reinsurance.

Day 1 loss vs. day 1 gain

For non-proportional treaties, there can be a ’negative’ CSM for reinsurance which means that both gains and losses on purchasing reinsurance are recognised in the statement of financial position on initial recognition and released to the profit or loss over the coverage period. In many cases this is different from the treatment for the underlying contracts issued where onerous contracts are recognised in profit or loss immediately.

Contract boundaries and future business yet to be written

The contract boundary of the reinsurance should be determined with reference to the substantive rights and obligations of the cedant to reassess the risks. This means that when measuring the reinsurance contract held the insurer must include cash flows for contracts that are yet to be issued but will be reinsured once issued (substantive right of the cedant to receive services from the reinsurer).

Different assumptions, aggregation and coverage units

Discount rates and currencies used may differ from underlying policies due to reinsurance aggregating books of business across different regions. As reinsurance can cover multiple products, it may span across more than one portfolio of underlying contracts, creating a potential mismatch. Coverage units will differ as they will be determined based on the coverage received from the reinsurer, and not the coverage provided by the cedant to the underlying policyholders.

In practice, what does this mean?

(Re-)insurers are likely to see a wholesale change in how their use of reinsurance impacts their profitability, with a lot less alignment with the underlying business written. In particular we will see:


  • Earnings from reinsurance and underlying policies being recognised at different rates and times due to differences in coverage units, contract boundaries, aggregation and even measurement.
  • Day one losses on underlying policies recognised immediately, whilst in many cases any profit resulting from non-proportional reinsurance will be considered independently and deferred over the life of the reinsurance contract.


(Re-)insurers will have to move away from a mind-set where reinsurance and underlying policies are treated together. Whilst still important for underlying performance, cash flows and regulatory capital, IFRS 17 treats the recognition and measurement separately.

What should insurers do?

This is a complex area, and may lead to product development and/or changes to reinsurance structures, and therefore, time is required to be able to adequately work the implications. It is unlikely a (re-)insurer will be able to eliminate all mismatches without major change to business models and/or reinsurance structures, but there are opportunities to minimise misalignments.

(Re-)Insurers should discuss with reinsurers (retrocessionaires) the prospect of redesigning any treaty(s) held. A more desirable impact can sometimes be achieved with relatively small wording changes without changing the substance of the treaty. As the insurer has to consider its substantive right to receive services from the reinsurer, both parties will need to work closely to ascertain if greater alignment can be achieved for example by the insurer having the ability to request a reprice by the reinsurer, or changing the basis on which risks attach.

The other consideration to explore is whether you can use the combination of contracts or conversely separation to try and align both sides of the balance sheet. This will also help with the run off profile of the contractual service margin. Alternative structures such as co-insurance could also be explored.

The systems impact should also not be underestimated. The requirement to model gross and track cashflows for assumed and held business separately, and then eliminate mismatches on consolidation (particularly for more complex groups) may push existing actuarial and finance platforms to their limit.

Ultimately (re-)insurers must accept that some mismatches will arise and will not be mitigated. Consideration must be given to how to communicate this to investors, how alternative or adjusted performance metrics could be used to mitigate the impact of mismatches in the standard.



Andrew Holland, Partner, Audit

Andrew is an audit partner with 16 years’ experience in insurance industry audit and advisory work as a chartered accountant. In May 2016 Andrew joined the Canadian firm for a two year secondment to gain experience of leading the global audit of one of the firm’s largest insurance audits. He returned to the UK in spring 2018 to join the Southern region financial services audit practice and lead the regional insurance audit practice.

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Prashanth  Ariyam, Director, Audit

Prashanth is a Director within Deloitte’s Insurance Audit and Advisory team. He has a considerable amount of experience working with a number of clients in the insurance industry, including FTSE 100 insurance groups managing multidisciplinary teams on finance change, IFRS and Solvency II and audit based engagements. Pras is one of the firms lead IFRS 17 Directors. He has led global impact assessments and is also the methodology lead for a global reinsurer. Pras regularly talks at IFRS 17 conferences and also helped set up the reinsurance working group which a number of the major UK and European listed insurers attend. Pras also served as interim Group Financial Controller for a FTSE 100 insurer, and as part of that role was responsible for delivering IFRS and Solvency II reporting for the year end as well as assisting with a number of other change initiatives.

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