Reinsurance contracts held under IFRS 17

Starting from the 1st of January 2023, the International Financial Reporting Standard (IFRS) 17 will become effective, superseding IFRS 4 on accounting for insurance contracts. The standard, issued by the International Accounting Standards Board (IASB) and the IFRS foundation, introduces principles to recognize, measure, present and disclose insurance or reinsurance contracts that an entity issues and reinsurance contracts that it holds. IFRS 17 brings new levels of transparency, giving users more insight into an insurer’s financial health than ever before. The objective is to provide accurate information to stakeholders and investors, harmonizing at an international level how insurance risks are treated. The new standard will drive greater consistency globally, allowing for better comparability between insurers. IFRS 17 is a complex legislation, which introduces new rules and practices on the way (re)insurance agreements are accounted, so that insurance companies will be strongly impacted. More, the Standard presents principles, which, as the word suggests, describe rules at high level, without explaining in detail methods and models applicable in real, concrete settings. This imposes to insurance and actuarial industry to develop the specific techniques to apply IFRS 17. Further, whenever a regulation results general, it involves interpretations, cause of ambiguities and mismatches. The premises appear challenging for insurance contracts, but even much more for reinsurance held business, whose regulation is often described through differences with respect to insurance one and it is less intensively explored. Also be aware that, even though insurance contracts issued and reinsurance contracts held share the general structure of the regulation, many sections differ, creating potential accounting mismatches The central question on which this paper is built is therefore the following: studying and analyzing how IFRS 17 affects and impacts on reinsurance contracts held and how reinsurance treaties will change under it. The Standard imposes new requirements which result also in new entities’ needs and objectives, to which reinsurance agreements have to be adapted. The point of view will always be that of insurance companies, so about reinsurance contracts held. In the first chapter IFRS 17 principles will be introduced, both for insurance contracts issued and reinsurance contracts held, creating a parallelism useful to identify differences and potential mismatches. This chapter will present only the general overview, without exploring any issue yet. The second chapter, instead, will be dedicated to issues of reinsurance contracts held accounting under the Standard, deepening main potential mismatches. Indeed, changes of reinsurance treaties’ features and characteristics are strictly related to problematic and critical points. Finally, Chapter 3 will discuss concrete numerical cases, in order to derive some conclusions about the topics previously arisen. These examples will be centered around main mismatches outlined in Chapter 2, trying to answer to the question about impacts of IFRS 17 on reinsurance contracts held. There is not a marked path of practices and rules yet and the Standard is still in evolution, in particular when considering net reinsurance business. Hence, every comment or conclusion will be partial and absolutely not definitive.