(paragraph 63 of IFRS 17)

Expected credit losses

BC307 As required by paragraph 63 of IFRS 17, cash flows for a group of reinsurance contracts held should be estimated using assumptions that are consistent with those used for the group(s) of underlying insurance contracts. In addition, IFRS 17 requires entities to reflect expected credit losses in the measurement of the fulfilment cash flows. This is discussed in paragraphs BC308-BC309.

BC308 An entity holding reinsurance contracts faces the risk that the reinsurer may default, or may dispute whether a valid claim exists for an insured event. IFRS 17 requires the estimates of expected credit losses to be based on expected values. Hence, estimates of the amounts and timing of cash flows are probability-weighted outcomes after calculating the effect of credit losses.

BC309 IFRS 17 prohibits changes in expected credit losses adjusting the contractual service margin. In the Board's view, differences in expected credit losses do not relate to future service. Accordingly, any changes in expected credit losses are economic events that the Board decided should be reflected as gains and losses in profit or loss when they occur. This would result in consistent accounting for expected credit losses between reinsurance contracts held and purchased, and originated credit-impaired financial assets accounted for in accordance with IFRS 9.

Amendments to IFRS 17 - feedback on the cash flows in the boundary of a reinsurance contract held