(paragraphs 65-65A, 66A-66B and B119D-B119F of IFRS 17)

BC310 The amount paid by the entity to buy reinsurance contracts would typically exceed the expected present value of cash flows generated by the reinsurance contracts held, plus the risk adjustment for non-financial risk. Thus, a debit contractual service margin, which represents the net expense of purchasing reinsurance, would typically be recognised on the initial recognition of a group of reinsurance contracts held. The Board considered whether the contractual service margin of the group of reinsurance contracts held could be a credit if, as happens in rare cases, the amount paid by the entity is less than the expected present value of cash flows plus the risk adjustment for non‑financial risk. Such a credit contractual service margin would represent a net gain on purchasing reinsurance. The most likely causes of such a net gain would be either of the following:

(a) an overstatement of the underlying insurance contract(s). An entity would evaluate this by reviewing the measurement of the underlying insurance contract(s).

(b) favourable pricing by the reinsurer; for example, as a result of diversification benefits that are not available to the entity.