Estimates of Future Cash Flows

The amount an entity pays for a reinsurance contract held consists of the premiums it pays minus any amounts paid by the reinsurer to the entity as compensation for expenses incurred, for example, ceding commissions. The amount an entity recognizes for reinsurance contracts held can be viewed as the share of the reinsurer for the risk-adjusted expected present value of the cash flows generated by the underlying insurance contracts and a CSM that makes the initial measurement of the reinsurance asset equal to the amount the entity pays for the reinsurance contract.

Consistent assumptions are used when measuring estimates of the present value of future cash flows for a group of reinsurance contracts held and estimates of the present value of future cash flows for the group(s) of underlying insurance contracts. This includes any associated adjustments for the financial risk and the time value of money arising from the reinsurance contracts held. As a result, the cash flows used to measure the reinsurance contracts held reflect the extent to which those cash flows depend on the cash flows of the underlying contracts that the reinsurance contract held covers.

Also, the expected present value of future cash flows includes an adjustment for the risk that the reinsurer may fail to satisfy its obligations under the reinsurance contract held. Changes in the fulfillment of cash flows that result from changes in the risk of non-performance by the reinsurer do not adjust the contractual service margin. Instead, these changes are reflected in profit or loss when they occur.