Educational Publication: HKFRS 17 Insurance Contracts – Journal Entries on Reinsurance Contracts Held

STANDARDSETTINGHKFRS 17 Insurance Contracts –Journal Entries on ReinsuranceContracts HeldNOVEMBER 2023ContentsAbbreviationsAbout this publication

1.Accounting for reinsurance contracts held from the perspective of cedant Scenario 1: Proportionate RCH – net cost position, profitable underlying contracts Scenario 2: Proportionate RCH – net gain position, onerous underlying contracts Scenario 3: Non-proportionate RCH – net gain position, onerous underlying contracts 23 Scenario 4: Non-proportionate RCH – net cost position, onerous underlying contracts 29

2.Comparison between GMM for direct insurance contracts issued and GMM for RCHAbout the Standard Setting DepartmentList of diagramsDiagram 1:

Relationship among reinsurer, insurer (cedant) and policyholdersDiagram 2:

Initial recognition of CSM for RCHDiagram 3:

Measurement of the carrying amount of CSM for RCHDiagram 4:

Calculation of the amount to be recognized as income for RCH whenunderlying contracts are onerousAbbreviationsThe following abbreviations are used within this publication:

AICAsset for Incurred ClaimsARCAsset for Remaining CoverageBELBest Estimate LiabilityCSMContractual Service MarginFCFFulfilment Cash FlowsGMMGeneral Measurement ModelIASBThe International Accounting Standards BoardLICLiability for Incurred ClaimsLRCLiability for Remaining CoveragePAAPremium Allocation ApproachP&LProfit and LossPVPresent ValueRARisk Adjustment for Non-financial RiskRCHReinsurance Contracts HeldTRGThe IASB’s Transition Resource Group for IFRS 17VFAVariable Fee ApproachAbout this publicationThis publication is a continuation of the ‘HKFRS 17 Insurance Contracts – Journal Entries’ thatwas published in June 2023. The previous publication focused on discussing the journal entriesfor direct insurance contracts under the different models specified in HKFRS 17. In this publication,we discuss another important aspect of insurance contracts accounting – the accounting forreinsurance contracts held (RCH). With these two publications, we hope that readers can gain acomprehensive understanding of the insurance contracts accounting, covering both the insurer’saccounting for insurance contracts issued and the cedant’s accounting for reinsurance contractsheld.There could be various reasons for a cedant to purchase reinsurance, depending on its specificneeds and operational objectives. Typically, a cedant may purchase reinsurance to help manageand mitigate risk by transferring a portion of insurance risk to a reinsurer, thereby limiting theirpotential losses in the event of significant claims. The accounting requirements in HKFRS 17 fordirect insurance contracts issued, as discussed in our previous publication, also apply toreinsurance contracts issued by reinsurers. These requirements also apply to RCH, except whenHKFRS 17 provides specific guidance, i.e., HKFRS 17.60-70A, or when HKFRS 17 specificallyrefers to insurance contract issued1. However, insurance contracts in which the entity is thepolicyholder is not within the scope of HKFRS 172, unless those insurance contracts are RCH[HKFRS 17.7(g)].In this publication, we explain the concepts of RCH by providing simplified scenarios and illustratingthe relevant journal entries that a cedant would record for reinsurance contracts it holds.This publication first illustrates the journal entries for basic RCH transactions in Part 1, followed byshowing in Part 2 the pertinent impacts of these journal entries on an entity’s statement of financialposition and statement of profit or loss. Readers should note that the tables presented in Part 1and Part 2 are intended solely for illustrating the relevant journal entries and do not serve as anillustration of the relevant presentation and disclosure requirements of HKFRS 17.While this publication aims to explain the requirements of HKFRS 17 through the use of simplifiedillustrative examples, there are ‘Notes for further insights’ (denoted with ☼) for those readerswho are interested in gaining deeper understanding and knowledge of HKFRS 17 in discussionsof relevant areas.1 See HKFRS 17.4(a).2 See HKFRS 17.3-8A for the scope of HKFRS 17.Users of the publication should note that the examples in this publication are developed based onhighly simplified fact patterns for educational purposes only. As such, the illustrative approachesin this publication may not necessarily be applicable to other circumstances or fact patterns.Entities should exercise judgement and carefully consider their specific contractual terms,facts, and circumstances when applying HKFRS 17. This publication does not prescribe,nor should it be interpreted as requiring, a specific approach to applying the requirements.There could be other possible ways to record the journal entries for compliance with HKFRS 17with regard to the fact pattern and assumptions given.

1.Accounting for RCH from the perspective of cedantHKFRS 17 Appendix A defines a reinsurance contract as an insurance contract issued by oneentity (the reinsurer) to compensate another entity (cedant) for claims arising from one or moreinsurance contracts issued by the cedant (underlying contracts)3. The scope of HKFRS 17 coversboth reinsurance contracts issued as well as reinsurance contracts held by the entity.In regard to the reinsurance contracts issued, their recognition and measurement requirementsunder the GMM and PAA are the same as those for direct insurance contracts issued. VFA cannotbe used for measurement of reinsurance contracts because reinsurance contracts cannot beinsurance contracts with direct participation features for the purposes of HKFRS 17 [HKFRS

17.B109]. The measurement requirements are applied to the reinsurance contracts themselves,rather than the individual underlying direct contracts. For a better understanding of the accountingfor direct insurance contracts issued, please refer to the previous publication.This section focuses on discussions of the cedant’s accounting for reinsurance contracts held(RCH). The diagram below provides a simple illustration of the relationship among the reinsurer,insurer (cedant) and policyholders.HKFRS 17 requires a RCH to be accounted for separately from the underlying insurance contractsto which it relates. This is because a cedant does not normally have a right to reduce the amountsit owes to the underlying policyholders by the amounts it expects to receive from the reinsurer4.That means, a cedant bears the primary responsibility for paying claims to the policyholders3 An insurance contract is a reinsurance contract if any of the underlying contracts issued by the cedant are insurance contracts.4 The IASB acknowledged that separate accounting for the reinsurance contracts and their underlying insurance contracts mightcreate mismatches that some regard as purely accounting, for example on the timing of recognition (see HKFRS 17.BC304-BC305), the measurement of the reinsurance contracts (see HKFRS 17.BC310-BC312) and the recognition of profit (see HKFRS

17.BC313). However, the IASB concluded that accounting for a RCH separately from the underlying insurance contracts gives afaithful representation of the entity’s rights and obligations and the related income and expenses from both contracts [HKFRS

17.BC298].covered by the RCH, irrespective of whether the reinsurer fulfils its obligation under the RCH.HKFRS 17 modifies the requirements for RCH to reflect the fact that:

(a)

groups of RCH are generally assets, rather than liabilities; and(b)

cedants generally pay a margin to the reinsurer as an implicit part of the premium, ratherthan generating profits from the reinsurance contracts purchased5 [HKFRS 17.BC302].In contrast to insurance contracts issued, a RCH cannot be considered onerous and therefore therequirements for dividing a portfolio into groups are modified for RCH. For a group of RCH, aninsurer (cedant) expects either to incur a net cost or make a gain from purchasing the reinsurancecontract, if any. In this regard, a portfolio of RCH is divided into at least three groups: (1) a net gainon initial recognition, if any; (2) no significant possibility of a net gain arising subsequently, if any;

and (3) remaining contracts in the portfolio, if any [HKFRS 17.61].In addition, the requirements of HKFRS 17.38 that relate to determining CSM on initial recognitionof insurance contracts issued are modified for RCH to reflect the fact that, for a group of RCH thereis no unearned profit but instead there is a net cost or net gain on purchasing the reinsurancecontract6. Hence, unless HKFRS 17.65A applies, on initial recognition the entity shall recognizeany net cost or net gain on purchasing the group of RCH as a CSM. The relevant requirementsare illustrated in Diagram 2 and Diagram 3 below:

5 In practice, the cedant may generate a gain from purchasing RCH, resulting in recognition of a positive CSM for RCH. SeeDiagram 2 for illustration.6 For the measurement of the group of insurance contracts the entity issues, HKFRS 17 specifies that the CSM can never benegative. HKFRS 17 does not include a limit on the amount by which the CSM of a group of RCH could be adjusted as a resultof changes in estimates of cash flows, subject to the amount of premium paid to the reinsurer. This is because the CSM for thegroup of RCH depicts the expense the entity incurs when purchasing reinsurance coverage rather than the profit it willmake by providing services under the insurance contract [HKFRS 17.BC314].NotesThe above diagram is a simplified illustration. Please refer to HKFRS 17.65 for detailed requirements of thecomponents that give rise to CSM for RCH.In situations where the net cost of purchasing reinsurance coverage relates to events that occurred beforethe purchase of the group of RCH, the entity shall recognize such a cost immediately in P&L as an expenseas required by HKFRS 17.65A. In other cases in which HKFRS 17.65A does not apply, referring to Diagram3 below, the entity shall initially recognize a positive or negative CSM for RCH on initial recognition inaccordance with HKFRS 17.65 as appropriate.NotesIn this diagram, the CSM for RCH at initial recognition is assumed to be a debit balance (i.e. net cost ofpurchasing the reinsurance) and so the adjustment to the CSM due to income recognized in P&L applyingHKFRS 17.66A is considered to be an addition to the CSM. See also Notes 3 & 4.FCF = BEL + RA = (Estimates of future cash flows + Time value of money) + RA. HKFRS 17.63 & 64 setout the requirements for the measurement of BEL and RA as follows:

(i)

BEL:

An entity shall use consistent assumptions7 to measure the estimates of the PV of future cash flowsfor the group of RCH and the estimates of the PV of the future cash flows for the group(s) ofunderlying insurance contracts.The contract boundary requirements of HKFRS 178 also apply to RCH. All expected future cashflows within the boundary of the group of RCH, including those anticipated cash flows related tounderlying contracts yet to be issued by the entity (i.e. those which have not been recognized bythe entity as underlying insurance contracts) should be considered9.7 As discussed in its February 2018 meeting (Agenda paper no.7, log#S17), the TRG agreed that ‘consistent’ in IFRS 17.63(HKFRS 17 equivalent) does not necessarily mean ‘identical’. The extent of dependency between the cash flows of RCH and theunderlying cash flows should be evaluated in applying IFRS 17.63.8 See HKFRS 17.33-35 and B61-B71 for the detailed requirements.9 In its February 2018 meeting (Agenda paper no.3), the TRG agreed that the cash flows within the boundary of a RCH arise fromsubstantive rights and obligations of the entity (cedant). Therefore, the substantive right is to receive services from the reinsurer;

and the substantive obligation is to pay amounts to the reinsurer. Consistently, a substantive right to receive services from thereinsurer ends when the reinsurer has the practical ability to reassess the risks transferred to the reinsurer and can set a price orlevel of benefits for the contract to fully reflect the reassessed risk, or when the reinsurer has a substantive right to terminate thecoverage. Accordingly, the boundary of a RCH could include cash flows related to underlying contracts covered by thereinsurance contracts that are expected to be issued by the cedant in the future.The entity shall include in BEL for RCH the effect of any risk of non-performance by the issuer ofthe reinsurance contracts, including the effects of collateral and losses from disputes [HKFRS

17.63]. This is because an entity holding reinsurance contracts faces the risk that the reinsurer maydefault, or may dispute whether a valid claim exists for an insured event. As HKFRS 17 requiresthe expected credit losses to be estimated based on expected values, estimates of the amountsand timing of cash flows are probability-weighted outcomes after calculating the effect of creditlosses [HKFRS 17.BC308].(ii) RA:

The estimate of RA shall be determined to represent the amount of risk being transferred by thecedant to the reinsurer [HKFRS 17.64].In October 2020, HKFRS 17.66 was amended and HKFRS 17.66A was added to require an entity to adjustthe CSM of a group of RCH, and as a result recognize income, when the entity recognizes a loss on initialrecognition of an onerous group of underlying insurance contracts or on addition of onerous underlyinginsurance contracts to a group and hence establishing a loss-recovery component. See further discussionimmediately following this diagram [HKFRS 17.BC315A]. It is noteworthy that HKFRS 17.66A applies if, andonly if, the RCH is entered into before or at the same time as the onerous underlying insurance contractsare recognized [HKFRS 17.B119C, BC315C]10.See the discussion in Note 2 in Diagram 2 concerning the requirement to recognize the net cost for coveragerelated to events that have occurred before the purchase of the group of RCH.This adjustment represents the reversals of a loss-recovery component recognized applying HKFRS 17.66Bto the extent those reversals are not changes in FCF of the group of RCH [HKFRS 17.66(bb)]11.This adjustment represents the changes in FCF, measured at the discount rates specified in HKFRS

17.B72(c) to the extent that the change relates to future service, unless (i) the change results from a changein FCF allocated to a group of underlying insurance contracts that does not adjust the CSM for the group ofunderlying insurance contracts; or (ii) the change results from applying HKFRS 17.57-58 (on onerouscontracts), if the entity measures a group of underlying insurance contracts applying the PAA [HKFRS

17.66(c)].The amount is determined by the allocation of the CSM remaining at the end of the reporting period (beforeany allocation) over the current and remaining coverage period of the group of RCH, applying HKFRS

17.B119 [HKFRS 17.66(e)].The Amendments to IFRS 17 published in June 2020 (HKFRS 17 equivalent, published in October2020) include changes to the accounting for RCH. The Amendments respond to concerns that,applying IFRS 17 before the Amendments, an entity would have recognized a loss on initialrecognition of an onerous group of insurance contracts (or on addition of onerous contracts to agroup), without recognizing corresponding income on a RCH that covers that onerous group ofinsurance contracts. Some stakeholders said this is an accounting mismatch and suggested theIASB amend IFRS 17 so that income is recognized on the RCH at the same time losses arerecognized on initial recognition of onerous underlying insurance contracts. That income wouldreflect the entity’s right to recover those losses [HKFRS 17.BC315E]. As a result, the IASB issuedthe Amendments to address such an issue by extending the ability to ‘match’ income from RCHwith the losses from the underlying contracts to all RCHs that are entered into before or at thesame time as the onerous underlying insurance contracts are recognized12. The amount to berecognized as income is calculated using the following formula:

10 For the amendment described in HKFRS 17.66A to apply, an entity must enter into a RCH before or at the same time as theentity recognizes the onerous underlying insurance contracts. The IASB concluded it would not be appropriate for an entity torecognize a recovery of loss when the entity does not hold a reinsurance contract [HKFRS 17.BC315C].11 The release patterns of CSM and loss-recovery component for RCH can be different under HKFRS 17. For more discussions,please refer to ‘Notes for further insights’ after JE2 in Scenario 4.12 Please refer to HKFRS 17.BC315F for the justification behind the IASB’s decision to make the Amendments.An entity adjusts the CSM of a group of RCH, and as a result recognizes income, when the entityrecognizes a loss on initial recognition of an onerous group of underlying insurance contracts oron addition of onerous underlying insurance contracts to a group [HKFRS 17.66A]. To applyHKFRS 17.66A, an entity applies the above formula in Diagram 4 to determine the adjustment tothe CSM of a group of RCHs [HKFRS 17.B119D]. The entity shall establish (or adjust) a loss-recovery component of the asset for remaining coverage for a group of RCHs depicting therecovery of losses recognized applying HKFRS 17.66(c)(i)-(ii) and 66A. The loss-recoverycomponent determines the amounts that are presented in P&L as reversals of recoveries of lossesfrom RCHs and are consequently excluded from the allocation of premiums paid to reinsurer[HKFRS 17.66B].After an entity has established a loss-recovery component applying HKFRS 17.66B, the entity shalladjust the loss-recovery component to reflect changes in the loss component of an onerous groupof underlying insurance contracts. The carrying amount of the loss-recovery component shall notexceed the portion of the carrying amount of the loss component of the onerous group of underlyinginsurance contracts that the entity expects to recover from the group of RCH [HKFRS 17.B119F].Illustration of scenariosThe following scenarios demonstrate the journal entries for a cedant’s accounting for its RCH,covering the situations below. The journal entries for the underlying contracts are not illustrated.Scenario 1: Proportionate RCH – net cost position, profitable underlying contractsScenario 2: Proportionate RCH – net gain position, onerous underlying contractsScenario 3: Non-proportionate RCH – net gain position, onerous underlying contractsScenario 4: Non-proportionate RCH – net cost position, onerous underlying contractsProportionate RCH covers the losses of separate insurance contracts on a proportionate basis.On the other hand, non-proportionate RCH covers aggregate losses from a group of underlyingcontracts that exceed a specified amount [HKFRS 17.BC304]. Under HKFRS 17, the classificationof a RCH as proportionate or non-proportionate has an impact on the timing of recognizing a groupof RCH. The different requirements on the determination of the initial recognition date forproportionate and non-proportionate RCH are set out in HKFRS 17.62 and 62A. The following fourscenarios provide examples of the relevant journal entries that apply these requirements. It is alsoimportant to note that, the timing of recognizing a group of RCHs, as stated in HKFRS 17.62(b), isalso affected by the timing of recognizing the onerous group of underlying insurance contracts13.The objective of the scenarios is to demonstrate the mechanics of the HKFRS 17 requirements forRCH (see ☼). The scenarios are highly simplified, with assumptions made for the sake of simplicity.They are not intended to reflect a real fact pattern. Each scenario is presented as a separateexample and has no connection with the others.Notes for further insights☼Premium Allocation ApproachThe scenarios below are prepared under GMM. Consistent with the requirements for the measurement ofinsurance contracts an entity issues, the entity may also use PAA to simplify the measurement of RCH,provided that the qualifying criteria are satisfied at the inception of the group [HKFRS 17.69-70]. Theapplication of PAA for RCH is not covered in this publication. However, readers should note that becauseRCH are recognized separately from the underlying insurance contracts, the assessment of whether agroup of RCH meets the conditions for PAA is performed separately and the outcome of which may differfrom the assessment of whether the group(s) of underlying insurance contracts meet(s) those conditions[HKFRS 17.BC301].Variable Fee ApproachFor reinsurance contracts, the cedant and the reinsurer do not share the returns on underlying items andthe cedant also does not receive investment-related services from the reinsurer. The three eligibilitycriteria set out in HKFRS 17.B101 are therefore not met, regardless of whether the underlying insurancecontracts issued are VFA contracts. As such, VFA is not applicable for RCH and reinsurance contractsissued [HKFRS 17.B109].Although the four scenarios are similar14, we have organized the journal entries for each of themto facilitate easy reference and comprehension of their corresponding entries. To further assistreaders in understanding, the following table presents an overview of the four scenarios,highlighting their major similarities and differences:

RCHInitial recognition –timingInitial recognition –CSM & loss-recoverycomponentSubsequent accountingScenario 1ProportionateApply HKFRS 17.62 &62A; 62A is applicablefor proportionate RCH[JE1]CSM is net costposition, so ARC –CSM is a debit on initialrecognition of the RCH[JE1] Release of expectedclaims recovery toP&L [JE3] Recognition of actualrecovery fromreinsurer in P&L [JE4]13 In June 2020, the IASB amended IFRS 17 for RCH when underlying insurance contracts are onerous at initial recognition (seeparagraphs IFRS 17.BC315A‒BC315L). As a consequence of that amendment, the IASB also amended the requirement in IFRS

17.62 (for recognizing a group of RCH) to require an entity to recognize a group of RCH when the entity recognizes onerousunderlying insurance contracts, if it does so earlier than when the entity would otherwise recognize the group of RCH. The IASBconcluded such an amendment was necessary for income to be recognized on a group of RCH at the same time thatlosses are recognized on initial recognition of onerous underlying insurance contracts. The HKICPA issued the equivalentamendments in October 2020 [HKFRS 17.BC305A].14 For example, the above table shows that the journal entries of Scenarios 2 and 3 are similar regardless of whether the RCHprovides proportionate or non-proportionate coverage. The key difference is the different consideration for the timing of initialrecognition of RCH under the relevant requirements of HKFRS 17.RCHInitial recognition –timingInitial recognition –CSM & loss-recoverycomponentSubsequent accountingProfitable underlyingcontracts, so no loss-recovery component isestablished.Payment of reinsurancepremium to reinsurer[JE2] Release of CSM toP&L [JE5] Receipt of claimsrecovery fromreinsurer [JE6]Scenario 2ProportionateSame with Scenario 1[JE1] CSM is a net gainposition, so ARC –CSM is a credit oninitial recognition ofthe RCH [JE1] Adjust to the CSMand recognize incometo match the onerousloss from theunderlying contracts.[JE2]Onerous underlyingcontracts, with thefollowing entries beingmade:

 Initial recognition ofthe loss-recoverycomponent [JE3]Payment of reinsurancepremium to reinsurer[JE4] Release of expectedclaims recovery toP&L [JE5] Recognition of actualrecovery fromreinsurer in P&L[JE6] Reversal ofrecoveries of lossesfrom RCH in P&L[JE7] Receipt of claimsrecovery fromreinsurer [JE8]Scenario 3Non-proportionateApply HKFRS 17.62;

62A not applicable[JE1]Same with Scenario 2[JE1 - JE4] Same with Scenario 2[JE5 - JE7] Release of CSM toP&L [JE8] Receipt of claimsrecovery fromreinsurer [JE9]Scenario 4Non-proportionateSame with Scenario 3[JE1]Same with Scenario 1[JE1]Same with Scenario 2[JE2 - JE4]Same with Scenario 3[JE5 - JE9]The relevant journal entries to record the payment of reinsurance premium and the receipt of actualclaims recovery from reinsurer are the same for all four scenarios.Scenario 1: Proportionate RCH – net cost position, profitable underlying contractsAn entity enters into a reinsurance contract with a reinsurer for insurance coverage of its issuedinsurance contracts on a proportionate basis15. It is expected that the entity will incur a net costfrom the RCH. The fact pattern and assumptions are set out below:

Fact pattern and assumptionsHK$Profitable underlying insurance contractsCash flowsPremiums3,000Less: Expected claims(2,500)

Expected gainReinsurance contract held (RCH)

Cash flowsReinsurance premium to reinsurer(HK$3,000 X 40%)161,200Proportion of claims reinsured and expectedclaims recovery40%AssumptionsFor simplicity17:

(a) the beginning of the coverage period of the group of RCH; and15 See earlier discussions on the meaning of proportionate and non-proportionate reinsurance contracts [HKFRS 17.BC304].16 For illustration purposes in the examples provided in Scenario 1 and 2, the reinsurance premium paid to reinsurer is set at40% of the premium of the underlying cash flows. It is important to note that the pricing of reinsurance premium is agreed betweenthe cedant and the reinsurer. It is not necessarily based on a fixed percentage of the premium of the underlying insurancecontracts.17 Readers should note that the assumptions in the examples (Scenarios 1 to 4) are highly simplified, which is for illustrationpurposes only. Accordingly, the fact pattern given may not be consistent with reality. For example, the examples assume that allthe underlying contracts and the RCH are incepted and recognized on the same date.18 Please refer to Section 2 of this publication, ‘Comparison between GMM for direct insurance contracts issued and GMM forRCH’, for references to journal entries relating to the RAs.(b) the date the entity recognizes an onerous group of underlying insurance contracts applyingHKFRS 17.25(c), if the entity entered into the related RCH in the group of RCH at or beforethat date.Notwithstanding HKFRS 17.62(a), an entity shall delay the recognition of a group of RCH thatprovide proportionate coverage until the date that any underlying insurance contract is initiallyrecognized, if that date is later than the beginning of the coverage period of the group of RCH.[HKFRS 17.62A].In this example, the initial recognition of the RCH is the beginning of the year, which is both thecommencement of the coverage period (HKFRS 17.62(a)) and the date of recognition of theunderlying contracts (HKFRS 17.62A). HKFRS 17.62(b) is not applicable as the underlyingcontracts are profitable.JE1 – Initial recognition of proportionate RCHHK$HK$DRARC – BEL – Claims recovery(a)

1,000DRARC – CSM(b)

CRARC – BEL –Reinsurance premium(c)

1,200(a)

ARC – BEL – Claims recovery is determined as follows:

= Expected claims on underlying contracts X % of Proportion of claims reinsured= HK$2,500 X 40%= HK$1,000The amount represents the estimates of PV of future cash inflows.(b)

ARC – CSM (debit balance to reflect the net cost position) is calculated below:

Initial recognition of CSM for RCHHK$Claims expected to be recovered from reinsurer (See (a) above)

1,000Reinsurance premium (i.e. cost of reinsurance, see (c) below)

(1,200)

CSM net cost (debit)

(200)

(c)

The amount represents the estimates of PV of future cash outflows arising from reinsurance premiumpayable to the reinsurer.The net impact of JE1 is Dr. ARC – CSM HK$200, Cr. ARC – BEL HK$200. According to HKFRS

17.10719, the estimates of PV of future cash inflows of HK$1,000 and the estimates of PV of futurecash outflows of HK$1,200, together with RA (ignored in this example) and CSM net cost ofHK$200 determined on initial recognition of RCH should be included in the disclosures.19 HKFRS 17.107 states that ‘For insurance contracts other than those to which the premium allocation approach described inHKFRS 17.53-59 or 69-70A has been applied, an entity shall disclose the effect on the statement of financial position separatelyfor insurance contracts issued and reinsurance contracts held that are initially recognised in the period, showing their effect atinitial recognition on: (a) the estimates of the present value of future cash outflows, showing separately the amount of theinsurance acquisition cash flows; (b) the estimates of the present value of future cash inflows; (c) the risk adjustment for non-financial risk; and (d) the contractual service margin’ (underline added).JE2 – Payment of reinsurance premiumHK$HK$DRARC – BEL – Reinsurancepremium(d)

1,200CRCash(d)

1,200(d)

The amount represents the reinsurance premium paid to the reinsurer. See JE3 & JE5 for the reinsurancepremium allocation to reflect the impact of such expense in P&L.End of the YearJE3 – Allocation of reinsurance premium paid to P&L – release of expected claims recoveryHK$HK$DRAllocation of reinsurancepremium paid (P&L)

(e)

1,000CRARC – BEL – Claimsrecovery(e)

1,000(e)

This entry records the release of claims recovery of HK$1,000 (see JE1(a)) into P&L for the period, whichis measured at the amount expected at the beginning of the period.JE4 – Actual recovery from reinsurerHK$HK$DRAIC – BEL – Claims recovery(f)

1,000CRAmount recoveredfrom reinsurer –Recoveries fromincurred claims (P&L)

(f)

1,000(f)

This entry records the recognition of the amount of claims recovered from the reinsurer according to theterms of RCH. The term ‘Recoveries from incurred claims’ is included in ‘Amounts recovered from reinsurer’for presentation and disclosures, applying HKFRS 17.86(a).JE5 – Allocation of reinsurance premium paid to P&L – release of CSM for RCH for theperiodHK$HK$DRAllocation of reinsurancepremium paid (P&L)

(g)

CRARC – CSM(g)

(g)

This entry records the release of CSM for RCH into P&L in the period (see JE1) because of services receivedfrom reinsurer as required by HKFRS 17.66(e).JE6 – Receipt of claims recovery from reinsurerHK$HK$DRCash(h)

1,000CRAIC – BEL – Claimsrecovery(h)

1,000(h)

It is assumed that the amount is received in the same financial year.Part 2 – Relevant impacts on the statement of financial positionThe following table demonstrates the relevant impacts on RCH recognized in the entity’s statementof financial position based on the journal entries explained in Part 1. The table is not intended toillustrate the presentation20 and disclosure requirements of HKFRS 17.Relevant impacts on the statement of financial position – RCHARCDr / (Cr)

AICDr / (Cr)

TotalDr / (Cr)

BELCSMTotal ARCBEL(a)

(b)

(d)

HK$JEHK$JEHK$HK$JEHK$Initial recognitionInitial recognition of RCH

(200)

---Payment of reinsurancepremium1,200-1,200-1,200End of the YearAllocation of reinsurancepremium paid to P&L– release of expectedclaims recovery(1,000)

-(1,000)

Recognition of recoveriesof incurred claims---1,0001,000Allocation of reinsurancepremium paid to P&L– release of CSM forRCH

(200)

Receipt of recoveries ofincurred claims---(1,000)

(1,000)

End of the Year-----20 The following are the key principles in presentation of RCH as required by HKFRS 17.78:

(a) RCH are presented separately from insurance contracts issued,(b) RCH are presented in the statement of financial position at a portfolio level of aggregation, and(c) Portfolios of RCH that are in an asset position are presented separately from those in a liability position.Part 3 – Relevant impacts on the statement of financial performanceThe following table demonstrates the relevant impacts on the entity’s statement of financialperformance21 based on the journal entries made in Part 1. The table illustrates the impacts on therelevant line items only and is not intended to illustrate the presentation and disclosurerequirements of HKFRS 17.Relevant impacts on the statement of financial performance(Dr) / CrHK$JEAllocation of reinsurance premium paid:

i.End of the YearAllocation of reinsurance premium paid(1,200)

3, 5Amounts recovered from reinsurer:

i.End of the YearActual recoveries from reinsurer[Note 1]1,000Net cost from RCH[Note 2]

(200)

NotesThe amount of HK$1,000 is the same as the expected claims recovery as calculated in JE1(a).The amount of HK$200 is the same as the net cost from RCH (i.e. cash in HK$1,000 less cash out HK$1,200).See JE1(b).21 An entity shall present income or expenses from RCH separately from the expenses or income from insurance contracts issuedin its statement of financial performance [HKFRS 17.82].Scenario 2: Proportionate RCH – net gain position, onerous underlying contractsAn entity enters into a reinsurance contract with a reinsurer for insurance coverage of its issuedinsurance contracts on a proportionate basis. It is expected that the entity will make a net gainfrom the RCH. The fact pattern and assumptions are set out below:

Fact Pattern and assumptionsHK$Onerous underlying insurance contractsCash flowsPremiums3,000Less: Expected claims(4,500)

Expected loss[Note 1](1,500)

Reinsurance contract held (RCH)

Cash flowsReinsurance premium to reinsurer(HK$3,000 X 40%)

1,200Proportion of claims reinsured and expectedclaims recovery40%Underlying insurance contracts and RCHAssumptionsFor simplicity:

RCH is entered into at the same time as the underlying contracts arerecognized, which is the beginning of the yearOne-year coverage22 for both RCH and underlying contracts. GMM isapplied, i.e. the cedant does not opt to apply PAA. The coverage period ofRCH starts at the beginning of the yearNo differences in expected and actual future cash flowsNo contracts will lapse before the end of the coverage periodNo changes in other estimates and all other amountsEffect of discounting, RA and risk of non-performance of reinsurer areignoredNo other cash flows other than premiums and claims recoveryNoteThe expected loss is recognized in P&L on initial recognition as the group of underlying contracts is onerous[HKFRS 17.47].Part 1 – illustration of journal entries for RCH with narrative explanationIn this example, given that the RCH provides proportionate coverage and the underlying contractsare onerous, the requirements of HKFRS 17.62(a), (b) and HKFRS 17.62A are relevant forconsideration in determining the initial recognition of the RCH. Applying the requirements, theentity recognizes the RCH at the beginning of the year, which is both the commencement date ofthe coverage period of the RCH (HKFRS 17.62(a)) and the date the entity recognizes the onerousunderlying contracts (HKFRS 17.62(b), 62A). Please refer to ‘Illustration of scenarios’ in the22 In Scenarios 2 to 4, it is assumed that the coverage periods for the RCH and the underlying contracts are both one yearresulting in the release of CSM and loss-recovery component for RCH being fully recognized in the same year. However, it isworth highlighting that the release patterns of CSM and loss-recovery component for RCH can be different under HKFRS 17.Please refer to ‘Notes for further insights’ after JE2 in Scenario 4 for more discussions.above for relevant discussions of HKFRS 17.62(b) in situations where the underlying contracts areonerous.In contrast to Scenario 1 in which the underlying contracts are profitable, Scenarios 2 to 4illustrate the recoveries of losses from RCH for the onerous underlying contracts.JE1 – Initial recognition of proportionate RCHHK$HK$DRARC – BEL – Claims recovery(excluding loss-recoverycomponent)

(a)

1,800CRARC – CSM(b)

CRARC – BEL –Reinsurance premium(c)

1,200(a)

ARC – BEL – Claims recovery (excluding loss-recovery component) is determined as follows:

= Expected claims on underlying contracts X % of Proportion of claims reinsured= HK$4,500 X 40%= HK$1,800The amount represents the estimates of PV of future cash inflows.(b)

ARC – CSM (credit balance to reflect the net gain position) is calculated below:

HK$Claims expected to be recovered from reinsurer (See (a) above)

1,800Reinsurance premium (i.e. cost of reinsurance, see (c) below)

(1,200)

CSM net gain (credit)

(c)

The amount represents the estimates of PV of future cash outflows arising from reinsurance premiumpayable to the reinsurer.The net impact of JE1 is Dr. ARC – BEL HK$600, Cr. ARC – CSM HK$600. According to HKFRS

17.107, the estimates of PV of future cash inflows (HK$1,800) and the estimates of PV of cashoutflows (HK$1,200) on initial recognition of RCH, together with RA (ignored in this example) andCSM recognized in JE1 together with any amounts recognized in JE2 on initial recognition of RCH(see the table in JE2(d) below) should be included in the disclosures.JE2 – Adjustment of CSM to recognize income from the RCH to match the onerous lossfrom the underlying contracts recognized on day 1HK$HK$DRARC – CSM(d)

CRAmounts recoveredfrom reinsurer –Recoveries of lossesfrom RCH (P&L)

(d)

As required by HKFRS 17.66A, an entity shall adjust the CSM of a group of RCH, and as a result recognizeincome, when the entity recognizes a loss on initial recognition of an onerous group of underlying insurancecontracts or on addition of onerous underlying insurance contracts to a group. Applying HKFRS 17.66A, anentity shall determine the adjustment to the CSM of a group of RCH and the resulting income by applying aformula specified in HKFRS 17.B119D (see Diagram 4).The amount of recoveries of losses from the onerous underlying contracts and related adjustment to CSMof RCH applying the formula is determined as follows:

= Loss recognized on underlying insurance contracts X % of claims on underlying insurance contracts theentity expects to recover from reinsurance= HK$1,500 X 40%= HK$600 (see JE2 above)

The result of ARC – CSM from JE1 and JE2 is shown below:

Initial recognition of CSM for RCHHK$CSM net gain (before the income recognized under HKFRS 17.66A) (See JE1)

Adjustment to CSM due to income recognized under HKFRS 17.66A (See JE2)

(600)

CSM net gain (after income recognized under HKFRS 17.66A)

-JE3 – Initial recognition of loss-recovery componentHK$HK$DRARC – BEL – Loss-recoverycomponent(e)

CRARC – BEL – Claimsrecovery (excludingloss-recoverycomponent)

(e)

The loss-recovery component of the asset for remaining coverage for RCH is established in accordancewith HKFRS 17.66B.JE4 – Payment of reinsurance premiumHK$HK$DRARC – BEL – Reinsurancepremium(f)

1,200CRCash(f)

1,200(f)

The amount represents the reinsurance premium paid to the reinsurer. See JE5 for the reinsurance premiumallocation to reflect the impact of such expense in P&L.End of the YearJE5 – Allocation of reinsurance premium paid to P&L – release of expected claimsrecoveryHK$HK$DRAllocation of reinsurancepremium paid (P&L)

(g)

1,200CRARC – BEL – Claimsrecovery (excludingloss-recoverycomponent)

(g)

1,200(g)

This entry records the release of expected claims recovery (excluding loss-recovery component) ofHK$1,200 (see JE1(a) and JE3) into P&L for the period.JE6 – Actual recovery from reinsurerHK$HK$DRAIC – BEL – Claims recovery(h)

1,800CRAmounts recoveredfrom reinsurer –Recoveries fromincurred claims (P&L)

(h)

1,800(h)

This entry records the recognition of the amount of claims recovered from the reinsurer according to theterms of RCH. The item ‘Recoveries from incurred claims’ is included in ‘Amounts recovered from reinsurer’for presentation and disclosures, applying HKFRS 17.86(a).JE7 – Reversal of recoveries of losses from RCHHK$HK$DRAmounts recovered fromreinsurer – Reversal ofrecoveries of losses from RCH(P&L)

(i)

CRARC – BEL – Loss-recovery component(i)

(i)

This entry records the reversal of ARC – BEL – Loss-recovery component that reflects the changes in theloss component of an onerous group of underlying contracts [HKFRS 17.B119F]. See related entry in JE3.The item ‘Reversal of recoveries of losses from RCH’ is included in ‘Amounts recovered from reinsurer’ forpresentation and disclosures, applying HKFRS 17.86(ba).JE8 – Receipt of claims recovery from reinsurerHK$HK$DRCash(j)

1,800CRAIC – BEL – Claimsrecovery(j)

1,800(j)

It is assumed that the amount is received in the same financial year.Part 2 – Relevant impacts on the statement of financial positionThe following table demonstrates the relevant impacts on RCH recognized in the entity’s statementof financial position based on the journal entries explained in Part 1. The table is not intended toillustrate the presentation and disclosure requirements of HKFRS 17.Relevant impacts on the statement of financial position – RCHARCDr / (Cr)

AICDr / (Cr)

TotalDr / (Cr)

BEL (excludingloss-recoverycomponent)

BEL (loss-recoverycomponent)

Total BELCSMTotal ARC(a)

(b)

(d)

(e) = (c) +(d)

(f)

(g) = (e) +(f)

HK$JEHK$JEHK$HK$JEHK$HK$JEHK$Initial recognitionInitial recognition ofRCH-

(600)

---Adjustment of CSMto match with theonerous loss fromthe underlyingcontracts on initialrecognition----Initial recognition ofloss-recoverycomponent

(600)

-----Payment ofreinsurancepremium1,200-1,200-1,200-1,200End of the YearAllocation ofreinsurancepremium paid toP&L – release ofexpected claimsrecovery(1,200)

-(1,200)

Recognition ofrecoveries ofincurred claims-----1,8001,800Reversal ofrecoveries oflosses from RCH-

(600)

Receipt ofrecoveries ofincurred claims-----(1,800)

(1,800)

End of the Year-------Part 3 – Relevant impacts on the statement of financial performanceThe following table demonstrates the relevant impacts on the entity’s statement of financialperformance based on the journal entries made in Part 1. The table illustrates the impacts on therelevant line items only and is not intended to illustrate the presentation and disclosurerequirements of HKFRS 17.Relevant impacts on the statement of financial performance(Dr) / Cr(Dr) / CrHK$HK$JEAllocation of reinsurance premium paid:

i.End of the YearAllocation of reinsurance premium paid(1,200)

Amounts recovered from reinsurer:

i.Initial recognitionGain recognized as a result of recoveries oflosses from RCHii. End of the YearActual recoveries from reinsurer1,800Less: reversal of recoveries of losses fromRCH

(600)

1,800[Note 1]Net gain from RCH[Note 2]NotesThe amount of HK$1,800 is the same as the expected claims recovery as calculated in JE1(a).The amount of HK$600 is the same as the net gain from RCH (i.e. cash in HK$1,800 less cash out HK$1,200).See JE1(b).Scenario 3: Non-proportionate RCH – net gain position, onerous underlying contractsAn entity enters into a reinsurance contract with a reinsurer for insurance coverage of its issuedinsurance contracts on a non-proportionate basis. It is expected that the entity will make a net gainfrom the RCH. The fact pattern and assumptions are set out below:

Fact pattern and assumptionsHK$Onerous underlying insurance contractsCash flowsPremiums3,000Less: Expected claims(4,500)

Expected loss[Note 1](1,500)

Reinsurance contract held (RCH)

Cash flowsReinsurance premium to reinsurer1,560Expected claims recovery1,800AssumptionsFor simplicity:

RCH is entered into at the same time as the underlying contracts arerecognized, which is the beginning of the yearOne-year coverage for both RCH and underlying contracts. GMM is applied,i.e. the cedant does not opt to apply PAA. The coverage period of RCHstarts at the beginning of the yearNo differences in expected and actual future cash flowsNo contracts will lapse before the end of the coverage periodNo changes in other estimates and all other amountsEffect of discounting, RA and risk of non-performance of reinsurer areignoredNo other cash flows other than premiums and claims recoveryNoteThe expected loss is recognized in P&L on initial recognition as the group of underlying contracts is onerous[HKFRS 17.47].Part 1 – illustration of journal entries for RCH with narrative explanationRegarding initial recognition of RCH, unlike Scenario 2, HKFRS 17.62A is not applicable inScenario 3 as the RCH does not provide proportionate coverage. For Scenario 3, applying therequirements of HKFRS 17.62, the entity recognizes the RCH at the beginning of the year, whichis both the commencement date of the coverage period of the RCH (HKFRS 17.62(a)) and thedate when the onerous underlying contracts are recognized (HKFRS 17.62(b)).JE1 – Initial recognition of non-proportionate RCHHK$HK$DRARC – BEL – Claims recovery(excluding loss-recoverycomponent)

(a)

1,800CRARC – CSM(b)

CRARC – BEL –Reinsurance premium(c)

1,560(a)

The amount of expected claims recovery is HK$1,800 in this example, which represents the estimates ofPV of future cash inflows.(b)

ARC – CSM (credit balance to reflect the net gain position) is calculated below:

HK$Claims expected to be recovered from reinsurer (See (a) above)

1,800Reinsurance premium (i.e. cost of reinsurance, see (c) below)

(1,560)

CSM net gain (credit)

(c)

The amount represents the estimates of PV of future cash outflows arising from reinsurance premiumpayable to the reinsurer.The net impact of JE1 is Dr. ARC – BEL HK$240, Cr. ARC – CSM HK$240. According to HKFRS

17.107, the estimates of PV of future cash inflows (HK$1,800) and the estimates of PV of futurecash outflows (HK$1,560) on initial recognition of RCH, together with RA (ignored in this example)

and CSM recognized in JE1 together with any amounts recognized in JE2 on initial recognition ofRCH (see the table in JE2(d) below) should be included in the disclosures.JE2 – Adjustment of CSM to recognize income from the RCH to match the onerous lossfrom the underlying contracts recognized on day 1HK$HK$DRARC – CSM(d)

CRAmounts recoveredfrom reinsurer –Recoveries of lossesfrom RCH (P&L)

(d)

% of claims on underlying insurance contracts the entity expects to recover from reinsurance:

= HK$1,800 / 4,500= 40%As required by HKFRS 17.66A and B119D, the calculation formula in Diagram 4 for determination of theamount of recoveries of losses from the onerous underlying contracts is applied below:

= Loss recognized on underlying insurance contracts X % of claims on underlying insurance contracts theentity expects to recover from reinsurance= HK$1,500 X 40%= HK$600 (see JE2 above)

The result of ARC – CSM from JE1 and JE2 is shown below:

Initial recognition of CSM for RCHHK$CSM net gain (before the income recognized under HKFRS 17.66A) (See JE1)

Adjustment to CSM due to income recognized under HKFRS 17.66A (See JE2)

(600)

CSM net cost (after income recognized under HKFRS 17.66A) (See JE8)

(360)

JE3 – Initial recognition of loss-recovery componentHK$HK$DRARC – BEL – Loss-recoverycomponent(e)

CRARC – BEL – Claimsrecovery (excludingloss-recoverycomponent)

(e)

The loss-recovery component of ARC for RCH is established in accordance with HKFRS 17.66B.JE4 – Payment of reinsurance premiumHK$HK$DRARC – BEL – Reinsurancepremium(f)

1,560CRCash(f)

1,560(f)

The amount represents the reinsurance premium paid to the reinsurer. See JE5 and JE8 for the reinsurancepremium allocation to reflect the impact of such expense in P&L.End of the YearJE5 – Allocation of reinsurance premium paid to P&L – release of expected claims recoveryHK$HK$DRAllocation of reinsurancepremium paid (P&L)

(g)

1,200CRARC – BEL – Claimrecovery (excludingloss-recoverycomponent)

(g)

1,200(g)

1,800CRAmounts recoveredfrom reinsurer –Recoveries fromincurred claims (P&L)

(h)

1,800(h)

(i)

CRARC – BEL – Loss-recovery component(i)

(i)

This entry records the reversal of ARC – BEL – Loss-recovery component that reflects the changes in theloss component of an onerous group of underlying contracts [HKFRS 17.B119F]. See related entry in JE3.The item ‘Reversal of recoveries of losses from RCH’ is included in ‘Amounts recovered from reinsurer’ forpresentation and disclosures, applying HKFRS 17.86(ba).JE8 – Allocation of reinsurance premium paid to P&L – release of ARC – CSM into P&LHK$HK$DRAllocation of reinsurancepremium paid (P&L)

(j)

CRARC – CSM(j)

(j)

This entry records the release of ARC – CSM into P&L for the period (see the table under JE2) applyingHKFRS 17.66(e).JE9 – Receipt of claims recovery from reinsurerHK$HK$DRCash(k)

1,800CRAIC – BEL – Claimsrecovery(k)

1,800(k)

It is assumed that the amount is received in the same financial year.Part 2 – Relevant impacts on the statement of financial positionThe following table demonstrates the relevant impacts on RCH recognized in the entity’s statementof financial position based on the journal entries explained in Part 1. The table is not intended toillustrate the presentation and disclosure requirements of HKFRS 17.Relevant impacts on the statement of financial position – RCHARCDr / (Cr)

AICDr / (Cr)

TotalDr / (Cr)

BEL (excludingloss-recoverycomponent)

BEL (loss-recoverycomponent)

Total BELCSMTotal ARC(a)

(b)

(d)

(e) = (c) +(d)

(f)

(g) = (e) +(f)

HK$JEHK$JEHK$JEHK$HK$JEInitial recognitionInitial recognition ofRCH-

(240)

---Adjustment of CSMto match with theonerous loss fromthe underlyingcontracts on initialrecognition----Initial recognition ofloss-recoverycomponent [Note 1]

(600)

-----Payment ofreinsurancepremium1,560-1,560-1,560-1,560End of the YearAllocation ofreinsurancepremium paid toP&L – release ofexpected claimsrecovery(1,200)

-(1,200)

Relevant impacts on the statement of financial position – RCHARCDr / (Cr)

AICDr / (Cr)

TotalDr / (Cr)

BEL (excludingloss-recoverycomponent)

BEL (loss-recoverycomponent)

Total BELCSMTotal ARC(a)

(b)

(d)

(e) = (c) +(d)

(f)

(g) = (e) +(f)

HK$JEHK$JEHK$JEHK$HK$JERecognition ofrecoveries ofincurred claims-----1,8001,800Reversal ofrecoveries oflosses from RCH-

(600)

Allocation ofreinsurancepremium paid toP&L – release ofARC – CSM---

(360)

Receipt ofrecoveries ofincurred claims-----(1,800)

(1,800)

End of the Year-------NoteJE2 and JE3 refer to the same amount of HK$600. The initial recognition of loss-recovery component (HK$600)

as referred to in JE3 is the direct result of HK$600 recognized in P&L under JE2.Part 3 – Relevant impacts on the statement of financial performanceThe following table demonstrates the relevant impacts on the entity’s statement of financialperformance based on the journal entries made in Part 1. The table illustrates the impacts on therelevant line items only and is not intended to illustrate the presentation and disclosurerequirements of HKFRS 17.Relevant impacts on the statement of financial performance(Dr) / Cr(Dr) / CrHK$HK$JEAllocation of reinsurance premium paid:

i.End of the YearAllocation of reinsurance premium paid(1,560)

5, 8Amounts recovered from reinsurer:

i.Initial recognitionGain recognized as a result of recoveries oflosses from RCHii. End of the YearActual recoveries from reinsurer1,800Less: reversal of recoveries of losses fromRCH

(600)

1,800[Note 1]Net gain from RCH[Note 2]NotesThe amount of HK$1,800 is the same as the expected claims recovery as stated in JE1(a).The amount of HK$240 is the same as the net gain from RCH (cash in HK$1,800 less cash out HK$1,560).See JE1(b).Scenario 4: Non-proportionate RCH – net cost position, onerous underlying contractsAn entity enters into a reinsurance contract with a reinsurer for insurance coverage of its issuedinsurance contract on a non-proportionate basis. It is expected that the entity will incur a net costfrom the RCH. The fact pattern and assumptions are set out below:

Fact pattern and assumptionsHK$Onerous underlying insurance contractsCash flowsPremiums3,000Less: Expected claims(4,500)

Expected loss[Note 1](1,500)

Reinsurance contract held (RCH)

Cash flowsReinsurance premium to reinsurer1,950Expected claims recovery1,800For simplicity:

RCH is entered into at the same time as the underlying contracts arerecognized, which is the beginning of the yearOne-year coverage for both RCH and underlying contracts. GMM is applied,i.e. the cedant does not opt to apply PAA. The coverage of the RCH startsat the beginning of the yearNo differences in expected and actual future cash flowsNo contracts will lapse before the end of the coverage periodNo changes in other estimates and all other amountsEffect of discounting, RA and risk of non-performance of reinsurer areignoredNo other cash flows other than premiums and claims recoveryNoteThe expected loss is recognized in P&L on initial recognition as the group of underlying contracts is onerous[HKFRS 17.47].Part 1 – illustration of journal entries for RCH with narrative explanationInitial recognitionSame as Scenario 3, which is also a non-proportionate RCH, the initial recognition of RCH in thisexample is at the beginning of the year applying HKFRS 17.62. However, unlike Scenario 3,Scenario 4 has a net cost positon for the RCH.JE1 – Initial recognition of non-proportionate RCHHK$HK$DRARC – BEL – Claims recovery(excluding loss-recoverycomponent)

(a)

1,800DRARC – CSM(b)

CRARC – BEL –Reinsurance premium(c)

1,950(a)

The expected claims recovery is HK$1,800 in this example, which represents the estimates of PV of futurecash inflows.(b)

ARC – CSM (debit balance to reflect the net cost position) is calculated below:

HK$Claims expected to be recovered from reinsurer (See (a) above)

1,800Reinsurance premium (i.e. cost of reinsurance, see (c) below)

(1,950)

CSM net cost (debit)

(150)

(c)

The amount represents the estimates of PV of future cash outflows arising from reinsurance premiumpayable to the reinsurer.The net impact of JE1 is Dr. ARC – CSM HK$150, Cr. ARC – BEL HK$150. According to HKFRS

17.107, the estimates of PV of future cash inflows (HK$1,800) and the estimates of PV of futurecash outflows (HK$1,950), together with RA (ignored in this example) and CSM recognized in JE1together with any amounts recognized in JE2 on initial recognition of RCH (see the table in JE2(d)

below) should be included in the disclosures.JE2 – Adjustment of CSM to recognize income from the RCH to match the onerous lossfrom the underlying contracts recognized on day 1HK$HK$DRARC – CSM(d)

CRAmounts recoveredfrom reinsurer –Recoveries of lossesfrom RCH (P&L)(see☼)

(d)

% of claims on underlying insurance contracts the entity expects to recover from reinsurance:

= HK$1,800 / 4,500= 40%As required by HKFRS 17.66A and B119D, the calculation formula in Diagram 4 for determination of theamount of recovery of loss from onerous underlying contracts is applied as follows:

= Loss recognized on underlying insurance contracts X % of claims on underlying insurance contracts theentity expects to recover from reinsurance= HK$1,500 X 40%= HK$600 (see JE2 above)

Notes for further insights☼Compared to Scenario 3, Scenario 4 demonstrates a net cost position on initial recognition of the RCH.It is worth noting that the recognition of the ‘day one’ gain (by creating a loss-recovery component)(seeJE2 and JE3) shall be made irrespective of whether the RCH is a net gain or net cost on initial recognition.The IASB considered a view that the amendment described in HKFRS 17.B119D and BC315A shouldapply only when a RCH is in a net gain position – in other words, when an entity expects to receive fromthe reinsurer claim recoveries that are higher than the premium the entity pays to the reinsurer. The IASBdisagreed with this view because an entity has a right to recover claims from the RCH regardless ofwhether claim recoveries are expected to be higher or lower than the premiums the entity pays to thereinsurer [HKFRS 17.BC315K].The result of ARC – CSM from JE1 and JE2 is shown below:

Initial recognition of CSM for RCHHK$CSM net cost (before the income recognized under HKFRS 17.66A) (See JE1)

(150)

Adjustment to CSM due to income recognized under HKFRS 17.66A) (See JE2)

(600)

CSM net cost (after income recognized under HKFRS 17.66A) (See ☼ below,JE8)

(750)

Notes for further insights☼According to HKFRS 17.66A, the loss-recovery component adjusts the CSM for RCH at initial recognition.Therefore, as shown in the above table, if the CSM is in a net cost position, the loss-recovery componentis an amount that is added to the CSM calculated applying HKFRS 17.65. However, the release patternwill be different for loss-recovery component and CSM. CSM recognized based on HKFRS 17.65 will berecognized in profit or loss based on coverage units whereas the loss-recovery component associatedwith the same RCH group will be reversed to P&L applying HKFRS 17.B119F (i.e. to reflect changes inthe loss component of an onerous group of underlying insurance contracts).Readers are also recommended to refer to the Illustrative Example 12C of HKFRS 17, whichdemonstrates the initial and subsequent measurement of a group of RCH when one of the groups ofunderlying insurance contracts is onerous, applying HKFRS 17.66A-66B and B119C-B119F.JE3 – Initial recognition of loss-recovery componentHK$HK$DRARC – BEL – Loss-recoverycomponent(e)

CRARC – BEL – Claimsrecovery (excludingloss recoverycomponent)

(e)

1,950CRCash(f)

1,950(f)

(g)

1,200CRARC – BEL – Claimrecovery (excludingloss-recoverycomponent)

(g)

1,200(g)

1,800CRAmounts recoveredfrom reinsurer –Recoveries fromincurred claims (P&L)

(h)

1,800(h)

(i)

CRARC – BEL – Loss-recovery component(i)

(i)

This entry records the reversal of ARC – BEL – Loss-recovery component that reflects the changes in theloss component of an onerous group of underlying contracts [HKFRS 17.B119F]. See related entry in JE3.The item ‘Reversal of recoveries of losses from RCH’ is included in ‘Amounts recovered from reinsurer’, forpresentation and disclosures, applying HKFRS 17.86(ba).JE8 – Allocation of reinsurance premium paid to P&L – release of ARC – CSM into P&LHK$HK$DRAllocation of reinsurancepremium paid (P&L)

(j)

CRARC – CSM(j)

(j)

This entry records the release of ARC – CSM of HK$750 (see the table under JE2) into P&L for the periodapplying HKFRS 17.66(e).JE9 – Receipt of claims recovery from reinsurerHK$HK$DRCash(k)

1,800CRAIC – BEL – Claimsrecovery(k)

1,800(k)

It is assumed that the amount is received in the same financial year.Part 2 – Relevant impact on the statement of financial positionThe following table demonstrates the relevant impacts on RCH recognized in the entity’s statementof financial position based on the journal entries explained in Part 1. The table is not intended toillustrate the presentation and disclosure requirements of HKFRS 17.Relevant impacts on the statement of financial position – RCHARCDr / (Cr)

AICDr / (Cr)

TotalDr / (Cr)

BEL (excludingloss-recoverycomponent)

BEL (loss-recoverycomponent)

Total BELCSMTotal ARC(a)

(b)

(d)

(e) = (c) +(d)

(f)

(g) = (e) +(f)

HK$JEHK$JEHK$HK$JEHK$HK$JEHK$Initial recognitionInitial recognition ofRCH

(150)

---Adjustment of CSMto match with theonerous loss fromthe underlyingcontracts on initialrecognition----Initial recognition ofloss-recoverycomponent [Note 1]

(600)

-----Payment ofreinsurancepremium1,950-1,950-1,950-1,950End of the YearAllocation ofreinsurancepremium paid toP&L – release ofexpected claimsrecovery(1,200)

-(1,200)

Recognition ofrecoveries ofincurred claims-----1,8001,800Reversal ofrecoveries oflosses from RCH-

(600)

Allocation ofreinsurancepremium paid toP&L – release ofARC – CSM---

(750)

Receipt ofrecoveries ofincurred claims-----(1,800)

(1,800)

End of the Year-------NoteJE2 and JE3 refer to the same amount of HK$600. The initial recognition of loss-recovery component (HK$600)

as referred to in JE3 is the direct result of HK$600 recognized in P&L under JE2.Part 3 – Statement of financial performanceThe following table demonstrates the relevant impacts on the entity’s statement of financialperformance based on the journal entries made in Part 1. The table illustrates the impacts on therelevant line items only and is not intended to illustrate the presentation and disclosurerequirements of HKFRS 17.Relevant impacts on the statement of financial performance(Dr) / Cr(Dr) / CrHK$HK$JEAllocation of reinsurance premium paid:

i.End of the YearAllocation of reinsurance premium paid(1,950)

5, 8Amounts recovered from reinsurer:

i.Initial recognitionGain recognized as a result of recoveries oflosses from RCHii. End of the YearActual recoveries from reinsurer1,800Less: reversal of recoveries of losses fromRCH

(600)

1,800[Note 1]Net cost from RCH

(150)

[Note 2]NotesThe amount of HK$1,800 is the same as the expected claims recovery as stated in JE1(a).The amount of HK$150 is the same as the net cost from RCH (cash in HK$1,800 less cash out HK$1,950).See JE1(b).

2.Comparison between GMM for direct insurance contracts issued and GMM for RCHGMM is the default approach for all insurance contracts issued by an entity, except for those forwhich VFA or PAA applies. A modified version of the GMM is applied by cedants for reinsurancecontracts they held, as discussed in Section 1 above23. RCH is required to be accounted forseparately from the underlying contracts and therefore accounting mismatches 24 may arisebetween the RCH and the underlying contracts when different measurement models are appliedto RCH (GMM or PAA) and the underlying contracts (GMM, PAA or VFA).The following table provides a high-level comparison between the GMM for insurance contractsissued and GMM for RCH.Direct insurance contracts issuedunder GMMRCH under GMMOnerouscontractsDifferent accounting requirements foronerous contracts and profitablecontracts issued and therefore thegrouping of insurance contracts. See‘Grouping in a portfolio’ below.The principal requirements of HKFRS 17for grouping of insurance contracts thatapply to direct insurance contractsissued also apply to RCH. See‘Grouping in a portfolio’ below. However,a RCH cannot be considered asonerous. Instead, an entity either:

incurs a net cost, ormakes a net gainfrom purchasing the reinsurancecontract.There are additional requirements forrecognizing and measuring loss-recovery component for RCH.Grouping in aportfolioAt a minimum, a portfolio is divided into:

a) a group of contracts that are onerousat initial recognition, if any;

b) a group of contracts that at initialrecognition have no significantpossibility of becoming oneroussubsequently, if any; andc) a group of remaining contracts in theportfolio, if any.At a minimum, a portfolio is divided into:

a) a group of contracts on which thereis a net gain at initial recognition, ifany;

b) a group of contracts on which atinitial recognition there is nosignificant possibility of a net gainarising subsequently, if any; andc) a group of remaining contracts inthe portfolio, if any.Timing ofinitialrecognitionRecognized at the earliest of:

a) the beginning of the coverage periodof the group of insurance contracts;

b) the date the first payment from apolicyholder in the group becomesdue; andc) for a group of onerous contracts,when the group becomes onerous.Recognized from the earlier of thefollowing:

a) at the beginning of the coverageperiod of the group of RCH; andb) the date the entity recognizes anonerous group of underlyinginsurance contracts applyingHKFRS 17.25(c), if the entity23 As discussed in Section 1, an entity may use PAA to simplify the measurement of RCH provided that the qualifying criteria aresatisfied at the inception of the group. VFA is not applicable for RCH and reinsurance contracts issued as cedant and reinsurerdo not share the returns on underlying items and the cedant also does not receive investment-related services from the reinsurer.24 In situation where the underlying insurance contracts issued are measured using VFA, a certain level of accounting mismatchcould be reduced if risk mitigation is applied. Please refer to HKFRS 17.B115-B118 and BC250-BC256H for detailed requirements.Direct insurance contracts issuedunder GMMRCH under GMMentered into the related RCH in thegroup of RCH at or before that date.Notwithstanding (a), an entity shall delaythe recognition of a group of RCH thatprovide proportionate coverage until thedate that any underlying insurancecontract is initially recognized, if thatdate is later than the beginning of thecoverage period of the group of RCH.Measurement –contractboundaryCash flows are within the boundary of aninsurance contract if they arise fromsubstantive rights and obligations thatexist during the reporting period in whichthe entity can compel the policyholder topay the premiums or in which the entityhas a substantive obligation to providethe policyholder with insurance contractservices.25The same HKFRS 17 requirement thatapplies to direct insurance contractsissued also applies to RCH. However,contract boundaries for RCH may differfrom those of the underlying directinsurance contracts because of differentterms and conditions of RCH.Cash flows are within the boundary of aRCH if they arise from substantive rightsand obligations that exist during thereporting period in which the reinsurercan compel the entity to pay thepremiums or in which the reinsurer hasa substantive obligation to provide theentity with insurance contract services.Measurement –estimates offuture cashflowsRepresents present value of all futurecash flows within the boundary of eachcontract in the group. The estimates offuture cash flows shall:

a) Be expected value (i.e. theprobability-weighted mean) of the fullrange of possible outcomes;

b) Reflect the perspective of the entity,provided that the estimates areconsistent with observable marketprices for market variables;

c) Be current – the estimates reflectconditions at the measurement date;

andd) Be explicit – estimate the riskadjustment for non-financial riskseparately from the other estimatesThe same HKFRS 17 requirement thatapplies to direct insurance contractsissued also applies to RCH. However, inapplying the measurement requirementsof HKFRS 17.32-36 to RCH, to theextent that the underlying contracts arealso measured applying thoseparagraphs, the entity shall useconsistent assumptions26 whendetermining estimates of present valueof future cash flows for a group of RCHand those of the underlying contracts.An adjustment is included in theexpected present value of future cashflows for the risk that the reinsurer mayfail to satisfy its obligations under theRCH (‘non-performance risk’)27.Changes in FCF due to changes in non-performance risk are reflected in P&Lwhen they occur, instead of adjusting25 Refer to HKFRS 17.34, B61-B71 for the detailed requirements.26 At its February 2018 meeting (Agenda paper no.7, log#S17), the TRG agreed that ‘consistent’ in IFRS 17.63 does notnecessarily mean ‘identical’. The extent of dependency between the cash flows of RCH and the underlying contracts should beevaluated when applying IFRS 17.63.27 Effect of risk of non-performance by the reinsurer includes the effects of collateral and losses from disputes [HKFRS 17.63].This is because cedant faces the risk that the reinsurer may default, or may dispute whether a valid claim exists for an insuredevent. HKFRS 17 requires the estimates of expected credit losses to be based on expected values. Hence, estimates of theamounts and timing of cash flows are probability-weighted outcomes after calculating the effect of credit losses [HKFRS

17.BC308].Direct insurance contracts issuedunder GMMRCH under GMMNo non-performance risk of the insurer isreflected in the FCF of insurancecontracts issued.CSM as those changes do not relate tofuture service.Measurement –riskadjustment fornon-financialriskReflects the compensation an entityrequires for bearing the uncertainty aboutthe amount and timing of cash flows fromnon-financial risk as the entity fulfils theinsurance contracts (i.e. an outflow).Reflects the amount of risk transferredfrom insurer (i.e. cedant, the holder ofthe group of reinsurance contracts) toreinsurer (i.e. inflow).Measurement –CSMRepresents unearned profit the entity willrecognize as it provides services in thefuture.At initial recognition, CSM is determinedas the amount that results in no incomeor expense arising from:

(a) initial recognition of FCF measured byapplying HKFRS 17.32-37;

(b) any cash flows arising from thecontracts in the group at that date;

(c) the derecognition at the date of initialrecognition of (i) any asset forinsurance acquisition cash flowsapplying HKFRS 17.28C; and (ii) anyother asset or liability previouslyrecognized for cash flows related tothe group of contracts as specified inHKFRS 17.B66A.At the reporting period end, it is adjustedto reflect a number of items, including theeffect of any new contracts to the group,interest accretion, changes in FCFrelating to future service, effect ofcurrency exchange differences and theamount recognized as insurance revenuebecause of transfer of services in theperiod [HKFRS 17.44].The amount recognized as insurancerevenue because of transfer of services inthe period is determined by the allocationof the CSM remaining at the reportingperiod end (before any allocation) overthe current and remaining coverageperiod of the group of contracts based oncoverage units applying HKFRS 17.B119.HKFRS 17 prohibits CSM to be negativeand hence expected losses on a group ofinsurance contracts issued is recognizedimmediately in P&L on initial recognitionof loss component.The same HKFRS 17 requirement thatapplies to direct insurance contractsissued also applies to RCH except forareas where HKFRS 17 has a specificrequirement.Represents the net cost (sometimes netgain) of purchasing reinsurance that theentity will recognize as it receivesservices under RCH. However, if theRCH covers events that have alreadyoccurred, the net cost at initialrecognition is recognized immediately inP&L.Adjusts the CSM, and as a resultrecognizes a gain when an entityrecognizes a loss on initial recognition ofan onerous group of underlyinginsurance contracts or on addition ofonerous underlying insurance contractsto a group [HKFRS 17.66A]. HKFRS

17.B119C further requires that HKFRS

17.66A applies, if and only if, the RCH isentered into before or at the same timeas the onerous underlying insurancecontracts are recognized.At the reporting end, it is adjusted for anumber of items, including the effect ofnew contracts added to the group,interest accretion, income recognized inP&L applying HKFRS 17.66A, changesin FCF, effect of currency exchangedifferences and the amount recognizedin P&L because of receipt of services inthe period, etc. [HKFRS 17.66] SeeDiagram 3 for the relevant requirements.The amount recognized in P&L becauseof services received in the period isdetermined by the allocation of the CSMremaining at the end of the reportingperiod (before any allocation) over thecurrent and remaining coverage periodof the group of RCHs based oncoverage units applying HKFRS

17.B119.Direct insurance contracts issuedunder GMMRCH under GMMJournal entries(assuming noIACF, no timevalue of moneyand otherfinancial risksare negligible)

The following journal entries refer to thebase scenario discussed in Section 1.1 ofthe previous publication on accounting fordirect insurance contracts issued underGMM:

Initial recognitionDr. LRC – BELCr. LRC – RACr. LRC – CSM<Initial recognition of insurance contractsissued>Dr. CashCr. LRC – BEL<Receipt of premium received>At year endDr. LRC – RACr. Insurance revenue<Release of risk adjustment for riskexpired>Dr. LRC – BELCr. Insurance revenue<Release of expected claims>Dr. LRC – CSMCr. Insurance revenue<Release of CSM over the coverage periodbased on coverage units>Dr. Insurance service expensesCr. LIC – BEL<Recognition of actual incurred claims>Dr. Insurance service expensesCr. LIC – RA<Recognition of related risk adjustmentduring the period>Dr. LIC – BELCr. Cash<Payment of actual incurred claims>Dr. LIC – RACr. Insurance service expenses<Release of related risk adjustment>The following entries are summarizedfrom Scenario 1 28 in this publication,which discusses the journal entries foraccounting for RCH with profitableunderlying contacts. To ensurecomparability with the entries for directinsurance contracts shown in the leftcolumn, the relevant entries on RAs arealso provided below:

Initial recognition of proportionate RCHwith profitable underlying contracts(assume no other cash flows other thanclaims recovery and reinsurancepremium and no underlying contractsare onerous)

Dr. ARC – BEL – Claims recoveryDr. ARC – RADr. ARC – CSM*Cr. ARC – BEL – Reinsurance premium<Initial recognition of RCH under net costposition>* If net gain position, then Cr. ARC – CSM.Dr. ARC – BEL – Reinsurance premiumCr. Cash<Payment of reinsurance premium>At year endDr. Allocation of reinsurance premiumpaid (P&L)

Cr. ARC – BEL – Claims recovery<Release of expected recoveries to P&L>Dr. Allocation of reinsurance premiumpaid (P&L)

Cr. ARC – RA<Release of RA to P&L>Dr. Allocation of reinsurance premiumpaid (P&L)

Cr. ARC – CSM<Release of CSM net cost>Dr. AIC – BEL – Claims recoveryCr. Amounts recovered from reinsurer –Recoveries from incurred claims (P&L)

<Recognition of actual claims recoveredfrom reinsurer>Dr. AIC – RACr. Amounts recovered from reinsurer(P&L)

<Recognition of related RA during theperiod>28 For the ‘RCH under GMM’ column, RA is ignored in Scenario 1, which was discussed earlier in this publication.Direct insurance contracts issuedunder GMMRCH under GMMDr. CashCr. AIC – BEL – Claims recovery<Receipt of actual claims from reinsurer>Dr. Amounts recovered from reinsurer(P&L)

Cr. AIC – RA<Release of related risk adjustment>About the Standard Setting DepartmentThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only body authorized bylaw to set and promulgate standards relating to financial reporting, auditing, ethics andsustainability disclosures for professional accountants in Hong Kong. The due process documentsof the Standard Setting Department (SSD) explain the processes and procedures for developinglocal standards and adopting international standards.To find out more about how SSD contributes to international standard-setting, please visit:

https://www.hkicpa.org.hk/en/Standards-setting/Standards/How-we-set-standards-and-contribute-to-international-standardsTo access SSD’s latest publications and webcasts, please visit:

https://www.hkicpa.org.hk/en/Standards-setting/Standards/Whats-News/2023Connect with us on social media:

HKICPA SSD@hkicpa.officialThis guidance is developed by the SSD of the HKICPA and is for general reference only. TheHKICPA, its staff, Council and its committees do not accept any responsibility or liability in respectof the publication or any consequence that may arise from any person acting or refraining fromaction as a result of any materials in the publication. Members of the HKICPA and other users ofthis publication should also read the full HKFRS Standard, as found in the HKICPA Members’Handbook for further reference and seek professional advice where necessary when applying thereferences contained in this publication. The SSD welcomes your comments on this publication.They can be sent to commentletters@hkicpa.org.hk.2186_20231117AuthorCarrie LauAssociate Director,Standard Setting,HKICPAHong Kong Institute of Certified Public Accountants37th Floor, Wu Chung House213 Queen’s Road East, Wanchai, Hong KongTel: (852) 2287 7228Fax: (852) 2865 6603Email: hkicpa@hkicpa.org.hkWebsite: www.hkicpa.org.hkThe author thanks members of the Financial Reporting Standards Committee and the InsuranceAdvisory Panel and their supporting teams for their input in reviewing this publication.

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Educational Publication: HKFRS 17 Insurance Contracts – Journal Entries on Reinsurance Contracts Held

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