Calculation of UPR when 100% of the GWP has been ceded to a Reinsurer

[Acti]

1. Background / context
a) A GI company has a single line type of business
b) The premium is a single premium to cover a 10 year period of risk (latent defect type of products)
c) Assume the GWP is £100m
d) All the GWP is ceded to a Reinsurer. The reinsurer pays a "placement fee" up front of 25% of GWP to the insurer.
e) The movement is £100m from Ins. co. to RI, and £25m (placement fee) paid back to Ins. co by RI.
f) In effect the placement fee is deemed to be 100% earned atthe signing of the contract

2. Questions:
a) Assume that the premium is earned linearly (i.e at the end of the first year 10% has been earned and 90% unearned).
b) is the UPR 90% of GWP (£100m) or 90% of GWP net of placement fee?: i.e is the UPR £90m or £67.5m = (90% of £75m).

3. Additional observations
I appreciate that there normally the UPR is calculated on GWP net of acquisition cost, but in this instance the "placement fee" paid by the RI Co. is not an acquisition cost for the Ins. Co.

 

[GemmaHayes]

Interesting question, it looks topical with IFRS 17 around the corner. I'm not an expert on this topic under whatever GAAP ye report under at present. I would always consider the cashflows and liabilities of my contract and how I wish to earn my risk at outset. I would guess ye would want to earn the placement fee over ten years rather than upfront irrespective of cashflows received. I'd calculate my URR at each accounting date and set up an AURR if I dipped below my retro net prem reserves under old IFRS 4 test. Far from a definitive answer tho

 

[Acti]

Interesting question, it looks topical with IFRS 17 around the corner. I'm not an expert on this topic under whatever GAAP ye report under at present. I would always consider the cashflows and liabilities of my contract and how I wish to earn my risk at outset. I would guess ye would want to earn the placement fee over ten years rather than upfront irrespective of cashflows received. I'd calculate my URR at each accounting date and set up an AURR if I dipped below my retro net prem reserves under old IFRS 4 test. Far from a definitive answer tho

Thanks GH. Indeed my thinking was not too far from yours. I was very surprised by the placement fee being earned 100% upfront (over a 10 years SP contract). Most unusual particularly on latent defect type of insurance. Thanks also for your observation on setting an AURR if retro dips below net premium reserves. Btw it is IFRS17 driven.

 

[GemmaHayes]

Yes, it'd be interesting to hear other feedback under IFRS 17 as I believe reinsurance and gross positions are separate due to separate contracts in place so position may not be aligned.
I guess you are considering the placement fee as a fronting fee at present but you would still be directly on the hook if a latent risk arises and default risk increases with time

 

[Katherine Young]

A further update on this.

The IASB is has now agreed to allow some deferral of acquisitions. It also now recognises gains on reinsurance contracts that cover onerous (ie loss-making) business, effectively changing the calculation to one based on expected cashflows and largely resolving the mismatch between RI and the underlying contracts.

For more information see https://www.theactuary.com/news/201...utm_source=Adestra&utm_medium=email&utm_term=.

All probably beyond SP7. More on this in SA3 ...