6.3.2.6. Reinsurance contracts

A reinsurance contract is an insurance contract issued by one entity (the reinsurer) to compensate another entity (the holder) for claims arising from one or more insurance contracts issued by that other entity (underlying contracts).

All reinsurance contracts issued by the PZU Group transfer significant insurance risk onto the reinsurer; therefore, they are considered reinsurance contracts held within the meaning of IFRS 17, and IFRS 17 is applied for their measurement.

The PZU Group identifies, classifies, measures and presents reinsurance contracts held under the same principles as insurance contracts, with the following key exceptions:

• reinsurance contracts held are divided into three profitability groups:
  • contracts with net profit on initial recognition;
  • contracts with net expense without significant possibility of net profit following initial recognition;
  • other contracts with net expense with significant possibility of net profit following the initial recognition;
• Cash flows are within the contract boundary if they arise from substantive rights and obligations that exist during the reporting period in which the entity:
  • is obliged to pay amounts to the reinsurer; or
  • has a material right to avail itself of the reinsurer’s services;
• the following models are applied to measure reinsurance contracts held:
  • general measurement model (GMM);
  • premium allocation approach (PAA);
• reinsurance contracts held are measured separately from their underlying insurance contracts. The entity uses consistent assumptions to measure the estimates of the present value of the future cash flows for the group of reinsurance contracts held and the estimates of the present value of underlying insurance contracts. Apart from the consistent assumptions, the PZU Group applies the following modifications to measure the estimates of the present value of cash flows for reinsurance contracts held, compared to underlying insurance contracts:
  • the estimates of the present value of the future cash flows for the group of reinsurance contracts held include the effect of any risk of non-performance by the issuer of the reinsurance contract, including the effects of collateral and losses from disputes;
  • estimated risk adjustment for non-financial risk is determined so that it represents the amount of risk being transferred by the holder to the reinsurer;
• requirements for determining the contractual service margin on initial recognition are modified in relation to reinsurance contracts held to reflect the fact that there is no unearned profit in such groups of contracts, but instead a net cost or net gain on purchasing the reinsurance. In light of the foregoing, on initial recognition:
  • the PZU Group recognizes net cost or net gain on purchasing the group of reinsurance contracts held as a contractual service margin, measured at an amount equal to the sum of the fulfilment cash flows, the amount derecognized at that date of any asset or liability previously recognized for cash flows related to the group of reinsurance contracts held, and any cash flows arising at that date; unless
  • the net cost of purchasing reinsurance coverage relates to events that occurred before the purchase of the group of reinsurance contracts held, in which case such a cost is immediately recognized in profit or loss as an expense.

Furthermore, if losses from onerous insurance contracts are recognized on initial recognition, the PZU Group recognizes gain on reinsurance contracts held to the extent in which the reinsurance contracts held have been concluded before or at the same time as underlying contracts. If an entity may establish a loss-recovery component on initial recognition, the income related to it adjusts the initial contractual service margin;

• in respect of reinsurance contracts held, the PZU Group’s consolidated statement of financial position, consolidated profit and loss account, and consolidated comprehensive income statement separately present:
  • net expenses on reinsurance contracts held:
    • allocation of reinsurance premiums – the consideration to which the reinsurer expects to be entitled in exchange for services provided in the period;
    • amounts due from reinsurers: reimbursement of claims incurred in the current period, excluding any investment components; reimbursement of expenses incurred in the current period; changes related to past service; loss recovery component and changes in assumptions (so-called unlocking) of the loss recovery component;
  • Reinsurance finance income or expenses:
    • the effect of the time value of money;
    • the effect of financial risk.