Wikilah admin: Created page with "{{Quiz/start}} {{Quiz | topic = Reinsurance as the mirror image: the insurer is the customer | question = AXA France underwrites a portfolio of 8,000 residential property contracts along the Mediterranean coast between Marseille and Nice, exposed to wildfire and storm risk. To limit its exposure, AXA France enters into a reinsurance treaty with a large European reinsurer. Under IFRS 17, how does AXA France present this reinsurance contract on its balance..."

2026-03-31T16:41:46Z

Created page with "{{Quiz/start}} {{Quiz | topic = Reinsurance as the mirror image: the insurer is the customer | question = AXA France underwrites a portfolio of 8,000 residential property contracts along the Mediterranean coast between Marseille and Nice, exposed to wildfire and storm risk. To limit its exposure, AXA France enters into a reinsurance treaty with a large European reinsurer. Under IFRS 17, how does AXA France present this reinsurance contract on its balance..."

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{{Quiz/start}}

{{Quiz
| topic = Reinsurance as the mirror image: the insurer is the customer
| question = AXA France underwrites a portfolio of 8,000 residential property contracts along the Mediterranean coast between Marseille and Nice, exposed to wildfire and storm risk. To limit its exposure, AXA France enters into a reinsurance treaty with a large European reinsurer. Under IFRS 17, how does AXA France present this reinsurance contract on its balance sheet?
| option_a = As a reduction of the insurance contract liability, netted against the underlying portfolio
| option_b = As a separate reinsurance asset, presented independently from the underlying insurance liability
| option_c = As a contingent asset disclosed only in the notes to the financial statements
| option_d = As an offset within equity, since reinsurance reduces risk
| correct_answer = b
| explanation = IFRS 17 requires reinsurance contracts held to be presented as a separate asset on the balance sheet. Netting the reinsurance asset against the insurance liability is not permitted because it would obscure the insurer's gross exposure and the extent of its reliance on the reinsurer.
}}

{{Quiz
| topic = Reinsurance as the mirror image: the insurer is the customer
| question = AXA France measures its reinsurance contract held using fulfilment cash flows and a CSM, just as it does for the underlying insurance contracts. However, the direction of cash flows is reversed. Which of the following correctly describes the cash flow pattern of the reinsurance asset?
| option_a = Premium inflows from policyholders and claim outflows to claimants
| option_b = Premium outflows to the reinsurer and expected recovery inflows from the reinsurer
| option_c = Premium inflows from the reinsurer and claim outflows to the reinsurer
| option_d = No cash flows, because reinsurance is an off-balance-sheet arrangement
| correct_answer = b
| explanation = From the cedant's perspective, reinsurance premiums are cash outflows (the cost of buying protection) and expected claim recoveries are cash inflows (the benefit of the reinsurer paying its share). This is the mirror image of an insurance contract, where premiums flow in and claims flow out.
}}

{{Quiz
| topic = Reinsurance as the mirror image: the insurer is the customer
| question = The risk adjustment on AXA France's reinsurance contract held reflects which of the following?
| option_a = The additional compensation the reinsurer demands for bearing uncertainty
| option_b = The reduction in risk that AXA France enjoys by holding the reinsurance contract
| option_c = A fixed percentage of the underlying insurance portfolio's risk adjustment
| option_d = The credit spread of AXA France's own corporate bonds
| correct_answer = b
| explanation = For a reinsurance contract held, the risk adjustment reflects the benefit of risk reduction from the cedant's perspective, that is, how much less uncertain the cedant's net position becomes because of the reinsurance. It is not automatically a fixed proportion of the underlying risk adjustment, and it is not about the reinsurer's own compensation.
}}

{{Quiz
| topic = Key asymmetries: day-one gains and loss recovery
| question = At initial recognition, AXA France determines that its reinsurance treaty will cost more in premiums than it expects to recover in claims. The net cost over the coverage period is estimated at €1,200,000. A negative CSM of €1,200,000 is established on the reinsurance asset. What does this negative CSM represent?
| option_a = A loss that must be recognised immediately in the income statement
| option_b = Evidence that the reinsurance contract is mispriced and should be renegotiated
| option_c = The net cost of purchasing reinsurance protection, which will be expensed over the coverage period as the cedant receives the service
| option_d = An error in measurement, since the CSM can never be negative
| correct_answer = c
| explanation = A negative CSM on a reinsurance contract held is normal. It represents the net cost the cedant pays for the reinsurance service. This cost is released as an expense over the coverage period. It is not a "loss" in the onerous-contract sense; it is simply the price of buying protection, similar to paying a premium on any insurance policy.
}}

{{Quiz
| topic = Key asymmetries: day-one gains and loss recovery
| question = Suppose AXA France's underlying Mediterranean property contracts become onerous after a severe reassessment of wildfire risk, and a loss of €3,000,000 is recognised immediately in the income statement. The reinsurance treaty covers a significant portion of this exposure. Under IFRS 17, how is the reinsurance benefit treated?
| option_a = The reinsurance benefit is recognised gradually over the remaining coverage period, with no acceleration
| option_b = A loss recovery component is established in the reinsurance asset, accelerating the recognition of the reinsurance benefit to match the period in which the underlying loss appears
| option_c = The reinsurance benefit is netted against the loss so only the net amount appears in the income statement
| option_d = The reinsurance benefit is recognised only when cash is actually received from the reinsurer
| correct_answer = b
| explanation = IFRS 17 introduces a loss recovery component to prevent an accounting mismatch. When underlying contracts become onerous, the offsetting reinsurance benefit is accelerated so it appears in the same period as the loss. Without this mechanism, the income statement would show the full pain immediately but spread the relief over many future periods, which would not reflect economic reality.
}}

{{Quiz
| topic = Key asymmetries: day-one gains and loss recovery
| question = Under the general model for insurance contracts issued, a profitable group locks its expected profit into the CSM at initial recognition and no day-one gain appears in the income statement. For a reinsurance contract held, is this treatment identical?
| option_a = Yes, the treatment is perfectly symmetrical; no day-one gain is ever permitted on reinsurance held
| option_b = No, IFRS 17 allows a day-one gain on reinsurance held in certain circumstances, because the cedant is a buyer of a service and a bargain purchase can be recognised
| option_c = No, a day-one gain is always required on reinsurance held regardless of terms
| option_d = Yes, but only if the reinsurance is classified as proportionate
| correct_answer = b
| explanation = This is a deliberate asymmetry in IFRS 17. For insurance contracts issued, day-one gains are never permitted; profit is deferred in the CSM. For reinsurance held, the cedant is the buyer, and if the terms are unusually favourable (expected recoveries exceed the premium), a day-one gain can be recognised. The logic follows the broader accounting principle that a buyer may recognise a bargain purchase.
}}

{{Quiz
| topic = Proportionate vs. non-proportionate reinsurance
| question = AXA France now structures its reinsurance programme with two layers. The first is a 30% quota share treaty covering the entire Mediterranean property portfolio. The second is an excess of loss treaty that responds only when a single-event loss exceeds €10,000,000. Which statement best describes the difference in how the fulfilment cash flows of these two treaties behave?
| option_a = Both treaties have fulfilment cash flows that move in direct proportion to the underlying insurance portfolio
| option_b = The quota share's cash flows track 30% of the underlying portfolio's cash flows in a predictable ratio, while the excess of loss cash flows respond only to extreme events and are driven by the tail of the claims distribution
| option_c = The excess of loss treaty has more predictable cash flows because it has a fixed threshold
| option_d = The quota share has no fulfilment cash flows because it is a proportionate arrangement
| correct_answer = b
| explanation = Proportionate treaties like quota share mirror the underlying book at a fixed ratio, making their cash flows relatively predictable. Non-proportionate treaties like excess of loss only activate when claims exceed a high threshold, meaning their cash flows are driven by low-probability, high-severity events and do not move in proportion to the underlying book.
}}

{{Quiz
| topic = Proportionate vs. non-proportionate reinsurance
| question = Under the 30% quota share, when AXA France incurs a €200,000 claim for storm damage to a villa near Cannes, the reinsurer's share is €60,000. A colleague suggests that AXA France can simplify reporting by deducting the €60,000 from the insurance liability and showing only the net €140,000. Is this permitted under IFRS 17?
| option_a = Yes, netting is permitted for quota share treaties because the cash flows are perfectly proportionate
| option_b = Yes, but only if the reinsurer's credit rating is above a specified threshold
| option_c = No, IFRS 17 requires the insurance liability to be reported gross and the reinsurance asset to be shown separately, even for proportionate treaties
| option_d = No, but the insurer may choose to net if it discloses the gross amounts in the notes
| correct_answer = c
| explanation = IFRS 17 does not permit netting of insurance liabilities and reinsurance assets, regardless of the treaty structure. The underlying insurance liability must be shown at its full gross amount, and the reinsurance recovery is presented as a separate asset. This ensures readers can assess both the insurer's total obligations and its reinsurance protection.
}}

{{Quiz
| topic = Proportionate vs. non-proportionate reinsurance
| question = The excess of loss treaty covering the Mediterranean portfolio has not been triggered in three years because no single event has exceeded €10,000,000. An analyst reviewing the balance sheet notices that the reinsurance asset for this treaty is relatively small compared to the quota share asset. Which of the following best explains this observation?
| option_a = The excess of loss treaty has expired and should have been derecognised
| option_b = Since the excess of loss only responds to extreme events, expected recoveries are low in most scenarios, resulting in smaller fulfilment cash flows and a smaller asset; the value is concentrated in low-probability, high-severity outcomes
| option_c = The treaty is mispriced and AXA France should cancel it
| option_d = Non-proportionate treaties are always measured at zero until a claim is triggered
| correct_answer = b
| explanation = Excess of loss treaties protect against tail risk. In most scenarios, the threshold is not breached and no recovery occurs. The expected fulfilment cash flows therefore reflect the probability-weighted average of many scenarios, most of which produce zero recovery. This results in a smaller reinsurance asset than a quota share that participates proportionally in every claim. The treaty is not worthless; its value lies in catastrophe protection.
}}

{{Quiz
| topic = Key asymmetries: day-one gains and loss recovery
| question = AXA France is reviewing its full reinsurance programme for the Mediterranean portfolio. The quota share covers 30% of every claim, and the excess of loss covers single-event losses above €10,000,000. A major wildfire pushes the underlying insurance group into onerous territory. The finance team must decide how to reflect the reinsurance benefit in the income statement. Which of the following approaches correctly applies IFRS 17?
| option_a = Recognise a loss recovery component on both the quota share and the excess of loss reinsurance assets to the extent each treaty offsets the onerous loss, accelerating the reinsurance benefit to match the period of the underlying loss recognition
| option_b = Recognise a loss recovery component only on the quota share because it is proportionate; the excess of loss benefit must wait until claims are actually paid
| option_c = Defer all reinsurance benefit recognition until the following reporting period to avoid overstating recoveries
| option_d = Combine the quota share and excess of loss into a single reinsurance group and recognise one blended loss recovery component
| correct_answer = a
| explanation = The loss recovery mechanism applies to any reinsurance contract held that covers an onerous group of underlying contracts, whether the treaty is proportionate or non-proportionate. Both the quota share and the excess of loss can give rise to a loss recovery component if they offset the recognised loss. They remain separate reinsurance groups and are not combined, but each can accelerate its respective benefit to align with the underlying loss timing.
}}

{{Quiz/end}}

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