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Assumed long-duration and limited payment reinsurance contracts are subject to the guidance applicable to direct writers of such contracts. This includes all of the relevant guidance for the liability for future policy benefits including the ongoing updating of assumptions (unlocking), use of an upper-medium fixed income yield to discount the net premium ratio, and being subject to the annual cohort restrictions. These concepts are further discussed in IG 5.2 and IG 5.3.
Reinsurance covers of existing blocks of traditional life insurance contracts and limited-pay contracts will typically lead to differences between the ceding insurer’s accounting and the assuming reinsurer’s accounting. The ceding insurer will have separate reserve cohorts at the issue year and product level. Each reserve cohort will have a different locked-in interest rate assumption and different periods for measuring the retroactive adjustment for changes in cash flow assumptions. The assuming entity will have a single-issue year as of the date of the inception of the reinsurance contract and thus the retrospective adjustment period due to updating of assumptions and the discount rate will be different. As a result, the assuming entity needs to ensure they are receiving the appropriate data to determine the liability for future policy benefits.
Often, there will be upfront consideration received for assuming the risks of an existing block of life insurance contracts. The guidance for direct insurers is applicable to assuming entities writing reinsurance cover without a level premium. Under the limited-payment contract model, the collection of premium does not represent the completion of an earnings process. Any gross premium received in excess of the net premium is required to be deferred. This deferred amount is referred to as the deferred profit liability. See IG 5.3 for further information.
Differences may also exist between the ceding insurer’s accounting for its direct liabilities and the assuming reinsurer’s accounting, even if the reinsurance is executed concurrent with the direct contracts. For example, the ceding and assuming entities may incorporate different cash flows into each of their measurements if they have differing views on the likelihood of the cedant exercising a voluntary recapture provision.

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