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A Closer Look at the Reinsurance Loss-Recovery Component (RLRC) under IFRS 17

The Financial Reporter, September 2025

By Taha Hameer

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Paragraph 284 of the IFRS 17 Basis for Conclusions states that the contractual service margin (CSM) represents the unearned profit arising from a group of insurance contracts. IFRS 17 does not permit this margin to become negative (except for reinsurance contracts held). If an insurer expects a group of insurance contracts to result in a loss (referred to as an “onerous” group) to the insurer, that loss is recognized immediately in the profit or loss statement.

But if the insurer has purchased reinsurance (to recover some of the losses), the related reinsurance contract held will likely result in a gain (positive CSM), which is not recognized immediately. This is because, applying IFRS 17, the insurer measures the present value of the future cash flows for the reinsurance contract held using assumptions consistent with those used to measure the present value of the future cash flows for the group of underlying insurance contracts.

This disconnect between the timing of losses and recoveries would appear to create an accounting mismatch, i.e., the loss from the insurance contracts issued (called underlying insurance contracts) is recognized immediately, but the gain from the reinsurance contract held is delayed. So why can’t the insurer offset the loss from its underlying insurance contracts with the expected recovery from the reinsurer at the same time?

This question was discussed by the IFRS Board in its November 2019 meeting. These discussions resulted in the introduction of the Reinsurance Loss-Recovery Component (RLRC). The RLRC was formally introduced as part of the amendments to IFRS 17 in June 2020.

This article provides some contextual information regarding the RLRC, how it is calculated under IFRS 17, and how it helps solve (to some extent) the accounting mismatch discussed above. To better understand that, the Loss Component (LC) associated with an onerous group of insurance contracts is a reasonable starting point.

Loss Component

When a group of insurance contracts is identified as onerous, that loss is recognized immediately in the profit or loss statement under IFRS 17. This immediate recognition of loss is aligned with other standards such as IFRS 15 and IAS 37.

At initial recognition, this results in the carrying amount of the liability of remaining coverage for the group being equal to the fulfilment cash flows and the CSM being zero. At the same time, IFRS 17 requires the creation of an LC equal to the amount of loss recognized in profit or loss. If subsequent changes make the group of contracts more loss-making, any additional losses are also recognized immediately, and the LC is increased.

The LC tracks the cumulative amount of losses recognized in profit or loss for a group of insurance contracts. Tracking the LC is important because it helps account for any future reversals of these losses (if the profitability expectation for the group of insurance contracts improves). The next section focuses on the RLRC, the counterpart of the loss component under IFRS 17.

Reinsurance Loss-Recovery Component

Insurance companies often purchase reinsurance to protect themselves from large losses. When a company expects to make a loss on the underlying insurance contracts, it may be able to recover part of that loss through reinsurance. The RLRC is a mechanism that enables the insurer to reflect that expected recovery in its IFRS 17 financial statements.

The calculation of the RLRC was defined in the IFRS staff paper from December 2019.[1] This paper outlined the following three objectives for the proposed calculation:

  1. Address stakeholder concerns about an accounting mismatch on initial recognition of onerous underlying insurance contracts.
  2. Be operationally simple for entities to apply.
  3. Provide comparable, transparent and useful information for users of financial statements.

With these principles in mind, the Board decided to require entities to determine the amount of loss recovered from a reinsurance contract held as follows: On initial recognition, an entity can apply the simplifying assumption that the RLRC is determined by multiplying:

  • The loss recognized on the group of underlying insurance contracts; and
  • the percentage of claims on underlying insurance contracts the entity expects to recover from the reinsurance contracts held.

Stakeholder Concerns

Stakeholders raised some concerns about the RLRC calculation. This section discusses two of the concerns addressed by the Board in the IFRS staff paper from December 2019.  

  1. The assumption that a loss on an underlying insurance contract is caused by claims, without considering any other cash flows that contribute to the loss.
  2. The calculation is based on the connection between insurance claims and reinsurance claim recoveries, without considering whether the reinsurance contract held is in an overall net gain or net cost position.

With respect to the first concern, stakeholders felt that focusing only on claims oversimplifies the situation since losses can arise from other cash flow components as well. The staff countered that trying to split the loss into different components (claims, expenses, etc.) and map each to reinsurance recovery would be operationally complex and burdensome, and could require arbitrary assumptions. The result would lead to inconsistencies across insurers, reducing the comparability of financial statements. The Board concluded that it was necessary to make a simplified assumption about the cause of a loss when identifying how much of a loss is recovered through a reinsurance contract held.

The second concern points out that the RLRC calculation ignores the profitability of the reinsurance contract held. What if the reinsurance contract itself is in a net cost (loss) position? In such cases, some stakeholders feared that allowing the insurer to recognize income from RLRC might mislead users of financial statements. It could appear as if the insurer is improving its financial position, even though the reinsurance contract is not profitable. In its response, the staff noted that the RLRC is not meant to reflect the overall profitability of the reinsurance contract. It simply shows the amount of insurance contract loss expected to be offset by reinsurance.

To address the concern about lack of visibility into the overall losses, the Board pointed to disclosure requirements in paragraph 100 of IFRS 17. The requirements mandate the companies to separately disclose the total loss (LC) on insurance contracts, and the expected recovery (RLRC) from reinsurance contracts. Hence, these disclosures allow users to see how much of the insurer’s loss is being offset by reinsurance, and how much remains as a net loss. This transparency helps users make their own assessments about the overall financial impact of reinsurance.  

Subsequent Measurement

Once the RLRC has been initially recognized, the company updates it over time as circumstances change. At the end of each reporting period, the company adjusts the CSM for the reinsurance contracts held, including the effect of:

  • Income recognized when losses are offset — If the insurer recognizes losses on its insurance contracts and is reimbursed by reinsurance, it shows income on the reinsurance side.
  • Reversals of RLRC — If expectations change and the company expects to recover less (or more), it adjusts the RLRC accordingly. However, these reversals do not include changes in the fulfilment cash flows of the group of reinsurance contracts held.

Conclusion

The RLRC under IFRS 17 is a mechanism to match insurance losses with expected reinsurance recoveries. Without the RLRC, insurers would recognize a full loss at initial recognition of onerous insurance contracts, even if the company expects to recover some of that loss through its reinsurance arrangements. This would result in a bigger loss being shown upfront and therefore not provide an accurate picture of the company’s exposure to losses on onerous insurance contracts.

The RLRC solves this mismatch by recognizing the expected recovery from its reinsurance arrangements at the same time as the loss is recognized, giving a more accurate financial picture of the company’s exposure to the loss. While IFRS 17 uses a simplified approach based on expected claims recovery to calculate the RLRC, it enables companies to reflect the economic benefit of reinsurance when recognizing losses on insurance contracts, while maintaining comparability of financial statements across insurers.

This article is provided for informational and educational purposes only. Neither the Society of Actuaries nor the respective authors’ employers make any endorsement, representation or guarantee with regard to any content, and disclaim any liability in connection with the use or misuse of any information provided herein. This article should not be construed as professional or financial advice. Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

Taha Hameer is a manager with Ernst & Young LLP and can be reached at taha.h.hameer@ey.com. The views reflected in this article are the views of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

Endnote

[1] IFRS Staff Paper; Project: Amendments to IFRS 17; Paper Topic: Reinsurance Contracts held – recovery of losses (December 2019).