ALBERTA MUNICIPAL INSURANCE EXCHANGE

Notes to the Financial Statements

Year ended December 31, 2022, with comparative information for 2021

3. Significant accounting policies (continued):

(a) Insurance contracts (continued):

(iv) Contract classification (continued):

Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if the insurance risk reduces significantly during the period, unless all rights and obligations are extinguished or expire.

(v) Liability adequacy test:

At the end of each reporting period, a liability adequacy test (“premium deficiency”) is performed to ensure the adequacy of the contract liabilities, net of related deferred acquisition cost (“DAC”) assets. In performing this test, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from the assets backing such liabilities, are used. Any premium deficiency is immediately charged to comprehensive income initially by writing off DAC assets and by subsequently establishing a provision for losses arising from the liability adequacy test. No such deficiency has been determined to exist as at December 31, 2022. The Exchange does not incur significant costs that would be considered DAC assets.

(vi) Reinsurance contracts:

The Exchange reinsures its contracts on an excess of loss basis. Reinsurance arrangements do not relieve the Exchange of its obligation to policyholders. Contracts entered into by the Exchange with reinsurers under which the Exchange is compensated for losses on one or more contracts issued by the Exchange and that meet the classification requirements for insurance contracts are classified as due from reinsurance.

The benefits to which the Exchange is entitled under its reinsurance contracts held are recognized as ceded claims and unreported losses. These assets consist of short-term balances due from reinsurers, as well as longer term receivables that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts. Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in accordance with the terms of each reinsurance contract. Reinsurance liabilities are primarily premiums payable for reinsurance contracts and are recognized as an expense when due.

The Exchange assesses its reinsurance assets for impairment on a quarterly basis. If there is objective evidence that the reinsurance asset is impaired, the Exchange reduces the carrying amount of the reinsurance assets to its recoverable amount and recognizes that impairment loss in the statement of comprehensive income. The Exchange fosters the objective evidence that a reinsurance asset is impaired using the same process adopted from non-financial assets. The impairment loss is calculated following the same method used for these assets.

The Exchange reflects reinsurance balances on the statement of financial position on a gross basis to indicate the extent of credit risk related to reinsurance and its obligations to subscribers and on a gross basis in the statement of comprehensive income to indicate the results of its retention of premiums written.

Expected reinsurance recoveries on unpaid claims are recognized as assets at the same time and using principles consistent with the Exchange’s method for establishing the related liability.