7 Appropriate Valuation Basis Flashcards
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What details of Published Accounts are Specific to General Insurers?
Segmental analysis of results and net assets are shown by type of risk and by territory
Results are shown usually gross of reinsurance with reinsurance results seperately
Assets and liabilities are valued in line with local and or international accounting principles
Results are per revenue year
How are statutory returns different under Solvency II?
Liabilites are calculated on different basis
No unearned premium reserve
No DAC
What is the public disclosure part of the solvency returns called?
Its called the Solvency and Financial Conditions Report (SFCR)
Whats in the SFCR?
It comprises a number of different templates providing analyses by:company sub-group and group of the technical provisions, assets and underwriting by class of business.
What is the purpose of management accounts?
Determine profitability by each class
Determine the need for rating revisions
Project the Companies profit position
How are SFCR liabilites discounted?
According to Solvency II rules
For Statutory Returns. When may explicit discounting be carried out?
IF the unpaid claim reserves have an average expected period to settlement of greater than 4 years.
This is weighted by expected gross claims
For Statutory Returns. If dicounting is carried out what disclosures should be made?
The total amount of provisions prior to discounting
The categories of claims to which discounting has been applied
For each category:
The methods applied
The assumed average period to settlement
The rate of investment return
Criteria for estimating settlement delay
For Statutory Returns. Where do investment return from the discounting go? a) Invesment income b) claims incurred
A) Investment Income
For Statutory Returns. Does the insurer deduct tax from investment income?
No claims are not taxable.
For Statutory Returns. On what type of policy can you discount the UPR? Give a typical example of a line of business with this policy.
Multi year policies
Mortgage indemnity guarantee
What does discounting do and not do to the performance of an insurer?
It does not change profitablity.
It does speed up the emergence of profit.
It does cause tax to be paid earlier.
What is the scope of IFRS 17
It applies to all insurance and reinsurance contracts issues by an entity and to reinsurance contracts it holds
What is a ‘portfolio’ under IFRS 17
It is a group of contracts that are subject to similar risks, managed together and are not more than a year apart
What portfolios would there be of a motor book?
Third party only
Third party fire and theft
Comprehesive
How are portfolios further subdivided?
1) Onerous when initially measured
2) Contracts that are thought of as initially profitable and no real risk of becoming onerous
3) Contracts which could become onerous
What are the three method of measuring insurance contracts under IFRS17?
1) General Measurement Model
2) Premium Allocation Model
3) Variable Fee Approach
What is the General Measurement Model also known as?
The building block approach
What are the building blocks fo the general measurement model?
1) Future cash flows that arise from provision of insurance contract
2) Discount rate to reflect the time value of money
3) A risk adjustment for non-financial risks
4) A contractual service margin that reperesents unearned profit
What furture cash flows need to be modelled? What dont need to be modelled?
1) Those that arise within the contract boundaries of the group
2) Future insurance contracts
When does a contract boundary end?
1) The time when the entity can change the price, the level of benefits or both
2) The current pricing of the coverage end. i.e when the period of time covered by current premium ends
What are the requirements behind the cash flow estimation?
1) Cashflows should be unbiased and incorporate all information available without due cost or effort. Esimated under a probability weighted basis accounting for the full range of possible outcomes
2) Reflective of an entitys purpose
3) Current and reflective of prevailing market conditions
4) Explicit, i.e each category of cash flow estimated seperately
What are the requirements behind the estimate of the discount rate?
1) Reflects the time value of money, the charactersitics of each cash flow and the liquidity characteristics of insurance contracts
2) Be consistent with observable market prices for financial instruments that have similar cash flows to insurance contracts modelled
3) Exclude factors that influence market prices but not the insurance contracts cash flows
Could you use a discount rate derived from fixed interest government bonds for Employers Liability contracts?
No. EL inflates - it needs to be discounted using real interest rates.
Need to derive discount rate from something that matches by term, nature, amount and currency.
How do you derive a discount rate for a nominal cash flow?
(Bottom Up Approach)
Use a discount rate determined by adjusting a risk free yield curve, to reflect differences in liquidity between gilt and underlying insurance contract
How do you derive a discount rate for a real cash flow?
(Top down approach)
A discount rate is derived from a yield curve on a reference portfolio of assets and adjusted for characteristics that have no relevance to insurance, e.g duration differences.
What is the Risk Adjustment?
THis reflects the compensation the insurer requires for bearing uncertain cash flows.
Relates to non financial risks only , e.g. insurance risk , lapse risk and expense risk.
The standard does not prescribe any methods for determining the risk adjustment.
What is the Contractual Service Margin?
This represents the profit in the group of insurance contracts that has not yet been recognised in the profit and loss accounts because it relates to future services to be provided under the contracts.
How is the Contractual Service Margin Calculated at initial recognition of a contract?
It is the balance after the sum of
Fufilment cashflows+
Derecognition of any assets or liabilities recognised for insurance acquisitions flows+
Any cashflows arising from the contracts in the group at that date
What does a positive CSM mean?
It indicates expected profit and should be earned over time as insurer fufills contract
How is the CSM adjusted on subsequent measurement?
It should be calculated by adjusting the beginning of the period by:
New contracts added to the group
Interest accretion on the amount of carried CSM
Changes in loss assumptions
Currency exchange differences
The amount of CSM released into profit.
What is Premium Allocation Approach?
It is an alternative simplified measurement model
When are you allowed to use PAA?
They have reasonable expectation that it would produce the same measurement of liability as the Building Block Approach.
Every contract in the group of modelled contracts has a coverage period of one year or less
What are the modifications for Reinsurance Contracts?
1) the risk adjustment for non financial risk should represent the amount of risk being transferred by the cedant
2) The Contractual Service Margin should represent a net gain or loss.
What is derecognition?
Derecognition is when insurance obligations are extinguished. E.g. contract is cancelled, discharged or expired.
What 4 Groups should an insurer present in the statement of financial position?
1) Groups of insurance contracts that are assets
2) Groups of insurance contracts that are in liabilities
3) Groups of reinsurance contracts that are assets
4) Groups of reinsurance contracts that are liabilities
What is the Statement of Profit and Loss also know as?
The statement of Financial Performance
What goes into the Statement of financial performance?
1) An insurance service result
2) An insurance finance income or expenses
What should be provided in the Disclosure?
qualitative and quantitative information regarding the
1) amounts recognised in financial statements
2) Significant judgements and changes in the judgements
3) The nature and extent of risks within the scope of the contracts
What are significant judgements?
These are changes to inputs, assumptions, estimation techniques and methods used for measurement of insurance contracts
