7 Appropriate Valuation Basis

Question 1

What details of Published Accounts are Specific to General Insurers?

Answer 1

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

Question 2

How are statutory returns different under Solvency II?

Answer 2

Liabilites are calculated on different basis
No unearned premium reserve
No DAC

Question 3

What is the public disclosure part of the solvency returns called?

Answer 3

Its called the Solvency and Financial Conditions Report (SFCR)

Question 4

Whats in the SFCR?

Answer 4

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.

Question 5

What is the purpose of management accounts?

Answer 5

Determine profitability by each class
Determine the need for rating revisions
Project the Companies profit position

Question 6

How are SFCR liabilites discounted?

Answer 6

According to Solvency II rules

Question 7

For Statutory Returns. When may explicit discounting be carried out?

Answer 7

IF the unpaid claim reserves have an average expected period to settlement of greater than 4 years.
This is weighted by expected gross claims

Question 8

For Statutory Returns. If dicounting is carried out what disclosures should be made?

Answer 8

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

Question 9

For Statutory Returns. Where do investment return from the discounting go? a) Invesment income b) claims incurred

Answer 9

A) Investment Income

Question 10

For Statutory Returns. Does the insurer deduct tax from investment income?

Answer 10

No claims are not taxable.

Question 11

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.

Answer 11

Multi year policies

Mortgage indemnity guarantee

Question 12

What does discounting do and not do to the performance of an insurer?

Answer 12

It does not change profitablity.
It does speed up the emergence of profit.
It does cause tax to be paid earlier.

Question 13

What is the scope of IFRS 17

Answer 13

It applies to all insurance and reinsurance contracts issues by an entity and to reinsurance contracts it holds

Question 14

What is a ‘portfolio’ under IFRS 17

Answer 14

It is a group of contracts that are subject to similar risks, managed together and are not more than a year apart

Question 15

What portfolios would there be of a motor book?

Answer 15

Third party only
Third party fire and theft
Comprehesive

Question 16

How are portfolios further subdivided?

Answer 16

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

Question 17

What are the three method of measuring insurance contracts under IFRS17?

Answer 17

1) General Measurement Model
2) Premium Allocation Model
3) Variable Fee Approach

Question 18

What is the General Measurement Model also known as?

Answer 18

The building block approach

Question 19

What are the building blocks fo the general measurement model?

Answer 19

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

Question 20

What furture cash flows need to be modelled? What dont need to be modelled?

Answer 20

1) Those that arise within the contract boundaries of the group
2) Future insurance contracts

Question 21

When does a contract boundary end?

Answer 21

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

Question 22

What are the requirements behind the cash flow estimation?

Answer 22

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

Question 23

What are the requirements behind the estimate of the discount rate?

Answer 23

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

Question 24

Could you use a discount rate derived from fixed interest government bonds for Employers Liability contracts?

Answer 24

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.

Question 25

How do you derive a discount rate for a nominal cash flow?

Answer 25

(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

Question 26

How do you derive a discount rate for a real cash flow?

Answer 26

(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.

Question 27

What is the Risk Adjustment?

Answer 27

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.

Question 28

What is the Contractual Service Margin?

Answer 28

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.

Question 29

How is the Contractual Service Margin Calculated at initial recognition of a contract?

Answer 29

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

Question 30

What does a positive CSM mean?

Answer 30

It indicates expected profit and should be earned over time as insurer fufills contract

Question 31

How is the CSM adjusted on subsequent measurement?

Answer 31

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.

Question 32

What is Premium Allocation Approach?

Answer 32

It is an alternative simplified measurement model

Question 33

When are you allowed to use PAA?

Answer 33

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

Question 34

What are the modifications for Reinsurance Contracts?

Answer 34

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.

Question 35

What is derecognition?

Answer 35

Derecognition is when insurance obligations are extinguished. E.g. contract is cancelled, discharged or expired.

Question 36

What 4 Groups should an insurer present in the statement of financial position?

Answer 36

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

Question 37

What is the Statement of Profit and Loss also know as?

Answer 37

The statement of Financial Performance

Question 38

What goes into the Statement of financial performance?

Answer 38

1) An insurance service result

2) An insurance finance income or expenses

Question 39

What should be provided in the Disclosure?

Answer 39

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

Question 40

What are significant judgements?

Answer 40

These are changes to inputs, assumptions, estimation techniques and methods used for measurement of insurance contracts