CIA.AA-IFRS17 Case Studies Flashcards
Scenario: The entity backs illiquid insurance contract liabilities with liquid assets. Using a discount rate consistent with illiquid contracts means the liabilities could be insufficient to discharge the entity’s obligations under the contracts. What would the AA do?
[Q1] Is the approach to setting discount rates consistent with IFRS 17?
[Q2] Is the approach to setting discount rates consistent with accepted actuarial practice?
[Q3] Are the discount rates similar to what the AA would have chosen?
[Q1]
- IFRS 17 doesn’t require liability sufficiency/adequacy
- Bottom - up: discount rates set independently of backing assets
- Top - down: adjust reference asset yield for credit/market risk, and illiquidity as needed
- No specific method required for illiquidity premium; aligned with contract liquidity, not asset liquidity
[Q2]
- the AA ensures discount rate methods align with CIA educational notes for life, health and P&C insurer under IFRS17
- If consistent, the AA concludes they followed accepted actuarial practice
- If not, the AA investigates the differences and reports with reservation if the rate fall outside of accepted practice
[Q3]
- For highly illiquid contracts, discount rates could exceed yields on more liquid asset portfolios
- The AA understands the risk of negative bias in investment results but addresses threats to financial condition through FCT analysis, not by using inappropriate discount rates
- If discount rates deviate from IFRS 17 or accepted actuarial practice, the AA would discuss the issue with management and auditors before reporting with reservation
Discuss issue with management. If resolved, report without reservation. If not, report with reservation.
Scenario: Management is using a set of contracts (“set-based”) approach to grouping, and the AA is told that all contracts in a newly developed product are priced with the same profitability level and therefore would be in the same group. However, when the AA runs the
numbers, they find that issue ages 60-65 appear to be onerous. For the sake of this case study, let’s assume that there are only two possible groups: onerous and non-onerous. What would the AA do?
[Q1] Is the set-based approach to grouping consistent with IFRS 17?
[Q2] Is the set-based approach to grouping consistent with accepted actuarial practice?
[Q3] Are there any legal constraints to pricing?
[Q4] Are the assumptions used in the individual contract calculations set at a higher level of aggregation than the pricing assumptions, which could create a bias in the results?
[Q5] Are the contracts onerous due to seasonal factors?
[Q6] Is the number of onerous contracts insignificant, and the impact immaterial?
[Q1]
- IFRS 17 does not specify a method for allocating new contracts into groups but emphasizes key principles in IFRS 17.17.
- If there is reasonable, supportable information that contracts will belong to the same group, they can be measured as a set to assess if they are onerous.
- Without such information, grouping must be done by considering individual contracts.
- The set-based approach is only valid if contracts are proven to be in the same group. In the case study, the AA’s testing suggests otherwise, requiring further investigation.
[Q2]
- Under IFRS 17, contract grouping is done on an individual basis, with set-based grouping allowed only if contracts are appropriately grouped.
- The AA would review relevant sections of the IFRS 17 Application EN and assess whether the set-based approach is suitable.
- To determine if contracts for ages 60-65 appear onerous, the AA would evaluate the assumptions, pricing calculations, or discuss with management.
- Key considerations for the AA include legal constraints, the aggregation level of assumptions versus pricing assumptions, seasonal factors, and the materiality of onerous contracts.
[Q3]
- Contracts may be grouped together if laws or regulations prevent different pricing or benefits for different policyholders (IFRS 17.20).
- This rule cannot be applied by analogy to other situations.
- Example: Unisex pricing may allow males and females to be grouped, even if one group is onerous when measured separately.
[Q4]
- Contracts grouped individually unless reasonable info supports set grouping (IFRS 17.17).
- Valuation assumptions may be higher-level than pricing assumptions, making some contracts appear onerous.
- Expense assumptions per contract can cause small contracts to seem onerous.
- Setting expenses per thousand of coverage may prevent contracts from appearing onerous.
[Q5]
- Issue ages 60-65 may appear onerous due to seasonal acquisition expenses.
- Policies priced with expected quarterly expenses can show monthly fluctuations.
- Higher monthly expenses may cause contracts to seem onerous at issue.
- If expenses revert to expected over the quarter, the AA may support the set-based approach.
[Q6]
- The AA assesses the set-based approach by evaluating the number and size of misallocated contracts.
- If due diligence is sufficient, the AA can report without reservation.
- If the approach is unacceptable or results are inconclusive, the AA discusses adjustments with management.
- The AA may reallocate issue ages 60-65 to the onerous group, ensuring compliance with IFRS 17 and reporting without reservation.
In the event that the due diligence above proves to be sufficient, the AA would be able to report without reservation. If the AA is not able to accept the approach above, or results of the analysis are inconclusive, the AA would consider discussing the matter with management to try to make the appropriate changes to the grouping and allocate contracts for issue ages 60-65 to the onerous group. In that case, the valuation would be in accordance with IFRS 17 and the AA would report without reservation.
Scenario:
- The entity’s mortality risk compensation (+10%) accounts for reinsurance and is set similarly for direct business.
- The AA suspects higher compensation (+15%) might be needed for direct business without reinsurance.
- The AA would review, test, and discuss with management, and recommend adjustments if necessary. They might report with reservation if compensation is deemed insufficient.
[Q1] Is the risk adjustment for non-financial risk consistent with IFRS 17?
[Q2] Is the risk adjustment for non-financial risk consistent with accepted actuarial practice?
[Q1]
- IFRS 17 doesn’t specify a technique for risk adjustment for non-financial risk but outlines key principles:
- Direct: Adjust present value of future cash flows for non-financial risk compensation.
- Reinsurance: Risk adjustment reflects the amount of risk transferred to the reinsurance issuer.
- Compensation should reflect the entity’s view, considering reinsurance.
- AA needs to verify if 10% compensation for direct business is appropriate given the reinsurance.
- “Simplicity and convenience” are not valid reasons for inconsistent risk adjustment.
- The AA will review documentation, discuss with management, and seek rationale for the 10% compensation.
[Q2]
- AA will refer to CIA guidance on risk adjustments for reinsurance.
- Relevant educational notes include:
- IFRS 17 Risk Adjustment for Non-Financial Risk (Life and Health)
- IFRS 17 Risk Adjustment for Non-Financial Risk (Property and Casualty)
- IFRS 17 Actuarial Considerations Related to Reinsurance
- IFRS 17 Application EN
The AA would refer to the CIA guidance on risk adjustments as it pertains to reinsurance, as provided in the educational notes
Scenario:
- The entity holds a single reinsurance treaty covering two types of coverage.
- Management wants to split the treaty into two contracts for reporting convenience.
- The AA would need to assess if splitting the treaty is acceptable under IFRS 17, given that it is legally a single contract.
[Q1] Is the identification of contracts consistent with IFRS 17?
[Q2] Is the identification of contracts consistent with accepted actuarial practice?
[Q3] Is the identification of contracts similar to what the AA would have chosen?
[Q1]
- IFRS 17 requires contracts to be separated if necessary to reflect their substance.
- Guidance on separation can be found in TRG Staff Papers from February 2018.
- TRG Paragraphs:
- 20: Typically, contracts are designed to reflect their substance; a single legal contract is usually treated as a single contract in substance.
- 21: If the legal form doesn’t reflect the substance, separating the contract might be justified.
- The AA needs to determine if the two coverages are separate contracts in substance.
[Q2]
- Guidance on contract separation and combination is in IFRS 17 Application EN:
- Questions 1.7, 1.8, 1.19, 5.8, and 5.9.
- While there is no specific guidance for this case study, these principles can assist in deciding if the contract should be separated.
[Q3]
- The AA’s decision depends on accepting or rejecting management’s proposal to split the reinsurance treaty.
- If the AA believes the treaty should remain a single contract, they will discuss with management and the auditor.
- If unresolved, the AA will assess the materiality of the difference before deciding on reporting with reservation.
If the AA is convinced that keeping the treaty as a single contract is required, the AA would discuss with management and the auditor to try to resolve the issue. If it persists, the AA may assess the materiality of the difference before deciding whether reporting with reservation is appropriate.
Scenario:
- Management allocates revenue based on the passage of time for simplicity.
- The AA believes risk release is not uniform over the contract boundary (e.g., warranty, snowmobile, catastrophe coverage, travel insurance).
[Q1] Is the allocation of revenue consistent with IFRS 17?
[Q2] Is the allocation of revenue consistent with accepted actuarial practice in Canada?
[Q1]
- IFRS 17.B126: Insurance revenue under the PAA can be allocated based on:
- Passage of time, or
- Expected timing of incurred insurance service expenses if it significantly differs from the passage of time.
- The AA will assess if the difference from the passage of time is significant.
- If significant, the AA will discuss with management, auditor, and/or peer reviewer to resolve.
- If unresolved and the passage of time is used despite significant differences, reporting with reservation may be appropriate.
[Q2]
If the issue is not resolved and management uses the “passage of time” despite it being significantly different that the expected pattern of release of risk, reporting with reservation may be appropriate.
If the issue is not resolved and management uses the “passage of time” despite it being significantly different that the expected pattern of release of risk, reporting with reservation may be appropriate.
Baer.Intro: Glynn v Scottish Union & National Inc Co
Facts:
- Glynn injured in auto accident
- Was reimbursed by other drivers’ insurance (including medical)
- Glynn sued to Double-recover medical from own insurance
Issue:
- Does Glynn’s insurer have right to subrogation; in other words: can Glynn’s insurer claim benefits from guilty party’s payment to prevent double-recovery by Glynn
Ruling 1:
- For insured: Glynn gets double - recovery
Ruling 2:
- Subrogation concept applies because auto policy is contract of indemnity
- So Glynn’s insurer does not have to pay
Baer.Intro: Fletcher v MPIC
Facts (1990):
- Customer relied on MPIC
- There was no mention of UIM coverage on application or insurance certificate
Criteria - for duty of care
- MPIC owes a duty of care to its customers if:
(1) Customer rely on the information
(2) Their reliance is reasonable
(3) MPIC knew (or should have known) the customer would rely on this information
Issues:
(1) is government insurer responsible for informing customers of available coverages?
(2) What is the extent of the government’s liability should it fail to do so?
Ruling 1: Judge finds for plaintiff (insurer wins)
Ruling 2: Overturn on appeal (MPIC wins)
Ruling 3: Supreme court of Canada reinstates original ruling (insurer wins)
Final interpretation:
- Both private agents and government institution owe a duty of care
- But private agents owe a higher duty of care because of their promised expertise
