CIA.IFRS-1

Question 1

What does it mean for an insurance contract to be onerous?

Answer 1

A contract is onerous at the date of initial recognition if there is a net outflow for the sum of:
- FCFs (Fulfillment Cash Flows)
- Acquisition Cash Flows
- Cash flows arising from the contract at the date of initial recognition

Question 2

IFRS 17 definition of a reinsurance contract

Answer 2

An insurance contract issued by one entity (the reinsurer) to compensate another entity for claims arising from one or more insurance contracts issued by that other entity (underlying contracts)

Question 3

Based on IFRS 17, how shall an entity, at minimum, divide a portfolio into groups?

Answer 3

(a) a group that is onerous at initial recognition (if any)

(b) a group that has no significant possibility of becoming onerous (if any)

(c) a group of any remaining contracts (if any)

Question 4

Is an entity permitted to reassess composition of groups after initial recognition?

Answer 4

No. Group composition is established at initial recognition and shall not be reassessed

(although it can change between onerous & non-onerous)

Question 5

Does IFRS 17 permit disaggregation of individual insurance contracts

Answer 5

No (usually). Under IFRS17, the lowest unit of account is the insurance contract.

In most cases, it is not permitted to disaggregate individual insurance contracts

Question 6

How are multi-line reinsurance contracts aggregated into portfolios/groups under IFRS 17? (3 ways)

Answer 6

(a) based on the predominant exposure covered

(b) Creating a portfolio/group for multi-line contracts

(c) Separating the reinsurance contracts into sub-contracts and assigning those sub-contracts to separate groups and possibly portfolios

Question 7

Give some examples where it would be appropriate to separate a reinsurance contract issued/held into its contributing components (layers) when the terms or the exposures are significantly different

Answer 7

(a) a global reinsurance contract where some layers are covering a specific region

(b) A contract where some layers are multi-years, while some others are annual

(c) Different commission structures

Question 8

Consistent assumptions can produce differences between the estimates of FCF for insurance/reinsurance contracts issued and the estimates of FCF for reinsurance contracts held. These differences can arise from different sources, such as

Answer 8

• Contracts grouping
• Contract boundaries
• Discount Rates
• Risk adjustment

Question 9

Identify considerations when estimating the risk of non-performance of a reinsurer (3)

Answer 9

• Financial strength of the reinsurers
• History of claims and coverage disputes with reinsurers
• Risk of contagion across various reinsurance arrangements
• Delays in payments and concentration risk
• Length of time over which liabilities are expected to be settled
• Collateral available to mitigate risk

Question 10

Describe the RA associated with reinsurance contracts held

Answer 10

An entity shall determine the RA for non-financial risk so that it represents the amount of risk being transferred by the holder of the group of reinsurance contracts to the issuer of those contracts.

Conceptually could be thought of as the difference in the risk position of the entity with and without the reinsurance held. Could also consider the cost of reinsurance as an indicator of the compensation required for the risk

Question 11

When estimating the PV of future cash flows and the RA for reinsurance held contracts, the actuary has 3 options:

Answer 11

1. Estimate the gross and the net and then calculate the ceded as a difference
2. Estimate the gross and the ceded and then calculate the net as a different
3. Estimate the net and the ceded and then calculate the gross as a sum

Question 12

What are the key concepts underlying the risk adjustment:

Answer 12

• The RA for the insurance/reinsurance contracts issued represent the compensation that the entity requires for bearing the non-financial risk associated with writing those contracts
• The RA for the reinsurance contracts held accounts for the non-financial risk transferred from the entity to the reinsurer(s)

Question 13

How is the provision for reinsurer non-performance risk calculated?

Answer 13

Measured as an estimate of the future cash flows of reinsurance held

Question 14

Under IFRS 17, the concept of insurance revenue for reinsurance contracts issued may differ from the concept of earned premium for many reasons, including

Answer 14

1. For entity applying the PAA, the revenue recognition requirements
2. The treatment of reinsurance cash flows that are contingent on claims on the underlying contracts
3. The treatment of amounts paid to the purchaser of the reinsurance contracts issued that are not contingent on claims of the underlying contracts

Question 15

Briefly describe the IFRS17 Treatment of Reinsurance Held (Ceded) and Reinsurance Issued (Assumed) for the following types of cash flows: Is the cash flows contingent on claims (yes or no) w/ examples

Answer 15

No:
- Examples: Reinsurance Premiums, Premium on negotiated reinstatement (i.e. a new contract)
- IFRS17 treatment for reinsurance held (ceded): Reported as part of (or as on offet to) the allocation of premiums paid to the reinsurer
- IFRS17 treatment for reinsurance issued (assumed): Reported as part of (or as an offset to) the insurance revenue

Yes:
- Examples: Claims Incurred, Automatic reinstatement premium
- IFRS17 treatment for reinsurance held (ceded): Reported as part of (or as on offet to) the amounts recovered from the reinsurer
- IFRS17 treatment for reinsurance issued (assumed): Reported as part of (or as an offset to) the insurance service expenses

Question 16

Various contract provisions may indicate the need to assess whether an NDIC (non-distinct investment components) needs to be reported, including but not limited to

Exam question: Identify two contract provisions that may indicate the need to assess whether a non-distinct investment component (NDIC) needs to be reported.

Answer 16

• Sliding scale commissions
• Pre-paid reinstatement premiums repayable in all circumstances
• Loss or deficit carry-forward
• Contingency fee
• Stabilization fund

NDIC represents any amounts collected from the purchaser of the reinsurance contract (i.e. the ceding entity) that will be returned in all circumstances.

Question 17

How is the LRC estimated under GMA and PAA

Answer 17

GMA:
- LRC = (FCF related to future services) + CSM

PAA:
- LRC = premiums received - insurance acquisition cash flows
where
- premium received = unearned premiums - premiums receivable

Question 18

Should PAA eligibility for reinsurance contracts held be assessed separately from the PAA eligibility for the related underlying insurance contracts?

Answer 18

Yes.

Reinsurance contracts may have different set-ups than underlying contracts requiring a separate assessment of PAA eligibility (for ex: 1-yr risk attaching reinsurance contract)

Note: PAA eligibility for reinsurance contracts issued is the same as for underlying contracts (so they are assessed together)

Question 19

When does a substansive obligation to provide insurance contract services end?

Answer 19

When:

(a) the entity has the practical ability to reassess the risks of the particular policyholder and, as a result, can set a price or level of benefits that fully reflects those risks; or

(b) both of the following criteria are satisfied:

• The entity has the practical ability to reassess the risks of the portfolio of insurance contracts that contains the contract and, as a result, can set a price or level of benefits that fully reflects the risk of that portfolio; and
• The pricing of the premiums up to the date when the risks are reassessed does not take into account the risks that relate to periods after the reassessment date

Question 20

How is the CSM concept (Contractual Service Margin) modified for reinsurance contracts held?

Answer 20

• There is no unearned profit
• Instead, CSM represents the net cost or net gain on purchasing the reinsurance

Question 21

Can reinsurance contracts held be onerous?

Answer 21

No

Question 22

Describe a potential mismatch between revenues & FCFs when an entity uses GMA for LRC for reinsurance contracts held

Answer 22

• Revenues are recognized as they are earned
• FCF projections include projected cash flows for policies to the end of the year

Question 23

When does an entity shall recognize a group of insurance contracts?

Answer 23

From the earliest of the following:

(a) the beginning of the coverage period of the group of contracts

(b) The date when the first payment from a policyholder in the group becomes due

(c) For a group of onerous contracts, when the group become onerous (so at the earliest would be the bound date of the contract)

“Recognition” means reflected in financial statements

Question 24

When does an entity recognize a group of reinsurance contracts held?

Answer 24

From the earliest of the following:

(a) the beginning of the coverage period of the group of reinsurance contracts held

(b) the date the entity recognizes an onerous group of underlying insurance contracts, if the entity entered in the related reinsurance contract held in the group of reinsurance contracts at or before that date

“Recognition” means reflected in financial statements

Question 25

When can the LRECC be booked?

Answer 25

Single insurance policy (with loss occuring reins. treaty held):
- LRECC can be booked when onerous contract is effective (however will only cover some part of contract since there may be a portion of the policy that is earned after the reins. contract expiration)

Group of insurance contracts or a risk-attaching reinsurance contract issued (with loss occuring reins. treaty held):
- LRECC can be booked when onerous contract is effective (however will only cover some part of contract since there may be a portion of the policy that is earned after the reins. contract expiration)

Question 26

Briefly describe the accounting treatment of onerous groups in financial statements

Answer 26

In the statement of financial position:
- LC is booked as part of LRC

In the statement of financial performance:
- LC is recognized as insurance service expense

Question 27

Briefly describe the accounting treatment of Facility Association’s residual market mechanisms

Answer 27

UAF: Functions as a levy and therefore is not considered under IFRS17

FARM: member companies account for their share of FARM insurance contracts as direct business

RSPs: member companies use reinsurance accounting where the “reinsurer” is the collective FA membership. So contracts ceded would be accounted for as reinsurance contracts held, and contracts assumed would be accounted for as reinsurance contracts issued under IFRS17. (same conclusion for PRR in QC)