CIA.IFRS 17 Flashcards

1
Q

What principles does IFRS 17 establish?

A

For insurance contracts within the IFRS 17 standard:

  • Recognition
  • Measurement ( most important)
  • Presentation
  • Disclosure
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2
Q

Briefly describe 3 building blocks of the measurement of insurance contract liabilities under IFRS 17.

A
  1. Present Value of future cash flows
    • similar to PV(liabs)
    • except, IFRS 17 includes acquisition expenses and all premiums, and excludes risk adjustment for financial risk
  2. Risk adjustement for Non-Financial Risk:
    • similar to PfADs for non-economic risks (claims dev, reinsurance recovery)
  3. Contractual Service Margin (CSM):
    • represents unearned profit from a group of insurance contracts (no front-ending of profits)
    • current CIA standards do allow for front-ending of profits
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3
Q

Define the term fulfilment cash flows or FCF.

A

FCF =

= IFRS building block 1 + IFRS building block 2

= PV (future cash flows) + risk adjustment for non-Financial Risk

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4
Q

When is the CSM amount established and what is the amount?

A

When FCF < 0 (profit is negative) amount

= CSM = -FCF

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5
Q

Briefly describe 2 valuation methods under IFRS 17

A
  1. General Measurement Approach (GMA)
    - this is the default approach
  2. Premium Allocation Approach (PAA)
    • simplified version of GMA
    • certain eligibility requirements must be met (assessed at contract inception ) : ex short term contracts ( less than 1 year)
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6
Q

Identify examples where PAA may be used instead of GMA for measuring IFRS 17 liabilities. (2)

A
  • short term contracts (policy term <=1 year)
  • longer-duration contracts if PAA is a reasonable approximation to GMA over life of contract (both apply only to LRC (Liability for Remaining Coverage) component liabilities)
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7
Q

Define the term Liability for Incurred Claims (LIC)

A

Insurer’s obligation to pay claims for events that have already occurred

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8
Q

Define the term Liability for Remaining Coverage (LRC)

A

Insurer’s obligation to provide insurance coverage for events that have not yet occurred

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9
Q

Define the term “insurance contract” under IFRS 17

A

a contract under which 1 party (the issuer)…

  • accepts significant insurance risk from another party (the PH)…
  • by agreeing to compensate the PH…
  • if a specific uncertain future event (the insured event) adversely affects the PH
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10
Q

Identify components of an insurance contract under IFRS 17. (4)

A
  • insurance components: non-financial risk that is the “normal” part of any insurance contract
  • service components: e.g. claims adjudication with reinsurance protection
  • investment components: amounts include in premium that are returned customers, regardless of occurrence of an event
  • embedded derivatives (not on syllabus)
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11
Q

What is the formula for contract liability in terms of LIC (Liability for Incurred Claims) & LRC (Liability for Remaining Coverage)?

A

insurance contract liability = LIC + LRC

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12
Q

What is the formula for LRC under PAA at issue and `
subsequent
periods
`

A

at Issue :

LRC = Prm received  - DAC

at Subsequent periods:
LRC = UEP - Prm receivable -DAC

where :
Prm received = UEP - Prm receivable
DAC: defer acquisition costs

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13
Q

Identify the categories for differences between IFRS 17 and pre-IFRS17 (CIA practices) for measurement of liabilities. (5)

A

HINT: Crit = x2 (DAC,Discount)

  • Criteria
  • DAC Deferral
  • DAC Amount
  • Discounting of LRC
  • Discounting of LIC
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14
Q

Identify differences between IFRS 17 and pre-IFRS17 for measurement of liabilities (Item 1 - Criteria).

A

Criteria

IFRS 17: allows PAA for short-term contracts without testing whether PAA reasonably approximates GMA

pre-IFRS17: allows (UEP - DAC) to be used only if it’s a reasonable approximation to the explicit valuation approach

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15
Q

Identify differences between IFRS 17 and pre-IFRS17 for measurement of liabilities (Item 2 - DAC deferral).

A

DAC deferral

IFRS 17: entity may choose deferral or direct expense for short-term contracts

pre-IFRS17: no deferral in explicit valuation, but deferral if (UEP - DAC) is held

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16
Q

Identify differences between IFRS 17 and pre-IFRS17 for measurement of liabilities (Item 3 - DAC amount).

A

DAC amount:

IFRS 17: allows deferral of DAC that is directly attributable to the portfolio of insurance contracts

pre-IFRS17: allowable deferral is different

17
Q

Identify differences between IFRS 17 and pre-IFRS17 for measurement of liabilities (Item 4 - Discount LRC).

A

Discounting of LRC

IFRS 17: entity may choose not to discount (for short-term policies, or for longer-term policies if the discounting effect is not significant)

pre-IFRS17: requires discounting

18
Q

Identify differences between IFRS 17 and pre-IFRS17 for measurement of liabilities (Item 5 - Discount LIC).

A

Discounting of LIC

IFRS 17: ignore discounting and financial risk for LIC if:

  1. PAA is used for LRC;
  2. LIC Cash flows are received < 1 year within incurred date of claims

pre-IFRS17: requires discounting

19
Q

Identify examples in Canadian P&C where PAA can or cannot be used to measure LRC.

A

PAA ok:

  • auto outside QC (since policy term is generally <= 1 yr)
  • auto in QC (if PAA is a reasonable approximation to GMA)

PAA probably not ok:

  • warranty
  • mortgage default (both may have terms > 1 year, or high year-to year variability in claims)
20
Q

Briefly describe 2 measurement considerations for contract liabilities in IFRS 17.

A
  1. Level of aggregation:
  • must identify portfolio of contracts (contracts in a portfolio have similar risks and are managed together)
  • each portfolio is further subdivided into groups (a group is the unit of account for measurement of CSM)
  1. Contract boundary :
  • must identify contract boundary for each contract (this is normally the term of the policy)
  • cash flow estimates include only cash flows related to claims incurred within the boundary
21
Q

Identify areas where there are differences between IFRS 17 and pre-IFRS17 regarding probability-weighted cash flows. (5)

A
  • RA for non-financial risk
  • RA for financial risk
  • Policyholder options
  • Expenses
  • Taxes
  • Policyholder options
22
Q

Identify differences between IFRS 17 and pre-IFRS17 regarding probability-weighted cash flows. (Item 1- RA for non-financial risk)

A

RA for non-financial risk

IFRS 17: requires separate disclosure for risk adjustment for non-financial risk

23
Q

Identify differences between IFRS 17 and pre-IFRS17 regarding probability-weighted cash flows. (Item 2 - RA for financial risk)

A

RA for financial risk

IFRS 17: includes financial risk in the present value of future cash flows

24
Q

Identify differences between IFRS 17 and pre-IFRS17 regarding probability-weighted cash flows. (Item 3 - Policyholder Options)

A

Policyholder Options

IFRS 17: accounts for policholder behaviour

pre-IFRS17: the effect of cash flows is blurred

25
Q

Identify differences between IFRS 17 and pre-IFRS17 regarding probability-weighted cash flows. (Item 4 - Expenses)

A

Expenses

IFRS 17: includes only expenses that are directly attributable to the portfolio

pre-IFRS17: the above is not a requirement

26
Q

Identify differences between IFRS 17 and pre-IFRS17 regarding probability-weighted cash flows. (Item 5 - Taxes)

A

Taxes

IFRS 17: excludes taxes from cash flow estimates

pre-IFRS17: taxes are included

27
Q

What is the purpose of discounting?

A

To account for the time value of money.

28
Q

Under IFRS 17, how is the discount rate selected when cash flows **do not **vary with returns on underlying items?

A

The discount rate is based on a liquidity-adjusted risk-free discount rate curve (or yield curve).

29
Q

Identify approaches for determining the discount rate curve under IFRS 17. (2)

A

Bottom-up approach

Top-Down approach

30
Q

Briefly describe the Bottom-up approach for determining the discount rate curve under IFRS 17.

A

Bottom-up approach:

  • adjust the risk-free discount curve by adding an illiquidity premium that reflects the liabilities
  • under pre-IFRS17 practice, there’s no requirement to identify an illiquidity premium
31
Q

Briefly describe the Top-down approach for determining the discount rate curve under IFRS 17.

A

Top-down approach:

  • use the investment return on a reference portfolio of assets that’s ‘similar’ to the liabilities
    • Ex: use the 10-year spot rate on a Canadian bond for the 10-year liability cash flow
  • then remove asset characteristics not relevant to the liability
    • Ex: remove credit and market risk
  • under pre-IFRS17 practice, the rate would be tied more closely to the assets held by the company
32
Q

Briefly describe how financial risk is incorporated into discounting under IFRS 17.

A

TRICK: you can build financial risk into the:
* discount rate; or
* cash flows; or
* a combination of both

33
Q

Briefly describe how the discount rate is selected when cash flows do vary with returns on underlying premiums

A

choose a discount rate that makes the value of the liability cash flows equal the fair market value of the underlying assets

34
Q

Briefly describe how are cash flows handled when they vary with assumptions related to financial risk

A
  • either through adjustments to the discount rate or adjustments to the cash flows themselves
  • must adhere to market consistency
  • IFRS 17 suggests using of stochastic and risk-neutral measurement techniques and considering the costs of options and guarantees
35
Q

Regarding non-financial risk, how is the ‘measurement objective’ different under IFRS 17 vs pre-IFRS 17?

A

IFRS 17: compensation required by the entity to bear/take uncertainty

pre-IFRS 17: amount required to provide for the effect of uncertainty

  • what’s changed: focus on compensation required, not just the effect of uncertainty