CIA.IFRS17-1 RA Flashcards
Risk Adjustment for Non-Financial Risk for insurance contracts
describe the concept of “risk adjustment” under IFRS17
RA adjusts PV(future cash flows) to reflect the compensation the entity requires for bearing uncertainty about the amount and timing of cash flows
identify 4 methods for calculating RA under IFRS17
- quantile method
- cost of capital method
- margin method
- a combination of methods
considerations to determine which RA estimation approach to use
TPC(Taipei China) Risky ->RA considerations
- consistency with how the insurer assesses risk from a fulfillment perspective
- practicality of implementation and ongoing re-measurement
- translation of RA for discloure to an equivalent CI measure
considerations when using MfADs as the starting point for calculating RA
- is the current level of PfAD consistent with the compensation the entity requires for bearing uncertainty?
- are the diversification benefits included in current PfAD consistent with those would be reflected in IFRS17?
- how would the CI inherent in the current PfADs be determined?
- IFRS17 requires reinsurance contracts held to be measure as separate contracts. How would PfAD appropriate to the net liability be split between direct and ceded contracts?
identify 5 principles for calculating the non-financial risk adjustment in IFRS17
RA should be higher for
- risks where there is less information
- low frequency/high severity risks
- long duration contracts
- risks with wide probability distributions
RA should be lower with emerging experience
identify 2 further general considerations in calculating the risk adjustment in IFRS17
- pooling similar risks will lower the risk adjustment (LOLN -> more risks imply lower variance)
- pooling risks that are negatively correlated will lower the risk adjustment (because negatively correlated risks will offset each other)
are IFRS17 measurement requirements based on the “unit of account” or “aggregate level”?
unit of account level
are IFRS17 presentation requirements based on “unit of account” or “aggregate level”?
aggregate level
are IFRS17 disclosure requirements based on “unit of account” or “aggregate level”?
aggregate level
what does the entity’s perspective on diversification affect?
the amount of RA and the assessment of confidence interval of RA
how are diversification incorporated?
based upon
- statistical or empirical analyses
- expert judgement
- causal relationship
2 common methods to quantify the effect of diversification
- correlation matrices
- copulas
what is the appropriate time horizon for calculating IFRS17 RA?
the lifetime of the uncertainty in the insurance contract cash flows
how is reinsurance credit risk reflected under IFRS17?
through a reduction in expected cash flows
describe the quantile method for calculating RA under IFRS17
- quantile method assesses the probability of adequacy of FCF
- these probabilities are used to quantify RA
- specific methods include VaR and CTE
identify 1 advantage and 1 disadvantage of the quantile method for calculating RA
- adv: satisfies disclosure requirements regarding CI corresponding to RA
- disadv: if misrepresented, may introduce spurious accuracy
describe the cost of capital method for calculating RA under IFRS17
RA based on the compensation an entity requires to meet a target return on capital, not based on regulatory or actual capital. 3 components:
- projected capital amounts: level of non-financial risk during the duration of the contract
- cost of capital rates: relative compensation required by the entity for holding this capital
- discount rates : to obtain PV(future compensation)
identify 1 advantage and 1 disadvantage of the capital method for calculating RA
- adv: allows allocation of RA at a more granular level
- disadv: operationally complex because projection of capital requirement is an input to the liability calculation
describe the margin method for calculating RA under IFRS17
select margins that reflect the compensation the entity requires for uncertainty related to non-financial risk
identify methods for calculating risk adjustment for reinsurance held
- quantile methods
- CAT models
- proportional scaling
- cost of capital
describe 2 IFRS17 risk adjustment methods that are specific to reinsurance held
1) CAT models:
-use output from CAT model tailored to an entity’s book of business
- select a percentile directly from the given distribution
2) proportional scaling:
- works well with proportional or quota share reinsurance
- use the same % of FCFs for ceded RA as for direct RA
- % could be modified for considerations such as ceding commissions, expense allowances and reinsurance premiums
- may also work with non-proportional reinsurance if ceded RA can consistently be expressed as a portion of gross RA
consideration when using quantile method to estimate RA for reinsurance held
components not directly related to claims might be included in ceded & net data
i.e: reduction in recoverable due to netting of reinstatement premiums 保费净额结算
why might ceded losses for CAT reinsurance need a separate RA analysis from an entity’s direct losses?
- CAT reinsurance covers low-frequency high-severity events
- a standard quantile method may produce a RA that is too small or even 0
describe a method for calculating RA for ceded losses related to CAT reinsurance and high percentile events
use cost-of-capital method with an assumption for required capital set at a higher percentile
- captures compensation required at higher levels of treaty
describe a way of combining RA methods for a “unit of account” approach
- for groups with less skewed distributions: use VaR
- for groups with highly skewed distributions: use cost of capital method or margins
identify primary methods for calculating RA under an “aggregate approach”
- quantile methods
- cost of capital method
does IFRS17 require disclosure of a confidence interval around RA?
yes
identify the best RA method for incorporating a confidence interval
quantile methods
what is the basic concept behind simplified CoC approach?
target profit margin is allocated between
- reserve risk
- underwriting risk
- other risks not relevant to RA
identify a disadvantage of the simplified approach
the target profit margin may vary by portfolio or group
app2 problem
