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Exam 6 > CIA.IFRS17 > Flashcards

CIA.IFRS17 Flashcards

1
Q

what principles does IFRS17establish?

A

RMPD (RaMPeD)
- Recognition
- Measurement
- Presentation
- Disclosure

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2
Q

briefly describe the 3 building blocks for measuring insurance contract liabilities under IFRS 17

A

PV-risk-CSM
- PV of future cash flows
- risk adjustment for non financial risk
- CSM

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3
Q

define the term FCF

A

FCF
= PV(future CF) + risk adjustment for non-financial risk
= IFRS building block1 + IFRS building block2

  • building block 1 includes risk adjustment for financial risk
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4
Q

when is a CSM amount established and what is the amount?

A

when FCF<0, CSM = -FCF

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5
Q

identify and briefly describe 2 valuation methods under IFRS 17

A

GMA (General Measurement Approach)
- default
PAA (Premium Allocation Approach)
- simplified version of GMA
- certain eligibility requirements must be met

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6
Q

define LIC

A

Liability for Incurred Claims
= insured’s obligation to pay claims for events that have already incurred

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7
Q

define LRC

A

Liability for Remaining Coverage
= Premium Liability
= insurer’s obligation to provide insurance coverage for events that have not yet occured

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8
Q

what is the formula for insurance contract liability?

A

LIC+LRC

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9
Q

identify examples where PAA may be used instead of GMA for measuring IFRS17 liabilities

A
  • short term contract (policy term < 1year)
  • longer duration contracts if PAA is a reasonable approximation to GMA over life of contract (both apply only to LRC component liabilities)
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10
Q

define the term “insurance contract” under IFRS17

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 specified uncertain future event (the insured event) adversely affects the PH

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11
Q

identify components of an insurance contract under IFRS17

A
  • insurance components: non financial risk that is the normal part of any insurance contract
  • service components
  • investment components
  • embedded derivatives
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12
Q

how are reinsurance contracts issued treated under IFRS17?

A

in the same manner as direct written contracts

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13
Q

how are reinsurance contracts ceded (held) treated under IFRS17?

A

they are treated as separate contracts under IFRS17 and require their own classification

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14
Q

2 types of contracts that meet the definition of insurance contract but the entity has a choice to apply IFRS17 or other standards

A
  • Fixed Fee Contract
  • contracts where compensation is limited to PH’s obligation under the contract
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15
Q

are lapse and expense risk in a direct written contract considered as insurance risk?

A
  • Not under IFRS17, because the risk is created by the contract itself. Lapse/expense cannot be an insured event.
  • However, the transfer of lapse or expense risk from one entity to another would meet the defn of insurance risk.
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16
Q

what is the formula for LRC under PAA?

A

LRC = UEP - DAC
DAC = Deferred Acquisition Costs

17
Q

identify the differences between IFRS17 and current CIA practice of measurement of liabilities relating to LRC

A

LRC = Liability for Remaining Claims = Premium Liability
1) Criteria:
- 17 allows PAA for short term contracts without testing whether PAA reasonably approximates GMA
- Current allows (UEP-DAC) to be used only if it’s a reasonable approximation to the explicit valuation approach
2) DAC deferral
- 17: entity may choose deferral or direct expense for short term contracts
- current: no deferral in explicit valuation, but deferral if (UEP-DAC) is held
3) DAC amount:
- 17 allows deferral of DAC that’s directly attributable to the portfolio of insurance contracts
- current allowable deferral is different
4) Discounting of LRC
- 17 requires discounting if the contract has a significant financing component, unless the time between service provided and related premium due is less than 1 year
- current requires discounting
5) Discounting of LIC
- 17 ignores discounting and financial risk if
- PAA used for LRC
- LIC CF are received less than 1 year within incurred
date of claims
- current requires discounting

18
Q

identify differences between IFRS17 and current CIA practice regarding discounting

A

1) Discounting of LRC:
- 17: entity may choose not to discount for short term policies or longer term policies if the discounting effect is not significant
- current requires discounting
2) Discounting of LIC:
- 17 ignores discounting and financial risk if
- PAA used for LRC
- LIC CF are received less than 1 year within incurred
date of claims
- current requires discounting

19
Q

identify examples in Canadian P&C where PAA can & cannot be used to measure LRC

A

PAA ok:
- auto outside QC (since policy term is generally <=1year)
- auto in QC if PAA is a reasonable approximation to GMA
PAA not ok:
- warranty
- mortgage default
both have term >1 year or high year to year variability in claims

20
Q

briefly describe 2 measurement considerations for contract liabilities in IFRS17

A

1) level of aggregation
- must identify portfolios of contracts (contracts in a portfolio have similar risks and are managed together)
- each portfolio is further divided into subgroups (a group is the unit of account for measurement of CSM)
- exposures must be allocated into groups but other assumptions may be applied at whatever level most appropriate
2) contract boundary
- must identify contract boundary for each contract (normally the term of contract)
- CF estimates include only CFs related to claims incurred within the boundary

21
Q

do expenses need to be allocated to groups in IFRS17?

A

yes

22
Q

do assumption (other than expenses) related to measurements of liabilities need to be allocated to groups in IFRS17?

A

no - allocate at whatever is most appropriate for estimating cash flows

23
Q

identify differences between IFRS17 and current CIA practice regarding contract boundary

A
  • conservatism: 17 is less conservative, 4 includes losses that 17 wouldn’t
  • rights & obligations: 17 considers rights & obligations for both entity and PHs, 4 only considers entity
  • coverages: 17 treatment of coverages may be different
  • repricing: 17 doesn’t consider the intent of the entity (whether to reprice) in setting contract boundary
  • extension for DAC: concept doesn’t exist in 17 (acquisition costs are considered directly in measurement of liabilities)
  • segregated funds (with material guarantee): concept doesn’t exist in 17
  • segregated funds (supported by hedging strategy): hedging is irrelevant in 17 when determining contract boundary
24
Q

identify examples where IFRS contract boundary may be different from policy term under current practice

A

1) cancellable contracts
- 17: contract boundary = cancel date
- current: PT extends beyond cancel date if that increases liability
2) title insurance: covers defects in the title to land or buildings
- 17: contract boundary = period of ownership of land/building, coverage is triggered by discovery of defect
- current: PT = term of contract since coverage is trigger by the defect itself, not its discovery
3) onerous contracts
- 17 must recognize liability of an onerous contract when signed
- current: entity can wait until effective date to recognize liabilities
4) reinsurance held
- 17 requires reinsurance contracts held to be measured as separate contracts
- current determines policy term for underlying direct contract only

25
Q

how does IFRS17 define “estimate of future cash flow”

A

probability weighted mean of the full range of possible outcomes, considering all reasonable and supportable information available at reporting date without undue cost or effort

26
Q

identify differences between IFRS17 and prior CIA practice regarding probability weighted cash flows

A

MfADs-PET
1) MfAD for non financial risk;
- 17 requires separate disclosure for risk adjustment
- current: the difference between best estimate of CF and best estimate with PfAD is not always quantified
2)MfADs for financial risk:
- 17 includes financial risk in PV of CFs
- current MfAD for interest rate risk is separate from the best estimate of PV of CFs
3) PolicyHolder options: selections of limits and other coverage options can affect CFs
- 17 accounts for PH behavior
- current: effect on CF is blurred
4) Expenses:
- 17 includes only expenses directly attributable to the portfolio
- current: this is not a requirement
5) Taxes:
- 17 excludes taxes from CF estimates
- current: taxes are included

27
Q

what is the purpose of discounting?

A

to account for time value of money

28
Q

under pre- IFRS17, what are the 3 things you need for discounting calculation?

A

assuming you have the nominal value of liabilities, you need:
- discount rate
- discount rate MfAD
- payment pattern

29
Q

under IFRS17, how is the discount rate selected when cash flows donot vary with returns on underlying items?

A

discount rate is based on a liquidity adjusted risk free discount rate curve

30
Q

describe approaches for coming up with the discount rate curve under IFRS17

A

1) bottom up approach:
- adjust the risk free discount curve by adding an illiquidity premium that reflects the liabilities
2) top down approach:
- use investment return on a reference portfolio of assets that’s similar to the liabilities
- this reference portfolio does not have to be based on assets held by the company
- then remove asset characteristics not relevant to the liabilities

Under current: rate is tied more closely to assets held by the company

31
Q

describe how financial risk is incorporated into discounting under IFRS17

A

can build financial risk into
- discount rate
- CF
- combination of discount rate and CF

Under current: there’s an explicit provision for reinvestment

32
Q

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

33
Q

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

A
  • through adjustments to discount rate or adjustments to cash flows themselves
  • must adhere to market consistency
  • IFRS17 suggests using of stochastic and risk neutral measurement techniques and considering the costs of options and guarantees
34
Q

regarding non-financial risk, how is the measurement objective different under IFRS17 vs pre-IFRS17 pratice

A
  • IFRS17: reflects an insurer’s compensation for assuming non-financial risk
  • current: amount required to provide for the effect of uncertainty

Exam 6 (58 decks)

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