CIA.IFRS17 Flashcards
what principles does IFRS17establish?
RMPD (RaMPeD)
- Recognition
- Measurement
- Presentation
- Disclosure
briefly describe the 3 building blocks for measuring insurance contract liabilities under IFRS 17
PV-risk-CSM
- PV of future cash flows
- risk adjustment for non financial risk
- CSM
define the term FCF
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
when is a CSM amount established and what is the amount?
when FCF<0, CSM = -FCF
identify and briefly describe 2 valuation methods under IFRS 17
GMA (General Measurement Approach)
- default
PAA (Premium Allocation Approach)
- simplified version of GMA
- certain eligibility requirements must be met
define LIC
Liability for Incurred Claims
= insured’s obligation to pay claims for events that have already incurred
define LRC
Liability for Remaining Coverage
= Premium Liability
= insurer’s obligation to provide insurance coverage for events that have not yet occured
what is the formula for insurance contract liability?
LIC+LRC
identify examples where PAA may be used instead of GMA for measuring IFRS17 liabilities
- 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)
define the term “insurance contract” under IFRS17
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
identify components of an insurance contract under IFRS17
- insurance components: non financial risk that is the normal part of any insurance contract
- service components
- investment components
- embedded derivatives
how are reinsurance contracts issued treated under IFRS17?
in the same manner as direct written contracts
how are reinsurance contracts ceded (held) treated under IFRS17?
they are treated as separate contracts under IFRS17 and require their own classification
2 types of contracts that meet the definition of insurance contract but the entity has a choice to apply IFRS17 or other standards
- Fixed Fee Contract
- contracts where compensation is limited to PH’s obligation under the contract
are lapse and expense risk in a direct written contract considered as insurance risk?
- 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.
what is the formula for LRC under PAA?
LRC = UEP - DAC
DAC = Deferred Acquisition Costs
identify the differences between IFRS17 and current CIA practice of measurement of liabilities relating to LRC
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
identify differences between IFRS17 and current CIA practice regarding discounting
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
identify examples in Canadian P&C where PAA can & cannot be used to measure LRC
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
briefly describe 2 measurement considerations for contract liabilities in IFRS17
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
do expenses need to be allocated to groups in IFRS17?
yes
do assumption (other than expenses) related to measurements of liabilities need to be allocated to groups in IFRS17?
no - allocate at whatever is most appropriate for estimating cash flows
identify differences between IFRS17 and current CIA practice regarding contract boundary
- 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
identify examples where IFRS contract boundary may be different from policy term under current practice
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
how does IFRS17 define “estimate of future cash flow”
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
identify differences between IFRS17 and prior CIA practice regarding probability weighted cash flows
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
what is the purpose of discounting?
to account for time value of money
under pre- IFRS17, what are the 3 things you need for discounting calculation?
assuming you have the nominal value of liabilities, you need:
- discount rate
- discount rate MfAD
- payment pattern
under IFRS17, how is the discount rate selected when cash flows donot vary with returns on underlying items?
discount rate is based on a liquidity adjusted risk free discount rate curve
describe approaches for coming up with the discount rate curve under IFRS17
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
describe how financial risk is incorporated into discounting under IFRS17
can build financial risk into
- discount rate
- CF
- combination of discount rate and CF
Under current: there’s an explicit provision for reinvestment
describe how the discount rate is selected when cash flows do vary with returns on underlying premiums
choose a discount rate that makes the value of the liability cash flows equal the fair market value of the underlying assets
describe how are cash flows handles when they vary with assumptions related to financial risk
- 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
regarding non-financial risk, how is the measurement objective different under IFRS17 vs pre-IFRS17 pratice
- IFRS17: reflects an insurer’s compensation for assuming non-financial risk
- current: amount required to provide for the effect of uncertainty
