CIA.IFRS17-2

Question 1

briefly describe the concept of “risk adjustment” under IFRS 17

Answer 1

RA adjusts PV(future cash flows) to reflect the compensation the entity requires for bearing uncertainty about the amount and timing of cash flows

Question 2

identify 5 principles/consideration for estimating the non-financial risk adjustment in IFRS 17

Answer 2

 Should be higher when less information is known
 Should be higher for low frequency, high severity risks
 Should be higher for longer term contracts
 Should be higher for risks with higher volatility

Question 3

Are IFRS 17 measurement requirements based on the ‘unit of account’ or the ‘aggregate’ level?

Answer 3

Unit of account level

Question 4

Are IFRS 17 presentation requirements based on the ‘unit of account’ or the ‘aggregate’ level?

Answer 4

Aggregate level

Question 5

Are IFRS 17 disclosure requirements based on the ‘unit of account’ or the ‘aggregate’ level?

Answer 5

Aggregate level

Question 6

How is reinsurance credit risk reflected under IFRS17?

Answer 6

Through a reduction in expected cash flows (not through the RA)

Question 7

Identify 4 methods for calculating RA under IFRS17.

Answer 7

1. Quantile methods
2. Cost-of-Capital method
3. Margin method
4. Combination of methods

Question 8

Briefly describe the quantile method for calculating the RA under IFRS17.

Answer 8

• quantile methods assess the probability of the adequacy of the FCFs (Fulfilment Cash Flow)
• these probabilities are used to quantify the RA
• specific methods include VaR (Value at Risk) and CTE (Conditional Tail Expectation)

Question 9

Identify 1 advantage and 1 disadvantage of quantile methods.

Answer 9

advantage: satisfies the disclosure requirements regarding confidence level corresponding to the RA
disadvantage: if misrepresented, it may introduce spurious accuracy. Data Dependency

Question 10

Briefly describe the Cost-of-Capital method for calculating the RA under IFRS17.

Answer 10

RA is based on the compensation an entity requires to meet a target return on capital and has 3 components:
[1] projected capital amounts (Ct)
→ for the level of non-financial risk during the duration of the contract
[2] cost of capital rate(s) (Rt)
→ for the relative compensation required by the entity for holding this capital’
[3] discount rates (Rt)
→ for the present value calculation

	Formula:  `RA = PV(Capital amount held * %cost-of-capital rate)`

Question 11

Identify 1 advantage and 1 disadvantage of the cost-of-capital method.

Answer 11

advantage: allows allocation of the RA at a more granular level
disadvantage: method is more complex (projection of capital reqs is an input to the liability calculation)

Question 12

Briefly describe the margin method for calculating the RA under IFRS17.

Answer 12

Select margins that reflect the compensation the entity requires for uncertainty related to non-financial risk

Question 13

Identify 4 methods for calculating the risk adjustment for reinsurance held.

Answer 13

1. Quantile methods
2. Catastrophe models
3. Proportional scaling
4. Cost of capital

Question 14

Identify the 2 risk adjustment calculation methods that are specific to reinsurance held.

Answer 14

1. Catastrophe models
2. Proportional scaling

Question 15

Briefly describe the catastrophe models method for calculating RA for reinsurance held.

Answer 15

→ use output from a cat model tailored to an entity’s book of business
→ select a percentile directly from the given distribution

Question 16

Briefly describe the proportional scaling calculation method for RA of reinsurance held.

Answer 16

→ use the same percentage of FCFs for the ceded RA as for the direct RA
→ but percentage could be modified for considerations such as: ‘‘ceding commissions, expense allowances, reinstatement premiums’’
→ method may also work for non-proportional reinsurance if the ceded RA can consistently be expressed as a portion of the gross RA

Question 17

Briefly explain why might ceded losses for cat reinsurance need a separate RA analysis from an entity’s direct losses.

Answer 17

• catastrophe reinsurance covers low-frequency, high-severity events
• a standard quantile method may produce an RA that is too small or even 0

Question 18

Describe a method for calculating RA for ceded losses related to cat reinsurance and high percentile events.

Answer 18

Use a cost-of-capital method with an assumption for required capital set at a higher percentile
(captures compensation required at higher levels of the treaty)

Question 19

Describe a way of combining RA methods for a ‘unit of account’ approach (depending on skewness of distribution)

Answer 19

for groups with less skewed distributions → use VaR

for groups with highly skewed distributions → use cost of capital method or margins

Question 20

Identify the primary methods for calculating the RA under an ‘aggregate approach’.

Answer 20

• quantile methods
• cost-of-capital method

Question 21

Does IFRS 17 require disclosure of a confidence interval around the RA?

Answer 21

Yes

Question 22

Identify the best RA method for incorporating a confidence interval.

Answer 22

Quantile methods (they provide a confidence interval around the RA automatically.

Question 23

What is the basic concept behind the simplified CoC approach?

Answer 23

Target profit margin is allocated between:
• reserve risk
• underwriting risk
• other risks that are not relevant to the RA

Question 24

Identify a disadvantage of the simplified CoC approach?.

Answer 24

The target profit margin may vary by portfolio or group.