CIA.IFRS17

Question 1

identify differences between IFRS 17 and current CIA practice regarding discounting

Answer 1

Discounting of LRC:

• IFRS 17: may choose not to discount (for short-term policies, or for long-term policies if the disc effect is not significant)
• current: requires discounting

Discounting of LIC:

• IFRS 17: ignore discounting and financial risk for LIC if:
  
  • > PAA is used for LRC
  • > LIC cash flows are received <= 1 year within incurred date of claims
• current: requires discounting

Question 2

briefly describe approaches for coming up with the discount rate curve under IFRS 17

Answer 2

• bottom-up approach

- top-down approach

Question 3

describe bottom-up approach

Answer 3

take risk-free yield curve and add illiquidity premium

-> under current practce, there is no requirement to identify an illiquidity premium

Question 4

describe top-down approach

Answer 4

take portfolio of assets similar to liability (i.e. 10-year spot rate on canadian bonds) and remove all characteristics not relevant to liabilities in question

–> under current practice, the rate would be tied more closely to assets held by the company

Question 5

what principles does IFRS 17 establish

Answer 5

RMPD

• Recognition
• Measurement
• Presentation
• Disclosure

Question 6

3 building blocks for measuring liabilities under IFRS 17

Answer 6

PV of future cash flows

• similar to PV(liabilties)
• but IFRS17 includes acquisition expenses and all premiums

risk adjustment for non-financial risk
- similar to PfADs for non-economic risk (claims development, reins recovery)

Contractual Service Margin (CSM)

• represents unearned profit from a group of insurance contracts (no front-ending of profits)
• current CIA standards do allow front-ending of profits

Question 7

define fulfilment cash flows

Answer 7

FCF
= (IFRS building block 1) + (IFR2 building block 2)
= PV(future cash flows) + (risk adj for non-financial risk)

Question 8

when is a CSM amount established and what is the amount

Answer 8

when FCF < 0

amount = - FCF

Question 9

identify and briefly describe 2 valuation methods under IFRS 17

Answer 9

GMA (General Measurement Approach)
- this is the default approach
PAA (Premium Allocation Approach)
- simplified version of GMA
- certain eligibility requirements must be met (assessed at contract inception)

Question 10

define the term Liability for Incurred Claims (LIC)

Answer 10

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

Question 11

define the term Liability for Remaining Coverage (LRC)

Answer 11

insurer’s obligation to provide insurance coverage for events that have not yet occurred (basically just the premium liabilities)

Question 12

identify examples where PAA may be used instead of GMA for measuring IFRS 17 liabilities

Answer 12

• short-term liabilities (policy term < 1 year)

- longer-duration contracts if PAA is a reasonable approximation to GMA over life of contract

Question 13

define “insurance contract” under IFRS 17

Answer 13

a contract under which 1 party (the issuer)..

• accepts significant insurance risk from another party (the policyholder)..
• by agreeing to compensate the policyholder..
• if a specified uncertain future event adversely affects the policyholder

Question 14

identify components of insurance contract under IFRS 17

Answer 14

• insurance component
  (non financial risk that is the “normal” part of any insurance contract)
• service component
  (i.e. claims adjudication with reinsurance protection)
• investment component
  (amounts included in premiums that are returned customers, regarding the occurrence of an event)
• embedded derivatives
  (not on syllabus)

Question 15

what’s formula for contract liability in terms of LIC and LRC

Answer 15

= LIC + LRC

Question 16

formula for LRC

Answer 16

= UEP - (Prem receivable) - DAC

Question 17

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

Answer 17

PAA ok:

• auto outside QC (since the policy term is generally <= 1 year)
• 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)

Question 18

describe 2 measurement considerations for contract liabilities in IFRS17

Answer 18

level of aggregation:
- must identify portfolios of contracts
- each portfolio is further subdivided into groups
contract boundary
- must identify contract boundary for each contract (term of the contract)
- cash flow estimates include only cash flows related to claims incurred within the boundary

Question 19

how does IFRS 17 define “estimate of future cash flow”

Answer 19

estimate of future cash flows
= probability-weighted mean of the full range of possible outcomes
(use all credible information available at the reporting date without undue cost or effort)

Question 20

identify differences between IFRS17 vs. current CIA practice regarding probability-weighted cash flows

Answer 20

MfADs(non-financial risk)
MfAD(financial risk)
Policyholder options
Expenses
Taxes
(to elaborate)

Question 21

under IFRS17, how is the discount rate selected when cash flows do not vary with returns on underlying items

Answer 21

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

Question 22

briefly describe how financial risk is incorporated into discounting after IFRS17

Answer 22

you can build financial risk into the

• discount rate
• or the cash flows
• or a combination of both

-> under current practice, there is an explicit provision for reinvestment risk (no such provision under IFRS17)

Question 23

regarding non-financial risk, how is the measurement objective different under IFRS17 vs. current practice

Answer 23

IFRS17
- compensation required by entity to bear uncertainty
current
- amount required to provide for the effect of uncertainty