CIA.IFRS17-IC Flashcards
Briefly explain what is an insurance contract
The issuer has to accept significant insurance risk from a policyholder which arises from an uncertain future event that adversely affects said policyholder.
Define Insured event
Uncertain future event covered by an insurance contract that creates insurance risk.
Explain what a significant loss is
A loss is significant if there is a non-zero probability that the insurer will suffer a loss greater than premium received.
Define CFs within contract boundaries
Arise from substantial rights & obligations that exist during the reporting period in which the entity compels policyholder to pay premium and entity has obligation to provide insurance services.
Identify 2 reasons for reinsurance contracts having different boundaries than the underlying contracts
- May cover contracts that already existed before reinsurance coverage goes in effect
- May cover contracts that are going to be issued in the future
When should a contract be recognized under IFRS17?
At the earlier of the:
1. Beginning of coverage period
2. Date of first payment
3. Moment a contract becomes onerous
When should contracts be grouped together? (2 scenarios)
- When rights & obligations are different individually vs collectively
- When one contract cannot be measured without considering another
Define portfolio of insurance contracts
Comprises similar risks that are managed together
Usually the reserving groups used in AAR
Ex: ON Auto, ON Prop, AB Comm Auto, etc.
Identify 6 factors to consider for ‘managed together’
- Distribution channels (direct/broker)
- Regulatory level
- Capital allocation basis
- Entity management structure (comm/pers)
- Presentation in performance reports (AAR)
- How assets & liabilities are managed
Identify 4 impacts of an entity’s portfolio choice
- Whether further subgrouping of contracts are needed within a portfolio
- Level at which entities can make an accounting policy choice
- Level an entity can consider ability to reassess risks for contract boundaries
- Expenses included in measurement
Identify the 6 requirements of Fulfillment Cash Flows (FCFs)
- Include all future CFs within contract boundaries
- Probability weighted average of full range of outcomes
- Unbiased:
- No intention to attain a particular outcome
- No intention to influence behaviour - Reflect the perspective of the entity rather than a market perspective
- Current: based on currently available information
- Explicit
Identify 4 items included in FCFs
- Premiums
- Incurred Losses
- Salvage & Subrogation
- Transaction taxes
- Risk adjustment
- Discounting
What factors to consider when estimating FCFs?
Consider only factors that can be collected without undue cost & are likely to materially impact estimate.
Based on insurer’s judgement
Briefly explain the treatment of inflows in FCFs (3)
- Policy loans & repayments are part of FCFs
- Interest on prepaid premiums are treated as adjustment to premiums
- Extra premiums on substandard risks are treated as other premiums
Briefly explain the treatment of outflows in FCFs (3)
- Input from financial market has to be adjusted to reflect insurer’s characteristics
- Stochastic projections are allowed (not required)
- Consider anti-selection in risk adjustment
Define Insurance Acquisition Cash Flows
CFs arising from selling, underwritting, starting a groups of contracts that are directly attributable to them
Need to include CFs not directly attributable to insurance contracts within the portfolio such as commissions & UW costs
Considered an asset if incurred before reporting period in which contracts are recognized (& acquisition costs is allocated)
Identify 4 examples of insurance acquisition CFs
- Sales commissions
- Payments to managers of agencies/brokerages (iff based on sales)
- UW costs
- Contracts set up costs
Which of the following taxes are included in FCFs?
1. Transaction taxes
2. Wage-based taxes
3. Taxes paid on behalf of policyholder
4. Income taxes & other levies on the insurer
Transaction taxes are included (premium levies, GST)
Wage-based taxes & taxes paid on behalf of policyholder are included
Income taxes & other levies on the insurer are not included
When should FCFs & assumptions be reevaluated?
Every reporting period
Define Level of Aggregation
Insurance contracts may be aggregated into portfolios & groups within portfolios on initial recognition & not reassessed after.
Identify 2 reasons to not reassess groups after initial recognition
- Prevent offsetting onerous groups of contracts with profitable groups
- Report profits in appropriate reporting period
Identify 2 reasons making level of aggregation important
- Ensure accurate profit recognition
- Ensure consistent treatment of cross subsidies between insurance contract reporting
Define group
Subset of portfolio consisting of contracts issued no more than 12 months apart with profitable & onerous contracts separated.
Identify 3 types of groups
- Onerous
- Contract with no significant possibility of becoming onerous
- Any remaining contracts in the portfolio
Identify the initial assumption that should be used when determining groups for PAA approach
Contracts in the portfolio are not onerous unless facts & circumstances indicate otherwise.
What information is required during determination of groups
Requires reasonable & supportable information such as policy disclosure statements, valuation reports & pricing reports
In the absence of required information to determine groups, what are the 2 options for the entity.
- Determine the group to which the contracts belong by considering the FCFs of individual contracts at date of initial recognition
- Reasonably undertake a measurement approach at an individual contract level (this would enable a grouping assessment to be made)
True or False?
If a restricted characteristic would result in policies being split between onerous and other allocations, it should be used.
False
Should be ignored
Determine the equivalent of onerous group of contracts for reinsurance
Group of contracts with a net gain on initial recognition
If onerous contract is 100% ceded, it is still accounted for such
When purchasing an entity (acquisition), when are contracts assessed?
At the date of business combination
Identify the 3 approaches for transition to IFRS17
- Full retrospective approach
- Modified retrospective approach
- Fair value approach
Explain the Full Retrospective approach for transition to IFRS17
Business written up to transition is grouped applying IFRS17 retrospectively as if it had always applied (no exceptions)
Explain the Modified Retrospective approach for transition to IFRS17
Identification of groups that can be carried out with the info available at transition date.
Groups can include contracts issued more than 1y apart if no supportable information for retrospective approach.
Explain the Fair Value approach for transition to IFRS17
Permitted to include groups of contracts issued a year apart.
Can only divide groups issued within 1y or less if entity has supportable information.
Identify the main difference between PAA & GMM
There is no CSM under PAA
CSM is the unearned profit that will be recognized as insurance services are provided.
Calculate CSM at initial recognition
CSM = PV(inflows) - PV(outflows) = FCFs + discounting - RA
If CSM < 0, then CSM = 0 and LC is established
Define Loss Component (LC)
Expected amount of future obligations not covered by expected future CFs on a RA PV basis
Identify the main difference between LC & CSM
LC is recognized immediately in Profit & Loss Statement whereas a CSM is gradually released into Profit & Loss Statement
How is CSM released into P&L Statement
By considering coverage units
Identify the 2 considerations to determine coverage units
- Expected service provided by the contract
- Length of contract
Identify 3 examples of coverage units
- Passage over time
- Max contract cover
- Cover amounts for which PH can validly claim in each period
Calculate CSM at the end of the reporting period
CSM end = CSM beginning
+ New contracts added
+ Interest accretion
+ Changes in FCF for future service
+ Currency exchange difference
- Amounts recognized as Ins Revenue from transfer of services
Identify 3 changes in FCFs adjusting CSM
- New contracts added to the group
- Change in PV of future CFs
- Change in RA
Identify 2 changes in FCFs that do not adjust CSM
- Change in time value of money & financial risks
- Change in FCF in the LIC
Briefly explain how do we deal with multiple benefits on a single contract (3 steps)
- Consider whether contract can be separated into components for the purpose of measurement
- Determine cov units based on the individual benefit components separately & adjust CSM according to the recognition of all relevant cov units during the period
- Consider whether a coverage unit reflecting the characteristics of all benefits can be determined
Define onerous contract
A contract is onerous if the CSM is negative and thus a LC is established.
Identify 2 characteristics of CSM specific for reinsurance contracts held
- Cannot have onerous reinsurance contracts
If onerous underlying contract, gain is recognized on reins held (loss recovery component) which adjusts CSM (if PAA, then adjustment to asset instead of CSM) - If PV(inflows)<PV(outflows) => CSM reduces Reins Held Asset (Defer profit)
If PV(inflows)>PV(outflows) => CSM Increases Reins Held Asset (Defer loss)
Reinsurance contracts are grouped based on which 2 items
- Characteristics
- Inception dates
NOT based on the underlying contracts!!!
Identify 2 requirements for use of PAA instead of GMA
- Estimate will not materially differ from GMA
- Cov period of group < 1y
Identify 2 differences between PAA (IFRS17) & Premium Liabilities
- PAA is net of acquisition expenses
- PAA uses premium received (instead of written premium)
Identify 2 situations where PAA is not allowed
- Derivatives embedded in contract
- Longer duration contracts
Identify a disadvantage of PAA approach
PAA does not account for expected policy cancellations. If they are materially large, LRC could be overestimated.
Calculate PAA at subsequent measurement
LRC end = LRC beginning
+ P received in period
+ Amortization of insurance acquisition CFs
+ Adjustment to financing component
- Insurance Acquisition CFs
- Earned Premium
- Investment component paid to LIC
Define reinsurance contract under IFRS17
Insurance contract where the reinsurer takes on a portion of the insurance risk of a group of contracts issued by another entity
How should income & expense from reinsurance contracts held be presented
Either as:
1. A single amount
2. Separately
Identify 4 considerations if entity decides to present income & expenses separately
- Treat Reins CFs that are contingent on claims from underlying contracts as part of claims that are expected to be reimbursed
- Treat expected amounts to receive from reinsurer that are not contingent on claims from underlying contracts as a reduction in premiums to be paid to the reinsurer
- Treat amounts recognized relating to recovery of losses as amounts recovered from reinsurer
- Not present the allocation of premiums paid as a reduction in revenue
Explain how should assumptions be treated when measuring reinsurance contracts held & underlying contracts
Assumptions should be consistent
Identify 2 differences between reinsurance contracts & insurance contracts
- CSM can be negative for reinsurance contracts (concept of LC does not exist)
- Reinsurance contract held cannot be onerous
Explain what happens when there is a loss on underlying contract at initial recognition
Insurer will recognize a gain on reinsurance contracts held through CSM
Amount of CSM is based on expected recovery
Explain what happens if there is a loss or reversal of loss on underlying contract at subsequent measurement
If changes in FCFs do not adjust CSM because they are onerous: No adjustment for CSM of Reins Held
If onerous & non-onerous are grouped together: need a systematic method to determine portion of losses covered by reinsurance (loss recovery)
After loss recovery component is established, it is adjusted in subsequent periods to reflect changes in onerous group of underlying contracts (cannot exceed amount insurer expects to receive from reinsurer)
Identify another purpose of the loss recovery component
Determine the amounts that are presented in Profit & Loss as reversals of recoveries of losses from reinsurance contracts held
Define Risk Adjustment for Reinsurance Held
Difference in risk position between gross & net position
Compensation required to keep the risk & not ceding it
How is reinsurer credit risk taken into account (old PfAD(re)) (2 ways)
- Adjust expected CFs directly
- Adjust discount rates to reflect risk
Identify 2 purposes of the adjustment for reinsurer non-performance
- Potential reinsurance counter-party failure
- Possible disputes resulting in reduced payments
Identify 3 factors to consider when disaggregating a reinsurance contract
Disaggregation can be necessary when reins contracts grouping is not sufficiently granular to reflect the substance of its contractual rights & obligations
- Whether risks covered are independent
- Whether components of contract can lapse separately
- Whether components can be priced separately
Explain when the contract boundaries end for a reinsurance contract
When the reinsurer cannot force the PH to pay premium & PH cannot force reinsurer to provide service at original premium.
Explain when does initial recognition begin for:
1. Proportional reinsurance (QS)
2. Non-proportional reinsurance (XoL)
- Begins when the underlying contracts are recognized
- Begins when reinsurance coverage begins
Define profit participation
Feature that seek to return ceding premium based on performance of underlying book.
Identify 2 contracts not covered under IFRS17
- Product warranties issues directly by manufacturer
- Life-contingency annuities and pensions as part of employer’s benefits
