CIA.IFRS17-LRC Flashcards
Identify the two components to sum to get LRC.
LRC (excl LC) + LC
Define LRC (Liability for Remaining Claims).
LRC (Liabilities for Remaining Claims) is an entity’s obligation to:
(a) investigate & pay valid claims under existing insurance contracts for insured events that have not yet occurred
(b) pay amounts under existing insurance contracts that are not included in (a) and that relate to:
(i) insurance contract services not yet provided
(ii) any investment components or other amounts that are…
not related to the provision of insurance contract services and that have…
not been transferred to the liability for incurred claims
Define Contract boundary.
Cash flows that should be included when measuring the insurance liability arising from a contract:
• the relevant cash flows are triggered by the contract during the term of the contract
(Ex: 1 year)
• the cash flows include premiums paid by the policyholder & payments from the insurer to the policyholder
(in accordance with the contract)
Briefly explain what it means for a portfolio to be in asset position.
(expected cash inflows) > (expected cash outflows)
Briefly explain what it means for a portfolio to be in liability position.
(expected cash inflows) < (expected cash outflows)
At inception, what is the value of LIC?
0 (at contract inception, all liabilities are part of LRC)
At inception, what is the value of paid claims?
0 (at contract inception, no claims have been incurred so no claims could have been paid)
At contract termination, what is the value of LRC.
0 (at contract termination, all liabilities are part of LIC)
At contract inception, how much of the CSM has been released?
None
At contract termination, what is the value of CSM?
0 (all CSM has been released by contract termination)
Identify the 2 main steps in any discounting procedure (same for IFRS 17 and CIA)
- Determine a payment pattern
- Apply discount factors
Identify a procedure for estimating the timing of LRC cash flows on a group basis under IFRS 17
• estimate a payment pattern on a group basis
• adjust the AY payment pattern used for LIC to a pattern consistent with the average accident date of the group
Formula for: carrying amount of CSM @ end of reporting period
carrying amount of CSM @ ‘'’end’’’ of reporting period =
(carrying amount of CSM @ ‘'’start’’’ of reporting period) + adjustments
Identify 2 adjustments relevant to the CSM carrying amount
• the effect of new contracts added to the group
• interest on the CSM carrying amount during the reporting period
Define coverage units
The quantity of insurance contract services provided by the contracts in the group (as a simple example, this could just be equal to the # of policies)
What is the key concept that relates ‘coverage units’ to the CSM?
Coverage units determine how the CSM is released into profit (or loss)
How are coverage units determined?
Determined by considering (for each contract) the quantity of the benefits provided under a contract within its expected coverage period
What is the KEY FORMULA for how CSM is amortized?
Let CU = # of Coverage Units:
Proportion of CSM released during the quarter =
CUbeg / ( CUbeg + CUend )
What is the KEY PRINCIPLE for determining coverage units based on judgment & experience?
To reflect the insurance contract services provided in each period
Identify 3 general considerations for counting coverage units
• quantity of benefits relates to the amount that can be claimed by the policy-holder
• discounting is optional
• coverage period extends to the end of the period in which insurance contract services are provided (unless claims in settlement are included in LRC rather than LIC)
Describe the CSM amortization pattern if the policy limit doesn’t change over the coverage period.
Uniform
Describe the CSM amoritzation pattern if the policy limit descreases over the coverage period.
Declining (so less CSM is released toward the end)
Describe the CSM amortization pattern if the policy limit increases over the coverage period
Increasing (so more CSM is released toward the end)
Identify an example of an insurance product with a declining policy limit over the coverage period
Mortgage
Identify an example of an insurance product with a increasing policy limit over the coverage period
Product warranty with replacement coverage
(replacement costs could increase due to inflation)
What is one way of writing the GMA formula for FCFs at initial recognition of the contract?
FCF = (Future cash in-flows) – (Future cash out-flows) + (effect of discounting) – RA + CSM
Is an entity required to track these separately: LRC excluding LC and LC?
yes (because they want to keep non-onerous and onerous contracts separate)
Describe the measurement of onerous contracts subsequent to initial recognition (depending on whether there have been changes in underlying assumptions).
if there are no changes in underlying assumptions:
→ LC is expected to be systematically decreased
if there are changes in underlying assumptions that are favourable:
→ allocate changes to the LC until it reaches 0 then a CSM may be re-established
Describe the measurement of non-onerous contracts that ‘‘becomes onerous’’ subsequent to initial recognition.
reduce CSM to 0 and establish a LC
(this would happen when unfavourable changes in the fulfilment cash flows exceed the carrying amount of the CSM)
Why are non-onerous groups of contracts ‘good’?
They have net cash inflows
Why are onerous groups of contracts ‘bad’?
They have net cash outflows
Why do onerous and non-onerous contracts need to be tracked separately for accounting purposes?
• Non-onerous contracts have a CSM (but no LC)
• Onerous contracts have an LC (but no CSM)
What do the acronyms ‘GMA’ and ‘PAA’ stand for?
GMA is General Measurement Approach
PAA is Premium Allocation Approach
Describe PAA in 1 short phrase
PAA is a simplified version of GMA for measuring LRC (PAA does not apply to LIC)
Identify 2 things that make PAA simpler than GMA for LRC
• PAA does not require estimation of FCFs (Future Cash Flows)
• PAA does not require a CSM (Contractual Service Margin)
Under PAA, how is LRC excluding LC calculated differently for onerous and non-onerous contracts?
No difference!
Onerous contracts have an LC term however
Formula for LRC under PAA at initial recognition
LRC (ex. LC) at initial recognition =
+ Premiums
- insurance Acquisition cash flows (unless the entity chooses to recognize the payments as an expense)
+/- amounts arising from Derecognition of “certain” assets & liabilities
Formula for LRC under PAA at subsequent measurement
LRC (ex. LC) at subsequent measurement =
+ carrying amount at start of reporting period
+ Premiums received in period
- insurance Acquisition cash flows
+ amortization of insurance acquisition cash flows recognized as an expense in the reporting period
+ adjustments to a financing component
- insurance revenue (premium earned for insurance contract services provided in that period)
- investment components paid/transferred to LIC
Briefly explain the decision tree for establishing whether a group is onerous or not and what to do.
- Qualitative Assessment based on facts & circumstances
- Circumstances does not exist then non-onerous and stop
- Circumstances exist then continue
- Quantitative Assessment: D = FCF - (LRC excl. LC)
- D < 0 then non-onerous and stop
- D > 0 then onerous and continue
- Book LC on P&L (Profit & Loss statement) and increase LRC to FCF
Identify 5 facts & circumstances for the qualitative assessment of whether a group of contracts is onerous.
• a group of contracts in the portfolio that are known to be onerous at initial recognition
• past losses in the portfolio
• aggressive underwriting or pricing
• unfavourable experience trends
• unfavourable external conditions
Briefly describe the accounting steps if a quantitative assessment indicates a group of contracts is onerous
• recognize a loss in the insurance service expense immediately for the net outflow for the onerous group
• establish an LC as part of the LRC for the onerous group
Briefly describe the accounting steps required for the LC at subsequent measurements
The LC is released from insurance service expense and amortized from LRC over the duration of the contracts
(so LC = 0 by the end of the coverage period.)
Describe the difference between LRC under GMA & PAA for: acquisition costs
GMA: cannot recognize acquisition costs immediately
PAA: can recognize acquisition costs immediately if coverage period of all contracts in group ≤ 1 year
Describe the difference between LRC under GMA & PAA for: discounting
GMA: discounting required
PAA: can discounting not required unless there is a significant financing component (should be none if the period between premiums being due & provision of servies is ≤ 1 year)
Describe 2 differences between LRC under GMA & PAA aside from acquisition costs & discounting
Application
GMA: applies to any P&C contract
PAA: applies to P&C contracts with a coverage period ≤ 1 year
(PAA must be specifically tested if coverage period is more than 1 year)
Cash Flow Projections
GMA: for non-onerous contracts → yes
(cash flows projections are required to estimate LRC)
PAA: for non-onerous contracts → no
(cash flows projections are not required to estimate LRC)
Describe the difference between LRC under GMA & PAA for: initial measurement
GMA: LRC = PV(Cash Flows) + RA + CSM
PAA: LRC = premiums – (initial acquisition costs UNLESS recognized as expenses when incurred) ← non-onerous contracts
Describe the difference between LRC under GMA & PAA for: risk adjustment
GMA: RA is required for non-onerous contracts
PAA: RA is not required for non-onerous contracts
Describe the difference between LRC under GMA & PAA for: CSM
GMA: CSM is required for non-onerous contracts
PAA: CSM is not required for non-onerous contracts
If an underlying insurance contract is onerous, when must it be recognized in financial statements?
recognized when issued (even before coverage begins)
If an underlying contract is issued but non-onerous, does it have to be recognized before coverage begins?
No
If an underlying contract is in-force, does it have to be recognized in financial statements?
Yes
Do reinsurance contracts not entered into have to be recognized in fnancial statements?
No
Briefly describe the steps in calculating the Loss Component under PAA within IFRS 17
(1) Determine the UPR (Unearned Premium Reserve).
(2) Estimate future claims and loss adjustment expenses as follows:
• apply a selected ELR and an unallocated loss adjustment expense (ULAE) factor to the UPR by contract group
• (this is the largest component of the FCFs)
(3) Discount the result of step 2 to the evaluation date.
(4) Apply the RA (Risk Adjustment), acquisition costs, other attributable expenses to the result of step 3
(5) Subtract FCFs to get LC
Are regulatory bodies going to adpat their MCT guidelines upon implementation of IFRS 17
Yes
Identify a key consideration in adapting MCT for the implementation of IFRS 17
How to select the ELR (Expected Loss Ratio)
