CIA.IFRS17-LRC Flashcards

1
Q

Describe LRC

A

An entity’s obligation to:
(a) investigate and pay valid claims under existing insurance contracts for insured events that have not yet occurred; and
(b) pay amounts under existing insurance contracts that are not included in (a) and that relate to:
(i) insurance contract services not yet provided; or
(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.

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2
Q

Describe the concept of contract boundary under IFRS17

A

Cash flows are within the boundary of an insurance contract if they arise from substantive rights and obligations that exist during the reporting period:

(i) in which the entity can compel the policyholder to pay the premiums or;

(ii) in which the entity has a substantive obligation to provide the policyholder with insurance contract services

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3
Q

Formula carrying amount of CSM @ end of reporting period

A

carrying amount of CSM @ ‘‘end’’ of reporting period = (carrying amount of CSM @ ‘‘start’’ of reporting period) + adjustments

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4
Q

Identify adjustments relevant to the CSM carrying amount (4)

A
  • the effect of new contracts added to the group
  • interest on the CSM carrying amount during the reporting period
  • changes in FCFs relating to future services
  • effect of currency exchange differences
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5
Q

Define the term coverage units

A

the quantity of insurance contract services provided by the contracts in the group

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6
Q

Formula Amortization of CSM

A

[(CU_rep)/(CU_rep + CU_end)] * CSM_beg

CU_rep = Coverage units in the reporting period
CU_end = Expected remaining coverage units at the end of the reporting period
CSM_beg = reporting period opening CSM

*Ending CSM = (CSM_beg) - (amortization of CSM)

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7
Q

The determination of coverage units involves judgment and estimates, key principles to follow when using judgment (3)

A
  • quantity of benefits provided relates to the amount that can be claimed by policyholder (not expected costs to be incurred)
  • discount is optional
  • coverage period extends to the end of the period in which insurance contracts services are provided
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8
Q

Describe the CSM amortization pattern if the policy limit does not change over the coverage period

A

uniform

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9
Q

Describe the CSM amortization pattern if the policy limit decreases over the coverage period

A

declining (less CSM is released toward the end)

*mortgage insurance

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10
Q

Describe the CSM amortization pattern if the policy limit increases over the coverage period

A

increasing (more CSM is released toward the end)

*product warranty with replacement coverage (cost increase due to inflation)

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11
Q

GMA Formula for FCFs at initial recognition

A

FCFs = cash inflows - cash outflows + effect of discounting - RA

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12
Q

GMA Formula for LRC

A

LRC = (LRC excl. LC) + LC
LRC(excl. LC) = FCF + CSM

LC is only required for onerous contracts

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13
Q

Describe the measurement of LC (onerous contracts) subsequent to initial recognition

A

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

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14
Q

Formula PAA LRC (excl. LC) at initial recognition

A

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

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15
Q

Formula PAA LRC (excl. LC) at subsequent measurement

A

LRC (ex. LC) at subsequent measurement =

+ carrying amount at start of reporting period

+ Premiums received in period
(-) insurance revenue (premium earned for insurance contract services provided in that period)

(-) insurance Acquisition cash flows
+ amortization of insurance acquisition cash flows recognized as an expense in the reporting period

+ adjustments to a financing component

(-) investment components paid/transferred to LIC

***Simpler approach (given that there are no adjustments for financing or investment components):

LRC at subs. measurement = (prem received - insurance revenue recognize) - acquisition cost yet to be expensed

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16
Q

Possible indicators that may inform the decision to conduct quantitative testing of PAA (5)

A
  • a group of contracts in the portfolio that are know to be onerous at initial recognition
  • past losses in the portfolio
  • aggressive underwriting or pricing
  • unfavourable experience trends
  • unfavourable external conditions
17
Q

briefly describe the accounting steps if a quantitative assessment indicates a group of contracts is onerous

A
  • 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