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Exam 6C - Fall 2023 > CIA.IFRS17-LRC > Flashcards

CIA.IFRS17-LRC Flashcards

1
Q

What is a simple formula for “insurance contract liabilities” under IFRS 17

A

= LIC + LRC

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2
Q

What is a simple formula for “LRC” under IFRS 17

A

LRC = LRC Excl. LC + LC

where LC (Loss Component) is only required for onerous contracts

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3
Q

How does IFRS17 define LRC (Liability for Remaining Coverage)

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
- (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 LIC

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4
Q

Describe the concept of “contract boundary” under IFRS 17

A

The contract boundary distinguishes future cash flows to be considered in the measurement of the insurance contract from other future cash flows.

  • Per IFRS17.34 “Cash flows are within the boundary of an insurance contract if they arise from substansive rights and obligations that exist during the reporting period in which the entity can compel the policyholder to pay the premiums or in which the entity has a substansive obligation to provide the policyholder with insurance contract services”
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5
Q

Fill in the blank: policies are subdivided into:

A

Portfolios

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6
Q

Fill in the blank: portfolios are subdivided into:

A

Groups

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7
Q

What does it mean for a portfolio to be in an “asset position”

A

Expected cash inflows are greater than expected cash outflows

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8
Q

What does it mean for a portfolio to be in an “liability position”

A

Expected cash outflows are greater than expected cash inflows

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9
Q

What is a simple formula for LRC that uses cash flows

A

LRC = FCFs + CSM

where, CSM exists only for non-onerous contracts (this is the GMA method formula)

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10
Q

At contract inception, what is the value of LIC

A

0 (at contract inception, all liabilities are part of LRC)

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11
Q

At contract inception, what is the value of paid claims

A

0 (at contract inception, no claims have been incurred so no claims could have been paid)

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12
Q

At contract termination, what is the value of LRC

A

0 (at contract termination, all liabilities are part of LIC)

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13
Q

At contract inception, how much of the CSM has been released

A

None

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14
Q

At contract termination, what is the value of the CSM?

A

0 (all CSM has been released by contract termination)

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15
Q

Identify the main steps in any discounting procedure (same for IFRS 17 and CIA)

A
  • Determine a payment pattern
  • Apply discount factors
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16
Q

When estimating the timing of LRC cash flows on a group basis, it is necessary to either:

A
  • Estimate a payment pattern on a group basis; or
  • Adjust the accident year payment pattern used for LIC to a pattern consistent with the average accident date of the group
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17
Q

Formula for: 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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18
Q

Identify adjustments relevant to the CSM carrying amount (3)

A

(a) the effect of any new contracts added to the group

(b) interest accreted on the carrying amount of the CSM during the reporting period

(c) The effect of any currency exchange differences on the CSM

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19
Q

Define the term “number of coverage units” according to IFRS 17 & how this is determined

A

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

It is determined by considering for each contract the quantity of the insurance contract services provided under a contract and its expected coverage duration.

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20
Q

What is the key concept that relates “coverage units” to the CSM?

A

Coverage units determine how the CSM is released into profit (or loss)

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21
Q

What is the key formula for how CSM is amortized?

A

Let CU = # of coverage units:
- Proportion of CSM released during the quarter = CU(released in period) / (CU(released in period) + CU(end))

22
Q

What is the key principle for determining coverage units based on judgment & experience?

A

To reflect insurance contract services provided in each period

23
Q

In applying judgment for determining coverage units, the actuary would follow the key principles:

A
  1. Quantity of benefits would generally not be based on expected claims or release of risk adjustment. The quantity of benefits provided under a contract is related to the amount that can be claimed by the policyholder and not the expected costs to be incurred by the entity.
  2. It is optional to use discounting in the calculation of quantity of benefits provided under a contract.
  3. The coverage period extends to the end of the period in which insurance contract services are provided and would not extend to the period over which claims are settled (unless claims in settlement are included in LRC rather than LIC)
24
Q

Describe the CSM amortization pattern if the policy limit:
- Doesn’t change
- Decreases
- Increases
over the coverage period & include examples

A

Doesn’t change (regular P&C policy): Uniform

Decreases (e.g. Mortgage insurance contracts): Declining (so less CSM is released toward the end)

Increases (e.g. product warranty coverages with replacement coverage): Increases (so more CSM is released toward the end)

25
Q

What is one way of writing the GMA formula for FCFs at initial recognition of the contract

A

FCF = (Future Cash in-flows) - (future cash out-flows) + (effect of discounting) - RA

Note: signs can be confusing, the actual appropriate method would be to switch the signs above, but this is how it was in the source text

26
Q

Is an entity required to track these separately: LRC Excl. LC and LC?

A

Yes (because you want to keep non-onerous and onerous contracts separate)

27
Q

Describe the measurement of onerous contracts subsequent to intial recognition

A

If there are no changes in underlying assumptions:
- LC is expected to systematically decrease

If there are changes in underlying assumptions that are favorable:
- Allocate changes to the LC until it reaches 0 then a CSM may be re-established

28
Q

Describe the measurement of non-onerous contracts that “become onerous” subsequent to initial recognition

A

Reduce CSM to 0 and establish an LC

(this would happen when unfavorable changes in the fulfilment CFs exceed the carrying amount of the CSM)

29
Q

Why are non-onerous groups of contracts “good”?

A

They have net cash inflows

30
Q

Why are onerous groups of contracts “bad”?

A

They have net cash outflows

31
Q

Why do onerous and non-onerous contracts need to be tracked separately for accounting purposes?

A
  • Non-onerous contracts have a CSM (but no LC)
  • Onerous contracts have a LC (but no CSM)
32
Q

Describe PAA in 1 short phrase

A

PAA is a simplified version of GMA for measuring LRC (PAA doesn’t apply to LIC)

33
Q

Identify 2 things that make PAA simpler than GMA for LRC

A
  • PAA does not require estimation of Fulfilment CFs
  • PAA does not require a CSM (Contractual Service Margin)

(this is when contracts are non-onerous)

34
Q

Briefly describe 2 eligibility criteria for using PAA to calculate LRC under IFRS 17

A
  • Can be used for short-term contracts (policy term ≤ year)
  • Can be used for longer-duration contracts IF PAA is a reasonable approximation to GMA over the contract term
35
Q

Under PAA, how is LRC excluding LC calculated differently for onerous and non-onerous contracts

A

There is no difference!

However, onerous contracts will need to have a LC term calculated.

36
Q

Formula for LRC excl. LC under PAA at initial recognition

A

LRC excl. LC at initial recognition =
(+) the premiums, if any, received at initial recognition

(-) any insurance acquisition cash flows at that date, unless the entity chooses to recognize the payments as an expense

(+/-) any amount arising from the derecognition at that date of: any asset for insurance acquisition cash flows & any other asset or liability previously recognised for cash flows related to the group of contracts

37
Q

Formula for LRC excl. LC under PAA at subsequent measurement

A

LRC excl. LC at subsequent measurement =
(+) the carrying amount at the start of the reporting period

(+) the premiums received in the period

(-) insurance acquisition cash flows; unless entity chooses to recognise the payments as an expense

(+) any amounts relating to the amortization of insurance acquisition cash flows recognized as an expense in the reporting period; unless entity chooses to recognise the payments as an expense

(+) any adjustments to a financing component

(-) the amount recognized as insurance revenue for insurance contract services provided in that period (usually is EP)

(-) any investment component paid or transferred to the liability for incurred claims

38
Q

Identify facts & circumstances for the qualitative assessment of whether a group of contracts is onerous (aka possible indicators that may inform the decision to conduct onerous contract testing) (5)

A

(a) a group in the portfolio that is known to be onerous at initial recognition

(b) past losses in the portfolio

(c) aggressive underwriting or pricing

(d) unfavorable experience trends

(e) unfavorable external conditions

39
Q

Describe the quantitative assessment of a potentially onerous group of contracts

A

(1) calculate the difference: D = FCF - (LRC excl. LC)
- if D > 0, group is onerous
- if D ≤ 0, group is not onerous

(2) if onerous, then book LC on P&L
- increase LRC to FCF
- where LRC = FCF = LRC excl. LC + LC

40
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
41
Q

Briefly describe the accounting steps required for the LC at subsequent measurements

A

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)

42
Q

Describe 8 differences between GMA and PAA (1-3)

A

Application:
- GMA: All P&C Contracts
- PAA: All P&C contracts ≤ 1 year, or longer-duration that have been tested to not differ materially from GMA

Initial Measurement:
- GMA: PV of Cash flows + RA + CSM
- PAA: If non-onerous, prems received - initial acquisition cashflows (unless recognized as expenses incurred)

Cash flow projections:
- GMA: Yes
- PAA: No, unless the contract is onerous

43
Q

Describe 8 differences between GMA and PAA (4-6)

A

Risk Adjustment:
- GMA: Yes
- PAA: no, unless the contract is onerous

CSM:
- GMA: Yes (if contract is issued & is not onerous)
- PAA: No

Loss Component:
- GMA and PAA: Yes, if onerous

44
Q

Describe 8 differences between GMA and PAA (7-8)

A

Option to Immediately Recognize acquisition costs:
- GMA: No
- PAA: yes, if the coverage period of all contracts in the group is one year or less

Onerous contract test at initial recognition:
- GMA: a quantification is always required
- PAA: a quantitative test is performed if indicated by a qualitative assessment (facts & circumstances)

45
Q

If an underlying insurance contract is onerous, when must it be recognized in financial statements?

A

Recognized when issued (even before coverage begins)

46
Q

If an underlying insurance contract is non-onerous, does it have to be recognized before coverage begins?

A

No

47
Q

If an underlying contract is in-force, does it have to be recognized in financial statements?

A

Yes

48
Q

Do reinsurance contracs not entered into have to be recognized in financial statements?

A

No

49
Q

Are regulatory bodies going to adapt their MCT guidelines upon implementation of IFRS 17?

A

Yes

50
Q

Identify a key consideration in adapting MCT for the implementation of IFRS 17

A

How to select the ELR (expected loss ratio)

Exam 6C - Fall 2023 (56 decks)

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