Defrain

Question 1

Definition of an “insurance contract” under IFRS:

Answer 1

A contract under which one party accepts a significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely effects the policyholder.

Question 2

List 4 requirements of Phase 1 or IFRS:

Answer 2

1. Elimination of catastrophe & equalization provisions
2. Adequacy test of insurance liabilities & impairment test of reinsurance assets
3. Prohibition of offsetting insurance liabilities with reinsurance recoverables
4. Certain disclosures

Question 3

3 steps to determine liabilities according to IFRS:

Answer 3

1. Calculation of unbiased probability weighted expected cash flows
2. Application of discounting
3. Application of Margins

Question 4

List factors that would require higher risk margins:

Answer 4

• less is known about the estimate
• low frequency/ high severity
• longer duration
• wide probability distribution
• emerging experience increases uncertainty

Question 5

Outline 3 approaches to determine risk margins:

Answer 5

1. Confidence level (VaR) technique: the needed load to the expected value to result in a specific probability that the insurer has sufficient funds to pay for the liabilities
2. Conditional Tail Expectation (CTE): probability weighted average of all scenarios in the tail - Mean estimate
3. Cost of capital method: the amount necessary to produce an adequate return, after factoring in the investment return.