IAA.RiskAdjs Flashcards

Principles for estimating risk adjustments under IFRS 17

1
Q

Identify reasons for adding risk adjustments to claim liability estimates under IFRS 17

A
  • to REWARD the insurer for taking on risk

- to COVER adverse deviation in claims experience

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2
Q

On initial recognition, how are insurance contracts measured in IFRS 17

A

FCF (fulfilment cash flows) = estimates of future cash flows + adjustments for the time value of money (and financial risk) + adjustment for non-financial risk

CSM (contractual service margin) = represents unearned profit from a group of insurance contracts

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3
Q

What does non-financial risk measure in IFRS 17

A

non-financial risk measures the compensation required to make the entity indifferent between:
choice 1: fulfilling a liability with a RANGE of possible outcomes due to non-financial risks
choice 2: fulfilling a liability with FIXED future cash flows equivalent to the expected value of choice 1

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4
Q

Identify 5 principles for calculating the non-financial risk adjustment in IFRS 17

A

risk adjustment should be HIGHER for
- risk where there is less information
- low frequency / high severity risks
- longer duration contracts
- risks with wide probability distributions
risk adjustment should be LOWER with emerging experience

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5
Q

Identify 2 FURTHER general considerations in calculating the risk adjustment in FIRS 17

A
  • pooling SIMILAR RISKS will lower the risk adjustment (law of large numbers -> more risks implies lower variance)
  • pooling risks that are negatively correlated will lower the risk adjustment (because negatively correlated risks will offset each other)
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6
Q

Identify an entities’ reporting/disclosure requirements for risk adjustments under IFRS 17

A
  • must REPORT a liability for risk adjustment (this is added to the PV of expected cash flow)
  • must DISCLOSE a confidence interval for the risk adjustment (for benchmarking against other entities)
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7
Q

What is IFRS 17?

A

IFRS 17 is a

  • new international standard for financial reporting
  • effective date changed to Jan 1, 2023 (was pushed back again to allow more time to determine effects of change)
  • applies to valuation of insurance contract liabilities
  • different from current Canadian practice (Canada: PV + 3 different kinds risk provisions)
  • uses CURRENT interest rates for calculating PV (instead of actual investment return rates)
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