IAA.RiskAdjs

Question 1

identify 5 principles for calculating the non-financial risk adjs in IFRS17

Answer 1

risk adjs should be higher for

• less information
• low freq/high severity
• longer duration contracts
• risks with wide probability distributions

risk adj should be lower with emerging experience

Question 2

reasons for adding risk adj to claim liability estimates under IFRS17

Answer 2

• to reward the insurer for taking on risk

- to cover adverse deviation in claims experience

Question 3

on initial recognition, how are insurance contracts measured in IFRS17

Answer 3

total of FCF + CSM
FCF = estimates of future cash flows + adj for time value of money and financial risks + adj for non-financial risk
CSM: represents unearned profit from a group of insurance contracts

Question 4

what does non-financial risk measure in IFRS17

Answer 4

measures the compensation required to make the entity indifferent between:

1. fulfilling a liability with a range of possible outcomes due to non-financial risks
2. fulfilling a liability with fixed future cash flows equivalent to the unexpected value of choice 1

Question 5

identify 2 futher general considerationis in calculating the risk adj in IFRS17

Answer 5

-pooling similar risks will lower the risk adj
(law of large numbers -> more risks implies lower variance)
- pooling risks that are negatively correlated will lower the risk adj
(negatively correlated risks will offset each other)

Question 6

identify an entity’s reporting/disclosure requirements for risk adj under IFRS17

Answer 6

• must report a liability for risk adj (added to the pv of expected cash flows)
• must disclose a confidence interval for the risk adj (for benchmarking against other entities)