IFRS 17 Flashcards by Daniel Yip

What principles does IFRS 17 establish?

For insurance contracts within the IFRS 17 standard:

Recognition
Measurement
Presentation
Disclosure

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Briefly describe 3 building blocks of the measurement of insurance contract liabilities under IFRS 17.

Present Value of future cash flows
- similar to PV(liabs)
- except, IFRS 17 includes acquisition expenses and all premiums, and excludes risk adjustment for financial risk
Risk adjustement for Non-Financial Risk:
- similar to PfADs for non-economic risks (claims dev, reinsurance recovery)
Contractual Service Margin (CSM):
- represents unearned profit from a group of insurance contracts (no front-ending of profits)
- current CIA standards do allow for front-ending of profits

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Define the term fulfilment cash flows or FCF.

FCF =

= IFRS building block 1 + IFRS building block 2

= PV (future cash flows) + risk adjustment for non-Financial Risk

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When is the CSM amount established and what is the amount?

When FCF < 0 (profit is negative) amount

= CSM = -FCF

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Briefly describe 2 valuation methods under IFRS 17

General Measurement Approach (GMA)
this is the default approach
Premium Allocation Approach (PAA)
simplified version of GMA
certain eligibility requirements must be met (assessed at contract inception)

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Define the term Liability for Incurred Claims (LIC)

Insurer’s obligation to pay claims for events that have already occurred (basically claim liability)

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Define the term Liability for Remaining Coverage (LRC)

Insurer’s obligation to provide insurance coverage for events that have not yet occurred (basically just the premium liability)

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Identify examples where PAA may be used instead of GMA for measuring IFRS 17 liabilities. (2)

short term contracts (policy term <=1 year)
longer-duration contracts if PAA is a reasonable approximation to GMA over life of contract (both apply only to LRC (Liability for Remaining Coverage) component liabilities)

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Define the term “insurance contract” under IFRS 17

a contract under which 1 party (the issuer)…

accepts significant insurance risk from another party (the PH)…
by agreeing to compensate the PH…
if a specific uncertain future event (the insured event) adversely affects the PH

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Identify components of an insurance contract under IFRS 17. (4)

insurance components: non-financial risk that is the “normal” part of any insurance contract
service components: e.g. claims adjudication with reinsurance protection
investment components: amounts include in premium that are returned customers, regardless of occurrence of an event
embedded derivatives (not on syllabus)

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What is the formula for contract liability in terms of LIC (Liability for Incurred Claims) & LRC (Liability for Remaining Coverage)?

insurance contract liability = LIC + LRC

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What is the formula for LRC

LRC = UEP - (premium receivable) - DAC

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Identify the categories for differences between IFRS 17 and current CIA practices for measurement of liabilities. (5)

HINT: Crit = x2 (DAC,Discount)

Criteria
DAC Deferral
DAC Amount
Discounting of LRC
Discounting of LIC

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Identify differences between IFRS 17 and current CIA practices for measurement of liabilities (Item 1).

Criteria

IFRS 17: allows PAA for short-term contracts without testing whether PAA reasonably approximates GMA

current: allows (UEP - DAC) to be used only if it’s a reasonable approximation to the explicit valuation approach

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Identify differences between IFRS 17 and current CIA practices for measurement of liabilities (Item 2).

DAC deferral

IFRS 17: entity may choose deferral or direct expense for short-term contracts

current: no deferral in explicit valuation, but deferral if (UEP - DAC) is held

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Identify differences between IFRS 17 and current CIA practices for measurement of liabilities (Item 3).

DAC amount:

IFRS 17: allows deferral of DAC that is directly attributable to the portfolio of insurance contracts

current: allowable deferral is different

Identify differences between IFRS 17 and current CIA practices for measurement of liabilities (Item 4).

Discounting of LRC

IFRS 17: entity may choose not to discount (for short-term policies, or for longer-term policies if the discounting effect is not significant)

current: requires discounting

Identify differences between IFRS 17 and current CIA practices for measurement of liabilities (Item 5).

Discounting of LIC

IFRS 17: ignore discounting and financial risk for LIC if:

PAA is used for LRC;
LIC Cash flows are received < 1 year within incurred date of claims

current: requires discounting

Identify examples in Canadian P&C where PAA can or cannot be used to measure LRC.

PAA ok:

auto outside QC (since policy term is generally <= 1 yr)
auto in QC (if PAA is a reasonable approximation to GMA)

PAA probably not ok:

warranty
mortgage default (both may have terms > 1 year, or high year-to year variability in claims)

Briefly describe 2 measurement considerations for contract liabilities in IFRS 17.

Level of aggregation:

must identify portfolio of contracts (contracts in a portfolio have similar risks and are managed together)
each portfolio is further subdivided into groups (a group is the unit of account for measurement of CSM)

Contract boundary (not on syllabus):

must identify contract boundary for each contract (this is normally the term of the policy)
cash flow estimates include only cash flows related to claims incurred within the boundary

How does IFRS 17 define ‘estimate of future cash flows’?

Estimate of future cash flows:

the probability-weighted mean of the full range of possible outcomes (use all credible information available at the reporting date without undue cost or effort).

Identify areas where there are differences between IFRS 17 and current CIA practices regarding probability-weighted cash flows. (5)

MfADs for non-financial risk
MfADs for financial risk
Policyholder options
Expenses
Taxes

Identify differences between IFRS 17 and current CIA practices regarding probability-weighted cash flows. (Item 1)

MfADs for non-financial risk

IFRS 17: requires separate disclosure for risk adjustment for non-financial risk

Current: difference between ‘best estimat’ of cash flows and ‘best estimate with PfAD’ is not always quantified

Identify differences between IFRS 17 and current CIA practices regarding probability-weighted cash flows. (Item 2)

MfADs for financial risk

IFRS 17: includes financial risk in the present value of future cash flows

Current: MfAD for interest rate risk is separate from the best estimate of PV for cash flows

Identify differences between IFRS 17 and current CIA practices regarding probability-weighted cash flows. (Item 3)

Policyholder Options IFRS 17: accounts for policholder behaviour Current: the effect of cash flows is blurred

Identify differences between IFRS 17 and current CIA practices regarding probability-weighted cash flows. (Item 4)

Expenses IFRS 17: includes only expesnses that are directly attributable to the portfolio Current: the above is not a requirement

Identify differences between IFRS 17 and current CIA practices regarding probability-weighted cash flows. (Item 5)

Taxes IFRS 17: excludes taxes from cash flow estimates Current: taxes are included

What is the purpose of discounting?

To account for the time value of money.

Under current practice, what 3 things do you need for the discounting calculation?

Assuming you have the nominal value of the liabilities, you need the: 1. discount rate 2. discount rate MfAD 3. payment pattern

Under IFRS 17, how is the discount rate selected when cash flows do not vary with returns on underlying items?

The discount rate is based on a liquidity-adjusted risk-free discount rate curve (or yield curve).

Identify approaches for determining the discount rate curve under IFRS 17. (2)

Bottom-up approach Top-Down approach

Briefly describe the Bottom-up approach for determining the discount rate curve under IFRS 17.

Bottom-up approach: * adjust the risk-free discount curve by adding an illiquidity premium that reflects the liabilities * under current practice, there's no requirement to identify an illiquidity premium

Briefly describe the Top-down approach for determining the discount rate curve under IFRS 17.

Top-down approach: * use the investment return on a reference portfolio of assets that's 'similar' to the liabilities * Ex: use the 10-year spot rate on a Canadian bond for the 10-year liability cash flow * then remove asset characteristics not relevant to the liability * Ex: remove credit and market risk * under current practice, the rate would be tied more closely to the assets held by the company

Briefly describe how financial risk is incorporated into discounting under IFRS 17.

TRICK: you can build financial risk into the: * discount rate; or * cash flows; or * a combination of both under current practice, there is an explicit provision for reinvestment risk (there is no such provision under IFRS 17)

Regarding non-financial risk, how is the 'measurement objective' different under IFRS 17 vs the current practice?

IFRS 17: compensation required by the entity to bear uncertainty Current: amount required to provide for the effect of uncertainty