IFRS 17

Question 1

Define an Insurance contract under IFRS 17

Answer 1

• One party accepts significant insurance risk from another. Insurance risk is significant if and only if, an insured event could cause the entity to pay additional amounts that are significant in any single scenario.
• Investment contracts with discretionary participation features, although not defined as above, are also included in IFRS17

Question 2

Describe Level Aggregation under IFRS 17

Answer 2

Identify products with similar risk, into a portfolio and manage together e.g. same product line
Minimum of following groups:
• onerous at initial recognition
• no significant possibility of becoming of onerous at recognition
• group of remaining contracts
Not allowed to include contracts more than a year apart in the same group.

Question 3

Describe the Liability Measurement under IFRS 17

Answer 3

Liability Measurement
Building blocks
Liability – fulfillment cashflows (BEL+RA) + CSM
• Gross of reinsurance
• Determined separately for insurance and reinsurance

BEL
• Cashflows projected up to contract boundary to get best i.e. premiums, claims, expenses + commission
• Discount rate to reflect TMV and liquidity of cashflows

Risk Adjustment
• Compensation entity requires for bearing uncertainty of cashflows for non-financial risks affecting amount and timing of cashflows
• Method to calculate not specified but confidence level must be disclosed.

Question 4

Describe the CSM

Answer 4

• set up at inception for a group of contracts, to represent the unearned profit which will emerge in line with general accounting principles
• If group is profitable at inception, BEL +RA< 0, CSM set to –(BEL+RA). Will lead to profit being recognized over lifetime of contract.
• CSM over lifetime represents a retrospective build up allowing for:
o Growth from interest
o Reassessment of fulfilment cashflows i.e. changes in profitability
o Release of CSM for profit recognition
• If Contract is onerous at recognition, CSM set to zero, the loss will be realized immediately

• Need to decide the rate the CSM will be released over lifetime, by transfer of serv. Any unreleased CSM represents profit not recognized.

Question 5

Outline the

Premium Allocation Approach

Answer 5

• Simplified Measurement, broadly akin to UPR
• measurement should not differ materially from building blocks.
• contract boundary less than a year.

Question 6

Presentation of Results under IFRS 4

Answer 6

Premium Income- Actual Claims +/- change in reserves + Investment Income

Question 7

Presentation of Results under IFRS 17

Answer 7

CSM recognized in period+ RA released +/- economic variances+/- Non-eco variances.
CSM released due to provision over service over the period

Question 8

Outline the Transitional Requirements for IFRS 17

Answer 8

IFRS 17 is effective from 1 Jan 2022, but a compliant balance sheet also needs to be determined at transition date of 1 Jan 2021, for comparative information.
While BEL and RA are prospective calculations, The CSM is retrospective and needs to be determined at inception of contracts. Hence, CSM at transition would have to be determined.
Full retrospective
Default methodology, determine CSM retrospectively for all groups at initial recognition date of each group and roll forward to transition date
Modified retrospective
- Achieve closest possible outcome to full retrospective approach possible, using reasonable and supportable information, without undue cost and effort
Fair value
CSM is difference between
The fair value of a group of insurance contracts at that date (applying IFRS 13 fair value measurement)
And fulfilment cash flows as measured at that date
Will have a material impact on future profits recognised on existing business, with company having little flexibility to change it once IFRS 17 is implemented