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CAS Exam 6C > IFRS 17-DR > Flashcards

IFRS 17-DR Flashcards

1
Q

Define the IFRS 17 term: Discount Rate

A

The rate used to discount the estimates of future cash flows which is consistent with the timing, liquidity and currency of the insurance contract cash flows.

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2
Q

Define the IFRS 17 term: Fulfilment Cash Flow (FCF)

A

FCF = PV(future cash flows) + (risk adjustment for non-financial risk)

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3
Q

Define the IFRS 17 term: Liquidity Premium

A
  • adjustment made to a liquid-free yield curve
  • reflects differences between:
    • liquidity characteristics of the financial instruments that underlie the risk-free rates
      AND
    • liquidity characteristics of the insurance contracts

NOTE: highly liquid investments have low liquidity premium (and vice versa)

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4
Q

Define the IFRS 17 term: Reference Portfolio

A
  • a portfolio of assets used to derive discount rates based on current market rates of return
  • the portfolio rate of return is then adjusted to remove returns related to risk characteristics that are not in insurance contracts
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5
Q

Is the liquidity of a government bond High or Low?

A

High.

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6
Q

Is the liquidity of an investment in a messenger RNA research facility High or Low?

A

Low.

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7
Q

Identify considerations in deciding whether to use net or gross and ceded data for analysis. (3)

A
  • Data availability: if data is sparse, it may not be possible to directly estimate the present value of ceded cash flows
  • Cash Flow Volatility: different approaches may be warranted for different segments of business depending on the volatility of cash flows by segment
  • Reinsurance held: consider the type and consistency of reinsurance held
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8
Q

identify considerations in segmenting data for selecting payment patterns. (3)

A
  • business segments used for analyzing undiscounted data
  • payout period
  • existence of a predetermined schedule of payments
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9
Q

Identify characteristics that an IFRS 17 discount rate should possess. (3)

A

1) the discount rate should reflect the:
- time value of money
- characteristics of cash flows
- liquidity characteristics of insurance contracts
2) the discount rate should be consistent with:
- market prices for financial instruments with similar cash flow characteristics as insurance contracts
3) the discount rate should exclude:
- factors that affect market prices but do not affect cash flows for insurance contracts

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10
Q

Identify methods for selecting a discount rate for valuation of insurance contract liabilities under IFRS 17 (2).

A
  • Bottom up approach: a liquid, risk-free yield curve is adjusted to reflect the differences between the liquidity characteristics of market financial instruments and the liquidity characteristics of the insurance contracts
  • Top down approach: the yield to maturity of a reference portfolio of assets is adjusted to eliminate any factors that are not relevant to insurance contracts
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11
Q

Identify Risk factors that may differ between a reference portfolio and insurance contracts. (4)

A
  • liquidity
  • investment risk (ex: credit risk, market risk)
  • timing
  • currency risk
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12
Q

Identify examples of credit risk adjustments.

A
  • default risk

- downgrade risk

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13
Q

Calculate the market risk adjustment if the reference portfolio consists solely of bonds.

A

No adjustment is necessary.

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14
Q

Identify 1 or more insurance contract features that increase liquidity.

A
  • low inherent value of contract

- high exit value of contract (large portion of the inherent value is already paid out)

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15
Q

Identify 1 or more insurance contract features that decrease liquidity.

A
  • high exit costs for contract (ex: surrender penalties)
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16
Q

Which set of insurance contract liabilities is more liquid: LIC or LRC?

A

LRC is more liquid:

  • since no claims have yet occurred, it’s easier to cancel or otherwise get rid of the contract
  • recall that LIC stands for Liability for Incurred Claims
17
Q

Identify the steps in a ‘combined approach’ for estimating the Liability Liquidity Premium (LLP). (3)

A

1) create a reference portfolio and calculate the rate of return
2) subtract the risk-free rate to get the indicated asset liquidity premium (ALP)
3) then LLP = r * ALP + (constant liquidity premium difference)

18
Q

Under IFRS 17, what is a reference curve?

A

It is a ‘standardized’ curve used to facilitate comparison among entities in the unobservable period.

19
Q

Under IFRS 17, should discount rate vary with the timing of cash flows?

A

Yes, this is main purpose of the yield curve (vs the spot rate).

20
Q

Under IFRS 17, what is a ‘locked-in’ yield curve?

A

It is a yield curve determined at the initial recognition of the group of contracts.

21
Q

Under IFRS 17, when would a ‘locked-in’ yield curve be used for discounting?

A
  • when an entity uses the GMA to determine the LRC for some or all groups of insurance contracts
    AND
  • when an entity elects the OCI option for some or all portfolios of insurance contracts
22
Q

Under IFRS 17, identify 2 lines on the Income Statement where insurance expenses are reported.

A
  • insurance service expense

- insurance finance expense

23
Q

Under IFRS 17, what do ‘insurance expenses’ refer to?

A

They refer to the change in the carrying amount of the group of insurance contracts arising from:

  • the effect of the time value of money and the changes in the time value of money
  • the effect of financial risk and the changes in financial risk
24
Q

Under IFRS 17, what is meant by the ‘unwinding of discounts’?

A

The difference between discounting the cash flows to the beginning of the period and discounting the cash flows to the end of the time period.

25
Q

Under IFRS 17, identify methods for calculating the unwinding of discounts. (3)

A
  • constant yield curve: uses the same discount curve at the beginning and end of the period
  • unwinding using spot rates: uses an end of period discount curve that is equal to the beginning discount curve, but shifted by 1 period
  • expectation hypothesis: proposes that the term structure of interest rates is solely determined by market expectations of future interest rate changes
26
Q

Under IFRS 17, what level of aggregation should be used for calculating FCFs?

A

Any level of aggregation, provided, estimates of LIC can be allocated back to portfolios and groups.

CAS Exam 6C (70 decks)

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