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CAS Exam 6C > IFRS 17-LRC > Flashcards

IFRS 17-LRC Flashcards

1
Q

What is the basic formula for ‘insurance contract liabilities’ under IFRS 17?

A

Insurance Contract Liabilities = LIC + LRC

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2
Q

What is a simple formula for ‘Liabilies for Remaining Claims’ (LRC) under IFRS 17?

A

LRC = (LRC excl. LC) + LC

where LC = loss component
Note: LC is required only for onerous contracts

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3
Q

How does IFRS 17 define Liabilities for Remaining Claims (LRC)?

A

Liabilities for Remaining Claims (LRC) is an entity’s OBLIGATION to:

a) investigate and pay valid claims under existing insurance contracts for insured events that NOT yet occurred; and,
b) pay amounts under existing insurance contracts that are not included in a) and that relate to:
i) insurance contract services NOT yet provided; and,
ii) any investment components or other amounts that are NOT related to the provision of insurance contract services and that have NOT been transferred to the Liability for Incurred Claims (LIC)

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4
Q

Describe the concept of ‘contract boundary’ under IFRS 17.

A

It defines the cash flows that should be included when measuring the insurance liability arising from a contract:

  • the relevant cash flows are triggered by the contract during the term of the contract (ex: 1 year)
  • the cash flows include premium paid by the policy holder AND payments from the insurer to the policyholder (in accordance with the contract)
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5
Q

What are the subgroups of an aggregations of insurance contracts? (2)

A

Policies, or insurance contracts, are subdivided into ‘portfolios’ (ex: provinces), and portfolios are subdivided into ‘groups’ (ex: auto, prop, CGL, etc.).

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6
Q

What does it mean for a portfolio to be either in an “asset position”, or in a “liability position”? (2)

A
  • A portfolio is considered to be in an ASSET position when expected cash inflows are greater than expected cash outflows.
  • A portfolio is considered to be in a LABILITY position when expected cash outflows are greater than expected cash inflows.
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7
Q

What is the simple formula for Liabilities for Remaining Claims (LRC) that uses cash flows?

A

LRC = Fulfillment Cash Flows (FCFs) + Contractual Service Margin (CSM)
Note: CSM exists only for non-onerous contracts)

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8
Q

At contract inception, what is the value of Liabilities for Incurred Claims (LIC)?

A

$0

- at contract inception, all liabilities are part of Liabilities for Remaining Claims (LRC)

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9
Q

At contract inception, what is the value of Paid Claims?

A

$0

- at contract inception, no claims have been incurred, so no claims could have been paid out

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10
Q

At contract termination, what is the value of Liabilities for Remaining Claims (LRC)?

A

$0

- at contract termination, all liabilities are part of Liabilities for Incurred Claims (LIC)

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11
Q

At contract inception, how much of the Contractual Service Margin (CSM) has been released?

A

$0

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12
Q

At contract termination, what is the value of the Contractual Service Margin (CSM)?

A

$0

- at contract termination, the entirety of the Contractual Service Margin (CSM) has been released

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13
Q

Identify the main steps in any discounting procedure (note: this is the same for IFRS 17 and CIA). (2)

A
  • determine the payment pattern

- apply discount factors

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14
Q

Identify a procedure for estimating the timing of LRC cash flows on a group basis under IFRS 17. (2)

A
  • estimate a payment pattern on a group basis
  • adjust the AY payment pattern used for Liabilities for Incurred Claims (LIC) to a pattern consistent with the average accident date of the group
    Recall: a group is a subdivision of a portfolio.
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15
Q

What is the formula for the ‘carrying amount of CSM at the END of the reporting Period’?

A

carrying amount of CSM at the END of the reporting Period

(carrying amount of CSM at START of reporting period) - adjustments

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16
Q

Identify adjustment that are relevant to the Contractual Service Margin (CSM) carrying amount. (2)

A
  • the effect of new contracts added to the group

- interest of the Contractual Service Margin (CSM) carrying amount during the reporting period.

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17
Q

Define the term ‘coverage units’ according to IFRS 17.

A

The quantity of insurance contract services provided by the contracts in the group.
ex: could be equal to the # of policies

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18
Q

What is the key concept that relates ‘coverage units’ to the CSM?

A

Coverage Units determine how the CSM is to be released into profit (or loss).

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19
Q

How are Coverage Units determined?

A

Determined by considering, for each contract, the quantity of benefits provided under a contract within its expected coverage period.

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20
Q

What is the Key Formula for how CSM is amortized?

A

Proportion of CSM released during time period:

=CU(rep. per.) / [ CU(rep. per.) + CU(remaining) ]
where, CU = # of coverage units

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21
Q

What is the Key Principle for determining coverage units based on judgement and experience?

A

To reflect the insurance contract services provided in each period.

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22
Q

Identify general considerations for counting coverage units. (3)

A
  • quantity of benefits relates to the amount that can be claimed by the policy-holder
  • discounting is optional
  • coverage period extends to the end of the period in which insurance contract services are provided (unless claims in settlement are included in LRC rather than LIC)
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23
Q

Describe the CSM amortization pattern if the policy limit doesn’t change over the coverage period.

A

Flat/uniform pattern.

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24
Q

Describe the CSM amortization pattern if the policy limit decreases over the coverage period.

A

Decreasing pattern (so, less CSM is released toward the end).

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25
Q

Describe the CSM amortization pattern if the policy limit increases over the coverage period.

A

Increasing pattern (so, more CSM is released toward the end).

26
Q

Identify an example of an insurance product with a decreasing policy limit over the coverage period.

A

Mortgage default insurance.

27
Q

Identify an example of an insurance product with an increasing policy limit over the coverage period.

A

Product warranty with replacement coverage (replacement costs could increase due to inflation).

28
Q

What is the simple formula for LRC?

A

LRC = [LRC excl. LC] + LC

where, LC = Loss Component

29
Q

What is the simple formular for LRC, that explicity uses FCFs?

A

LRC = FCF + CSM

30
Q

What is one way of writing the GMA formula for FCFs at initial recognition of the contract?

A

LRC = [Future Cash Inflows] - [Future Cash Outflows] + [effect of discounting] - [Risk Adjustment (RA)] + CSM

31
Q

Is an entity required to track ‘LRC excluding LC’ and ‘LC’ separately?

A

Yes, because they want to keep non-onerous and onerous contracts separate.

32
Q

Describe the measurement of onerous contracts subsequent to initial recognition.

A
  • if there are NO CHANGES in underlying assumptions:
  • > LC is expected to be systematically decreased
  • if there ARE CHANGES in underlying assumptions that are favourable:
  • > allocate changes to the LC until it reaches 0, then a CSM can be re-established
33
Q

Describe the measurement of non-onerous contracts that become onerous subsequent to initial recognition.

A
  • reduce the CSM to 0 and establish an LC

this would happen when unfavourable changes in the FCFs exceed the carrying amount of the CSM

34
Q

Why are non-onerous groups of contracts ‘good’?

A

Because they have net cash inflows.

35
Q

Why are onerous groups of contracts ‘bad’?

A

Because they have net cash out-flows.

36
Q

Why do onerous and non-onerous contracts need to be tracked separately for accounting purposes?

A
  • non-onerous contracts have CSM (but no LC)

- onerous contracts have LC (but no CSM)

37
Q

What do the acronyms ‘GMA’ and ‘PAA’ stand for?

A
  • GMA: General Measurement Approach

- PAA: Premium Allocation Approach

38
Q

Describe PAA in 1 short phrase.

A

PAA is a simplified version of GMA for measuring LRC.

Note: PAA does not apply to LIC.

39
Q

Identify 2 things that make PAA simpler than GMA for LRC.

A
  • PAA does not require estimation of FCFs

- PAA does not require a CSM

40
Q

Briefly describe 2 eligibility criteria for use PAA to calculate LRC under IFRS 17.

A
  • PAA can be used if the term of the insurance contract is less than or equal to one year; or,
  • PAA can be used if the term of the insurance contract is great than one year, and PAA is a reasonable approximation of GMA over the contract term.
41
Q

Under PAA, how is LRC excluding LC calculated differently for onerous and non-onerous contracts?

A

There is no difference. However, onerous contracts will have an extra term for LC.

42
Q

What is the formula for LRC under PAA at initial recognition?

A

LRC (excl. LC) @ initial recognition =
+ Premiums

  • Insurance Acquision Cash Flows (unless entity chooses to recognize the payments as an expense)

+/- amounts arising from Derecognition of “certain” assets and liabilities.

43
Q

What is the formula for LRC under PAA at subsequent measurement?

A

LRC (excl. LC) @ subsequent measurement =
+ Carrying amount at start of the reporting period
+ Premiums received in period

  • Insurance Acquision Cash Flows

+ amortization of insurance acquisition cash flows recognized as an expense in the reporting period
+ adjustments to financing component

  • insurance revenue (premium earned for insurance contract services provided in that period)
  • investment components paid/transferred to LIC
44
Q

Identify facts and circumstances for the qualitative assessment of whether a group of contracts is onerous. (5)

A
  • a group of contracts in the portfolio that are known to be onerous at initial recognition
  • past losses in the portfolio
  • aggressive underwriting or pricing
  • unfavourable experience trends
  • unfavourable external conditions
45
Q

Describe the quantitative assessment of a potentially onerous group of contracts. (2)

A

1) calculate the difference: D = FCF - [LRC excl. LC]
- if D > 0 -> group is onerous

2) if onerous -> book LC on “Profit and Loss”
- increase LRC to FCF
where, LRC = FCF = [LRC excl. LC] + LC

46
Q

Briefly describe the accounting steps if a quantitative assessment indicates that a group of contracts is onerous. (2)

A
  • recognize a loss in the insurance service expense immediately for the net outflow for the onerous group
  • establish an LC as part of the LRC for the onerous group
47
Q

Briefly describe the accounting steps for the LC at subsequent measurements.

A
  • the LC is released from insurance service expense and is amortized from LRC over the duration of the contracts.
    (so, LC = 0 by the end of the coverage period)
48
Q

Describe the difference between LRC under GMA and PAA for: acquisition costs.

A

GMA: cannot recognize acquisition costs immediately.
PAA: can recognize acquisition costs immediately, IF the coverage period of all contracts in the group are less than or equal to 1 year.

49
Q

Describe the difference between LRC under GMA and PAA for: Discounting

A

GMA: discounting is required
PAA: discounting is not required, UNLESS there is a significant financing component.
Note: if the period between premiums being due and provisions of services is less than or equal to 1 year, then there should be no significant financing component.

50
Q

Describe 2 differences between LRC under GMA and PAA other than for acquisition costs and discounting.

A

Application:
GMA: applies to any PandC contract
PAA applies to PandC contracts with coverage period less than or equal to 1 year.
Note: PAA must specifically tested if coverage period if more than 1 year

Cash Flow Projections:
GMA: for non-onerous contracts -> yes, cash flow projections are required to estimate LRC
PAA: for non-onerous contracts -> no, cash flow projections are not required to estimate LRC

51
Q

Describe the difference between LRC under GMA and PAA for: initial measurement.

A

GMA: LRC = PV(Cash Flows) + RA + CSM
PAA: LRC = Premiums - (initial acquisition costs UNLESS these are recognized as expenses when incurred)

52
Q

Describe the difference between LRC under GMA and PAA for: RIsk adjustment.

A

GMA: RA is required for non-onerous contracts
PAA: RA is NOT required for non-onerous contracts

53
Q

Describe the difference between LRC under GMA and PAA for: CSM.

A

GMA: CSM is required for non-onerous contracts
PAA: CSM is NOT required for non-onerous contracts

54
Q

If an underlying insurance contract is onerous, when must it be recognized in financial statements?

A

Immediately when issued, even if this is before coverage begins.

55
Q

If an underlying contract is issued, but is non-onerous, does it have to be recognized before coverage begins?

A

No.

56
Q

If an underlying contract is in-force, does it have to be recognized in financial statements?

A

Yes.

57
Q

Do reinsurance contacts not entered into (not bound) have to be recognized in financial statements?

A

No.

58
Q

Briefly describe the steps in calculating the Loss Component (LC) under PAA within IFRS 17.

A

1) Determine the UPR (Unearned Premium Reserve).
2) Estimate future claims and LAE as follows:
- apply a selected ELR and a ULAE factor to the UPR, by contract group (this is the largest component of the FCFs).
3) Discount the result in 2) to the evaluation date.
4) Apply the Risk Adjustment (RA), acquisition costs, other attributable expenses to the result in 3)

59
Q

Are regulatory bodies going to adapt their MCT quidelines upon implementation of IFRS 17?

A

Yes.

60
Q

Identify a key consideration in adapting MCT for the implemenation of IFRS 17.

A

How to select the ELR.

CAS Exam 6C (70 decks)

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