IFRS 4

Question 1

Financial risk

Answer 1

Risk of change in one or more:

Credit rating, interest rate, foreign exchange rate, index of prices

Question 2

Significant insurer risk

Answer 2

If and only if an insured event could cause an insurer to pay SIGNIFICANT ADDITIONAL BENEFITS in any scenario, excluding scenarios that lack commercial substance

Question 3

IFRS Implications to Non-publicly traded companies

Answer 3

Need to have understanding of the rules to remain competitive in foreign markets and conducting transactions with international companies

Question 4

IFRS vs. GAAP

Answer 4

IFRS believed to be more transparent (more footnote disclosures, information about estimates)

Question 5

IFRS 4: Insurance contracts

Answer 5

Contract under which one party accepts a significant insurance risk from another party by agreeing to compensate policyholder if a specified uncertain future event adversely affects the policyholder

Question 6

IFRS Phase 1 (Currently in effect)

Answer 6

Elimination of CAT provisions
Adequacy test of liabilities
Impairment test of reinsurance assets
Prohibiting offsetting of liabilities with reinsurance recoverables

Question 7

IFRS Insurance Liabilities: Date

Answer 7

Liability established at sold date (rather than effective date)

Question 8

IFRS Insurance Liabilities: Measurement

Answer 8

1) Calculating expected cash flows
2) Application of discounting
3) Application of margins

Question 9

IFRS: Risk Margin Determination Approaches

Answer 9

VaR, TVaR, cost of capital method

Question 10

IFRS Risk Margin characteristics

Answer 10

Should be higher if:
less is known about the estimate, 
low frequency/high severity,
longer duration,
wide probability distribution,
emerging experience increases uncertainty

Question 11

IFRS 4 Selection of Accounting Principles

Answer 11

Allowed to use accounting principles in effect before IFRS 4; should make change if change makes statements more relevant without being less reliable, and vice versa

Question 12

IFRS investment asset classes, values

Answer 12

HTM: historic cost less amortization
AFS: Marked to Market; changes in market value recorded in reserve;
HFT: Marked to Market; changes recorded as income

Question 13

IFRS changes, product design

Answer 13

Some insurance contracts with both insurance and investment features will need to be unbundled, causing loss of profitability

Question 14

Concerns regulators have with IFRS replacing SAP

Answer 14

Easier to manipulate (principle based)
Complexity of reserve calculations
Not as conservative (not established from solvency perspective)
Transition costs and costs of administration

Question 15

IFRS impact on GAAP

Answer 15

More volatile (accelerated recognition of premiums, losses, expenses)

Question 16

IFRS impact on SAP

Answer 16

More volatile (accelerated recognition of premiums, losses, expenses)

Question 17

IFRS impact on short-term profit

Answer 17

Accelerated recognition of premiums causes volatility

Question 18

IFRS impact on long-term profit

Answer 18

Remains unchanged (only timing of recognition is impacted), potentially higher as it may lower costs for companies operating internationally

Question 19

Contrast reinsurance contracts: IFRS/US

Answer 19

IFRS 4: does not require timing risk

US: requires indemnification

Question 20

Reinsurance recoverables on unpaid losses:

SAP, GAAP, IFRS

Answer 20

SAP: Reserves net of recoverables
GAAP: Recoverables are assets
IFRS: No offsetting allowed

Question 21

IFRS: Discounting

Answer 21

Allowed, but a risk margin must be added

Question 22

IFRS Risk Margin

Answer 22

Required; SAP and GAAP have no required explicit risk margin, but discounting reserves is implicit risk margin

Question 23

IFRS recognition of premium revenues

Answer 23

NPV of premiums recognized when contract entered into

Question 24

IFRS recognition of expenses

Answer 24

NPV of expenses recognized when contract entered into

Question 25

Desirable characteristics of IFRS risk margins

Answer 25

RECS:
Risk differences
Ease of calculation
Consistent over life of contract
Sound insurance pricing