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Exam 6 > IFRS - DR > Flashcards

IFRS - DR Flashcards

1
Q

define the IFRS17 term: discount rate

A

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 IFRS17 term: FCF

A

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

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3
Q

define the IFRS17 term: liquidity premium

A
  • adjustments made to a liquid risk-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
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4
Q

define the IFRS17 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

define the IFRS17 term: spot rate

A

the current interest rate available for a cash flow with a given time to maturity
the set of spot rate as a function of time to maturity is a yield curve

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6
Q

identify considerations in deciding whether to use net or gross & ceded data for analysis

A

DC-re
1) Data availability
- if ceded data is sparse, inappropriate to estimate PV(ceded CF)
2) CF volatility
- different approaches may be warranted for different segments of business depending on cashflow volatility by segment
3) Reinsurance Held
- consider type & consistency of entity’s reinsurance held

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7
Q

identify considerations in segmenting data for selecting payment patterns

A
  • business segments used for analyzing undiscounted data
  • payout period
  • existence of a predetermined schedule of payments
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8
Q

identify characteristics an IFRS17 discount rate should possess

A

1) reflect
- time value of money
- characteristic of cashflow
- liquidity characteristic of insurance contract
2) consistent with
- market prices for financial instruments with similar cashflow characteristics as insurance contracts
3) exclude
- factors that affect market prices but donot affect cashflow for insurance contracts

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9
Q

identify 2 methods for selecting a discount rate for valuation of insurance contract liabilities under IFRS17

A

1) bottoms up
- liquid risk free yield curve adjusted to reflect the difference between the liquidity characteristics of market financial instruments & liquidity characteristics of insurance contracts
2) top down
- yield to maturity of a reference portfolio of asset adjusted to eliminate any factors not relevant to insurance contracts

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10
Q

what is the formula for bottom up discount rate?

A

risk free rate + illiquidity premium

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11
Q

what is the formula for top down approach?

A

reference portfolio rate - credit risk, market risk and other adjustments

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12
Q

what is an advantage ad disadvantage of bottom up approach?

A
  • adv: availability of risk free yield curves
  • disadv: need to derive an illiquidity premium
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13
Q

what is an advantage ad disadvantage of top down approach?

A
  • adv: it does not require the explicit derivation of illiquidity premium
  • disadv: potential complexity o f the derivation of reference portfolio rate and applicable adjustments
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14
Q

consideration when selecting which method to use to determine discount rates (bottom-up or top-down)

A
  • characteristics of liability cash flows
  • availability of suitable data
  • investment environment
  • how frequently will the discount rate be updated
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15
Q

what is the formula for discount rate using the hybrid approach?

A

risk free rate + reference portfolio illiquidity premium

~bottoms up, but reference portfolio illiquidity premium incorporates top-down approach

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16
Q

what is the advantage of hybrid approach to determine discount rate?

A

it blends the use of robust model for estimating illiquidity premiums, which can be updated periodically as appropriate.
with the use of readily available Canadian risk-free yield curves, which are updated weekly.

17
Q

identify risk factors that may differ between a reference portfolio and insurance contracts

A
  • liquidity
  • investment risk (e.g. credit risk, market risk)
  • timing
  • currency risk
18
Q

identify examples of credit risk adjustments

A
  • default risk
  • downgrade risk
19
Q

are market risk adjustments needed if reference portfolio is comprised solely of bonds?

A

no

20
Q

identify 2 insurance contract features that increases liquidity

A
  • low inherent value 内在价值 of contract
  • high exit value of contract (large portion of inherent value is paid out)
21
Q

identify a insurance contract feature that decreases liquidity

A

high exit costs for contract (e.g: surrender penalties)

22
Q

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

A

LRC since
- no claims have yet occurred, it is easier to cancel or otherwise get rid of the contract

23
Q

identify steps in a combined approach for estimating LLP (Liability Illiquidity Premium)

A

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

r is given

24
Q

what is a reference curve?

A

a standardized yield curve used to facilitate comparison among entities in the unobservable period

25
Q

what is the liquidity of LRC evaluated on for a group of reinsurance contracts held?

A

on the basis of the ability of the purchaser of the reinsurance to cancel the reinsurance contract before its expiry date and to receive value
- likely illiquid

26
Q

should discount rates vary with the timing of cash flows?

A

yes - this is the purpose of yield curve (vs a spot rate)

27
Q

what are 4 assumptions required to discount the estimates of future cash flows?

A
  • undiscounted liability amount
  • expected payment pattern of undiscounted liability amount
  • expected timing of future payments
  • yield curve consistent with the characteristics of future cash flows
28
Q

what is a locked in yield curve?

A

a yield curve determined at the initial recognition of the group of contracts

29
Q

when would a locked in yield curve be used for discouting?

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

OCI= Other Comprehensive Income

30
Q

identify 2 lines on the income statement where insurance expenses are reported

A
  • insurance finance expense
  • insurance service expense
31
Q

what are the 2 components of insurance expenses?

A

incurred claims and directly attributable expenses

32
Q

what does insurance finance expense refer to?

A

it refers to the change in the carrying amount of the group of insurance contracts arising from
- the effect of time value of money and changes in the time value of money
- the effect of financial risk and changes in financial risk

33
Q

what does “unwinding of discount” mean?

A

the difference between discounting the cash flows to the beginning of period and discounting to the end of period
( = release of effect of discounting during a reporting period)

34
Q

identify 3 methods for calculating unwinding of discounts

A

1) constant yield curve: same discount curve at the beginning and end of period
2) spot rates: uses an end of period discount curve that is equal to the beginning discount curve shifted by one period
3) expectation hypothesis: proposes term structure of interest rates is solely determined by market expectations of future interest rate changes

35
Q

what level of aggregation should be used for calculating FCFs?

A

any level of aggregation provided estimates of LIC and LRC can be allocated back to portfolios and groups

36
Q

section 12 financial statement presentation

A

Exam 6 (58 decks)

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