IFRS - DR Flashcards
define the IFRS17 term: discount rate
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
define the IFRS17 term: FCF
FCF = PV ( future cash flows) + RA for non-financial risk
define the IFRS17 term: liquidity premium
- 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
define the IFRS17 term: reference portfolio
- 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
define the IFRS17 term: spot rate
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
identify considerations in deciding whether to use net or gross & ceded data for analysis
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
identify considerations in segmenting data for selecting payment patterns
- business segments used for analyzing undiscounted data
- payout period
- existence of a predetermined schedule of payments
identify characteristics an IFRS17 discount rate should possess
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
identify 2 methods for selecting a discount rate for valuation of insurance contract liabilities under IFRS17
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
what is the formula for bottom up discount rate?
risk free rate + illiquidity premium
what is the formula for top down approach?
reference portfolio rate - credit risk, market risk and other adjustments
what is an advantage ad disadvantage of bottom up approach?
- adv: availability of risk free yield curves
- disadv: need to derive an illiquidity premium
what is an advantage ad disadvantage of top down approach?
- 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
consideration when selecting which method to use to determine discount rates (bottom-up or top-down)
- characteristics of liability cash flows
- availability of suitable data
- investment environment
- how frequently will the discount rate be updated
what is the formula for discount rate using the hybrid approach?
risk free rate + reference portfolio illiquidity premium
~bottoms up, but reference portfolio illiquidity premium incorporates top-down approach
what is the advantage of hybrid approach to determine discount rate?
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.
identify risk factors that may differ between a reference portfolio and insurance contracts
- liquidity
- investment risk (e.g. credit risk, market risk)
- timing
- currency risk
identify examples of credit risk adjustments
- default risk
- downgrade risk
are market risk adjustments needed if reference portfolio is comprised solely of bonds?
no
identify 2 insurance contract features that increases liquidity
- low inherent value 内在价值 of contract
- high exit value of contract (large portion of inherent value is paid out)
identify a insurance contract feature that decreases liquidity
high exit costs for contract (e.g: surrender penalties)
which set of insurance contract liabilities is more liquid? LIC or LRC?
LRC since
- no claims have yet occurred, it is easier to cancel or otherwise get rid of the contract
identify steps in a combined approach for estimating LLP (Liability Illiquidity Premium)
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
what is a reference curve?
a standardized yield curve used to facilitate comparison among entities in the unobservable period
what is the liquidity of LRC evaluated on for a group of reinsurance contracts held?
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
should discount rates vary with the timing of cash flows?
yes - this is the purpose of yield curve (vs a spot rate)
what are 4 assumptions required to discount the estimates of future cash flows?
- 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
what is a locked in yield curve?
a yield curve determined at the initial recognition of the group of contracts
when would a locked in yield curve be used for discouting?
- 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
identify 2 lines on the income statement where insurance expenses are reported
- insurance finance expense
- insurance service expense
what are the 2 components of insurance expenses?
incurred claims and directly attributable expenses
what does insurance finance expense refer to?
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
what does “unwinding of discount” mean?
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)
identify 3 methods for calculating unwinding of discounts
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
what level of aggregation should be used for calculating FCFs?
any level of aggregation provided estimates of LIC and LRC can be allocated back to portfolios and groups
section 12 financial statement presentation
