IFRS odo.24

Question 1

FASB & IASB are cooperating to create financial reporting standards to:

Answer 1

• increase transparency & consistency among insurers operating in different countries
• align standards with company economics (versus regulatory prudence)

Question 2

an insurance contract is…

Answer 2

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

Question 3

IFRS 17

Answer 3

IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts.

established by the IASB

Permitted or required in most of the world’s major economies

precessor IFRS 4 had issues such as contracted being accounted for differently b/w jurisdictions

Objectives
▪ Improve comparability by standardizing insurance practices across jurisdictions
▪ Improve quality of financial info by increasing transparency of profitability and including useful financial info

Question 4

How are insurance contracts grouped under IFRS 17?

Answer 4

(1) onerous contracts
(2) contracts, initially, with no chance of becoming onerous
(3) all remaining contracts

A contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

Question 5

General Model (for liability measurement)

Answer 5

Balance Sheet Liability = fulfillment cash flow + contractual service margin
= Fulfillment Cash Flow
= [ Present Value of (premium - losses - benefits - expenses) ] + [ adjustment for timing and risk of these cash flows ]

CSM
= (expected profit for providing future insurance coverage) - initially set as the diff b/w cash inflows & outflows

Question 6

Variable Fee Approach

Answer 6

based on the General Model but with additional features to account for contracts with direct participating features

Question 7

premium allocation model

Answer 7

Simplification of General Model
▪ Insurers can implement this option if it is expected to produce results that are not
materially different from general model
o Splits measurement of groups of insurance contracts into two pieces:
▪ Liability for Remaining Coverage: Approx. equal to UEPR minus premium
receivable and DAC
▪ Liability for Incurred Claims: Calculated using fulfillment cash flows from the
general model (no CSM applicable)

Question 8

premium allocation model eligibility requirements

Answer 8

• can be used for short-term contracts (policy term ≤ 1 year)
  
  • can be used for longer-duration contracts IF PAA is a reasonable approximation to GMA over the life of the contract
  • applies only to LRC component of insurance contract liabilities

Question 9

accounting relationship

Answer 9

insurance contract liability = LRC + LIC

CSM is part of the LRC