IFRS17-1 Flashcards
What is the focus of the reading on IFRS 17?
Reinsurance contracts under IFRS 17
The reading discusses the treatment of reinsurance under IFRS 17 and overlaps with primary insurance.
Define ‘level of aggregation’ in the context of insurance contracts.
Insurance contracts are aggregated into portfolios and then into groups within each portfolio
Portfolios may correspond to geographical areas and groups are based on whether contracts are onerous.
What defines an insurance contract as onerous at initial recognition?
Total net outflow for the sum of FCFs, acquisition cash flows, and cash flows arising from the contract
‘Onerous’ implies a burden or difficult obligation.
What are the minimum group divisions required by IFRS 17 for a portfolio?
- A group that is onerous at initial recognition (if any)
- A group that has no significant possibility of becoming onerous (if any)
- A group of any remaining contracts (if any)
Groups cannot be reassessed after initial recognition.
Does IFRS 17 allow disaggregation of individual insurance contracts?
No, usually
The lowest unit of account is the insurance contract.
What are the components of Liability for Incurred Claims (LIC)?
- An unbiased current estimate of future cash flows
- An adjustment for discounting
- A risk adjustment
LIC represents the insurer’s obligation for claims that have already occurred.
Identify considerations when estimating the risk of non-performance of a reinsurer.
- Financial strength of the reinsurers
- History of claims and coverage disputes
- Risk of contagion across various reinsurance arrangements
- Delays in payments and concentration risk
- Length of time over which liabilities are expected to be settled
- Collateral available to mitigate risk
These factors help assess the reliability of reinsurers.
What is the adjustment for risk of non-performance under IFRS 17?
Included in the estimate of the present value of future cash flows for reinsurance contracts held
Changes in estimates of non-performance risk affect P&L but not CSM.
How is the LRC estimated under the General Measurement Approach (GMA)?
LRC = (FCF related to future services) + CSM
LRC stands for Liability for Remaining Claims.
What is the difference in revenue recognition for reinsurance contracts under IFRS 17 compared to earned premium?
- Revenue recognition requirements for entities applying PAA
- Treatment of reinsurance cash flows contingent on claims
- Treatment of amounts paid to the purchaser of reinsurance contracts
PAA stands for Premium Allocation Approach.
What does CSM stand for and how is it modified for reinsurance contracts?
Contractual Service Margin; there is no unearned profit, only a net cost or gain
CSM reflects the profitability of the contract.
What are the three options for grouping data when estimating the present value of future cash flows and the RA?
- Estimate gross & net losses, then calculate the ceded as gross - net
- Estimate gross & ceded losses, then calculate the net as gross - ceded
- Estimate net & ceded losses, then calculate the gross as net + ceded
RA stands for Risk Adjustment.
True or False: The composition of groups established at initial recognition can be reassessed under IFRS 17.
False
Groups cannot be reassessed after initial recognition, though the classification of a group may change.
What is the recognition principle for revenues in reinsurance contracts?
Revenues are recognized as they are earned
What do FCF projections include for insurance policies?
Projected cash flows for policies to the end of the year
At the end of the first quarter, what percentage of annual revenues would be recognized assuming uniform writings?
25%
When must projected cash flows be included in FCFs at the end of the first quarter?
100% of the policies expected to be written throughout the year
When should losses be recognized for a group of contracts that become onerous under IFRS 17?
Immediately, when the group becomes onerous
Does the concept of onerous groups exist for reinsurance contracts held?
No
In financial statements, where is the Loss Component (LC) booked for onerous groups?
As part of LRC (Liability for Remaining Coverage)
How is the Loss Component (LC) recognized in the statement of financial performance?
As insurance service expense
When are onerous groups recognized in financial statements?
When bound, even if prior to the effective date of the contract
What are the two approaches for measuring liabilities under IFRS 17?
GMA (General Measurement Approach) and PAA (Premium Allocation Approach)
What is the PAA in relation to GMA?
A simplified version of GMA that can be used if certain conditions are met
What are the residual market mechanisms administered by Facility Association?
- FARM (Facility Association Residual Market)
- RSPs (Risk-Sharing Pools)
- UAF (Uninsured Automobile Fund)
How is UAF accounted for under IFRS 17?
UAF functions more like a levy, meaning IFRS 17 would not apply
How do member companies account for their share of FARM and UAF insurance contracts?
As direct business
How is accounting handled for RSPs under IFRS 17?
Member companies use reinsurance accounting with the collective FA membership as the reinsurer
What are the two types of contracts accounted for in relation to RSPs?
- Ceded contracts as reinsurance held
- Assumed contracts as reinsurance issued
RA associated w. reinsurance held
RA for non-financial risk represents amount of non-financial risk being transferred by holder of reinsurance contracts to reinsurer
RA associated w. reinsurance held- how is it measured?
1) as the difference in risk position of the entity w. and w.o reinsurance held
2) the cost of reinsurance as an indicator of the entity’s view of the compensation required
How is reinsurer non-performance risk accounted for?
Through a reduction of PV of est future cash flows. NOT the RA for non-financial risk
Accounting treatment: changes in estimates of the non-performance risk at subsequent measurement
not adjust the CSM, but rather flow directly into the P&L
how is the provision for reinsurer non-performance risk calculated
determine a probability-weighted provision to account for the risk of non-performance of the reinsurer
FCFs that do not adjust the CSM:
’–Chg in time value of money & financial risks
‘–Chg in estimates of FCFs in the LIC
‘–Experience adjustments on current period cash flows except those described above
‘–risk of non-performance is changed at subsequent measurement, recognized immediately in profit or loss. No adj to CSM but the ARC & AIC would be adjusted
Accounting Treatment: Non-distinct investment component (NDIC)
