IFRS17-1

Question 2

What is the focus of the reading on IFRS 17?

Answer 2

Reinsurance contracts under IFRS 17

The reading discusses the treatment of reinsurance under IFRS 17 and overlaps with primary insurance.

Question 3

Define ‘level of aggregation’ in the context of insurance contracts.

Answer 3

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.

Question 4

What defines an insurance contract as onerous at initial recognition?

Answer 4

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.

Question 5

What are the minimum group divisions required by IFRS 17 for a portfolio?

Answer 5

• 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.

Question 6

Does IFRS 17 allow disaggregation of individual insurance contracts?

Answer 6

No, usually

The lowest unit of account is the insurance contract.

Question 7

What are the components of Liability for Incurred Claims (LIC)?

Answer 7

• 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.

Question 8

Identify considerations when estimating the risk of non-performance of a reinsurer.

Answer 8

• 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.

Question 9

What is the adjustment for risk of non-performance under IFRS 17?

Answer 9

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.

Question 10

How is the LRC estimated under the General Measurement Approach (GMA)?

Answer 10

LRC = (FCF related to future services) + CSM

LRC stands for Liability for Remaining Claims.

Question 11

What is the difference in revenue recognition for reinsurance contracts under IFRS 17 compared to earned premium?

Answer 11

• 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.

Question 12

What does CSM stand for and how is it modified for reinsurance contracts?

Answer 12

Contractual Service Margin; there is no unearned profit, only a net cost or gain

CSM reflects the profitability of the contract.

Question 13

What are the three options for grouping data when estimating the present value of future cash flows and the RA?

Answer 13

• 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.

Question 14

True or False: The composition of groups established at initial recognition can be reassessed under IFRS 17.

Answer 14

False

Groups cannot be reassessed after initial recognition, though the classification of a group may change.

Question 15

What is the recognition principle for revenues in reinsurance contracts?

Answer 15

Revenues are recognized as they are earned

Question 16

What do FCF projections include for insurance policies?

Answer 16

Projected cash flows for policies to the end of the year

Question 17

At the end of the first quarter, what percentage of annual revenues would be recognized assuming uniform writings?

Answer 17

25%

Question 18

When must projected cash flows be included in FCFs at the end of the first quarter?

Answer 18

100% of the policies expected to be written throughout the year

Question 19

When should losses be recognized for a group of contracts that become onerous under IFRS 17?

Answer 19

Immediately, when the group becomes onerous

Question 20

Does the concept of onerous groups exist for reinsurance contracts held?

Answer 20

No

Question 21

In financial statements, where is the Loss Component (LC) booked for onerous groups?

Answer 21

As part of LRC (Liability for Remaining Coverage)

Question 22

How is the Loss Component (LC) recognized in the statement of financial performance?

Answer 22

As insurance service expense

Question 23

When are onerous groups recognized in financial statements?

Answer 23

When bound, even if prior to the effective date of the contract

Question 24

What are the two approaches for measuring liabilities under IFRS 17?

Answer 24

GMA (General Measurement Approach) and PAA (Premium Allocation Approach)

Question 25

What is the PAA in relation to GMA?

Answer 25

A simplified version of GMA that can be used if certain conditions are met

Question 26

What are the residual market mechanisms administered by Facility Association?

Answer 26

• FARM (Facility Association Residual Market)
• RSPs (Risk-Sharing Pools)
• UAF (Uninsured Automobile Fund)

Question 27

How is UAF accounted for under IFRS 17?

Answer 27

UAF functions more like a levy, meaning IFRS 17 would not apply

Question 28

How do member companies account for their share of FARM and UAF insurance contracts?

Answer 28

As direct business

Question 29

How is accounting handled for RSPs under IFRS 17?

Answer 29

Member companies use reinsurance accounting with the collective FA membership as the reinsurer

Question 30

What are the two types of contracts accounted for in relation to RSPs?

Answer 30

• Ceded contracts as reinsurance held
• Assumed contracts as reinsurance issued