IFRS17 Flashcards
IFRS17 Principles
think about process of working on analysis
(RMPD):
Recognition
Measurement
Presentation
Disclosure
3 building blocks for measuring liabilities under IFRS17
think about how to calculate liabilities
(PV-RA-CSM):
Present value of future cash flows
Risk adjustment for non-financial risk
Contract service margin, represents unearned profit from a group of insurance contracts
- PV buffers the adverse deviation (basicially any uncertainty) for financial risks
- RA buffers the uncertainty for non-financial risks
- CSM is the unearned profit in the contracts
Financial risks are basically the risks easy to quantify as insurance related risks (underwriting,reinsurance, etc)/credit risks/market risks
Non-financial risks are basicially the risks hard to quantify such as regulatory risks/strategic risks/operational risks
Define fulfillment cash flows
Present value of future cash flows
+ risk adjustments for non-financial risk
When is CSM amount established and what’s the amount
When FCF < 0
CSM = - FCF
2 valuation methods under IFRS17
GMA: default approach
PAA:
- simplified version of GMA
- need to meet certain requirements:
» short term contracts less than 1 year
» if PAA is a reasonable approximation to GMA over the life of the contract
» applies only to LRC component of insurance contract liabilities
Define liability for incurred claims (LIC)
Insurer’s obligations to pay claims for events that have already occurred
Define liability for remaining coverage (LRC)
Insurer’s obligations to provide coverage for event that haven’t yet occurred
Define insurance contracts under IFRS17
A contract under which the issuer
- accepts significant insurance risk from policyholder
- by agreeing to compensate the policyholder
- if a specified uncertain future event adversely affects the policyholder
Components of an insurance contracts under IFRS17
think about what insurance contracts are used for
- insurance components (non-financial risks)
- service components (i.e, claims adjudication with reinsurance protection)
- investment components (amounts included in premiums that are returned to customers, regardless of the occurrence of an event. i.e, policyholder dividends)
- embedded derivatives
Insurance component: risk transfer/claims and benefits/premiums
Service component: obligations to provide services to policyholders (i.e, claim adjustification)
Investment component: financial return (i.e, policy dividends)
Formula: insurance for contract liability
LIC + LRC
Formula: LRC under PAA
UEP - DAC
Differences between IFRS17 and current CIA practice for measurement of liabilities relating to LRC
- criteria:
- IFRS17: allows PAA for short-term contracts without testing whether PAA reasonably approximates GMA
- current: allows UEP-DAC to be used only if it’s a reasonable approximation to the explicit valuation approach - DAC deferral:
- IFRS17: either may choose deferral or direct expense for short-term contracts
- current: no deferral in explicit valuation, but deferral if UEP-DAC is held - DAC amount:
- IFRS17: allows deferral of DAC that is directly attributable to the portfolio of insurance contracts
- current: allowable deferral is different - discounting of LRC:
- IFRS17: requires discounting if the contract has a significant financing component
- current: requires discounting - discounting of LIC:
- IFRS17: ignores discounting and financial risk for LIC if PAA is used for LRC and LIC cash flows are received <= 1yr within incurred date of claims
- current: requires discounting
financing component arises when there’s timing difference between receiving premiums and paying claims, especially significant for long-term contracts
discounting always required under current CIA practice
Differences between IFRS17 and current CIA practice regarding discounting
Discounting of LRC:
- IFRS17: entity may choose not to discount
- current: requires discounting
Discounting of LIC:
- IFRS17: ignores discounting and financial risk for LIC if PAA is used for LRC and LIC cash flows are received less than 1 year within incurred date of claims
- current: requires discounting
Examples in Canadian p&c where PAA can&can’t be used to measure LRC
PAA ok:
- auto outside QC
- auto in QC if PAA is a reasonable approximation to GMA
PAA not ok:
- warranty
- mortgage default
2 measurement considerations for contract liabilities under IFRS17
common sense, think about grouping and cutoff point
- Level of aggregation:
— must identify portfolio of contracts
— each portfolio is further subdivided into groups - Contract boundary:
— must identify contract boundary for each contract
— cash flow estimates include only cash flows related to claims incurred within the boundary
Do expenses need to be allocated to group in IFRS17?
Yes
Do assumptions related to measurements of liabilities need to be allocated to group in IFRS17?
No, allocate at whatever level is most appropriate for estimating cash flows
Differences between IFRS17 and current CIA practice regarding contract boundary
(CRCRESS):
1. Conservatism: IFRS17 less conservative
2. Rights&obligations: IFRS17 considers rights&obligations for both entity&policyholder
3. Coverages: IFRS17 treatment of coverages maybe different
4. Repricing: IFRS17 doesn’t consider the intent of the entity in setting contract boundary
5. Extension for DAC: concept doesn’t exist in IFRS17
6. Segregated funds with material guarantee: concept doesn’t exist in IFRS17
7. Segregated funds supported by hedging strategy: hedging is irrelevant in IFRS17 when determining contract boundary
Examples where IFRS17 boundary may be different from policy term under current practice
- Cancellable contracts:
— under IFRS17, contract boundary = cancel date
— under current, policy term extends beyond cancel date if that would increase the liability - Title insurance (covers defects in the title to land or buildings):
— under IFRS17, contract boundary = period of ownership of land/building (coverage is triggered by discovery of defect)
— under current, policy term = term of contract since coverage is triggered by the defect itself, not its discovery - Onerous contracts:
— under IFRS17, must recognize liability of an onerous contract when signed
— under current: the entity can wait until effective date to recognize liabilities - Reinsurance held:
— under IFRS17, requires reinsurance contracts held to be measured as separate contracts
— under current, determined policy term for underlying direct contract only
How does IFRS17 define estimate of future cash flows
Probability weighted mean of the full range of possible outcomes
Differences between IFRS17 and prior CIA practice regarding probability weighted cash flows
- MfADs for non-financial risk:
— IFRS17 requires separate disclosure of risk adjustment for non-financial risk
— current, the difference between best estimate of cash flow and the best estimate of PfAD is not always quantified - MfADs for financial risk:
— IFRS17 includes financial risk in the present value of future cash flows
— current, MfAD for interest risk is separate from the best estimate of PV for cash flows - Policyholder options:
— IFRS17 accounts for policyholder behavior (selections of limit and coverages)
— current, the effect on cash flows is blurred - Expenses:
— IFRS17 includes only expenses directly attributable to the portfolio
— current, this is not a requirement - Taxes:
— IFRS17 excludes taxes from cash flow estimate
— current, taxes are included
MfAD is margin for adverse deviations, it’s used to account for any uncertainty in underlying assumptions (i.e, expenses, interest rates, etc)
What’s the purpose of discounting
To account for the time value of money
3 things you need for discounting under pre-IFRS17
Assuming have the nominal value of liabilities:
- discount rate
- discount rate MfAD
- payment pattern
Under IFRS17, how’s the discount rate selected when cash flows do not vary with returns on underlying items
Discount rate is based on a liquidity-adjusted risk-free discount rate curve or yield curve