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Exam 6c 2025 > IFRS17 > Flashcards

IFRS17 Flashcards

1
Q

IFRS17 effective date

A

Jan 1 2023

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2
Q

what principles does IFRS 17 establish

A

for insurance contracts within the IFRS 17 standard:
Recognition
Measurement
Presentation
Disclosure

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3
Q

briefly describe the 3 building blocks for measuring liabilities under IFRS 17

A

PresentValue of future cash flows
- similar to PV(liabilities) without PfADs
- but IFRS 17 includes provisions for financial risk, unlike with current CIA practice
riskadjustment for non-financial risk
- similar to PfADs for non-economic risk
ContractualServiceMargin (CSM)
- represents unearned profit from a group of insurance contracts (nofront-ending of profits)
- current CIA standardsdoallow front-ending of profits

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4
Q

define the term Fulfilment Cash Flows (FCF)

A

FCF
= (IFRS building block 1) + (IFRS building block 2)
= PV(future cash flows) + (risk adjustment for non-financial risk)
(note that PV for IFRS17includesfinancial risk, unlike for current CIA practice)

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5
Q

when is a CSM (Contractual Service Margin) amount established and what is the amount

A

when:
FCF < 0
amount:
CSM = -FCF

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6
Q

identify and briefly describe 2 valuation methods under IFRS 17

A

GMA (General Measurement Approach)
- this is the default approach
PAA (Premium Allocation Approach)
- simplified version of GMA
- certain eligibility requirements must be met (assessed at contract inception)

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7
Q

define the term Liability for Incurred Claims (LIC)

A

insurer’s obligation to pay claims for events that have already occurred

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8
Q

define the term Liability for Remaining Coverage (LRC)

A

insurer’s obligation to provide insurance coverage for events that have not yet occurred
(basically just the premium liabilities)

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9
Q

identify examples where PAA may be used instead of GMA for measuring IFRS 17 liabilities

A
  • short-term contracts (policy term ≤ 1 year)
  • longer-duration contracts if PAA is a reasonable approximation to GMA over life of contract
    (both apply only to LRC component liabilities)
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10
Q

define the term ‘insurance contract’ under IFRS 17

A

acontractunder which 1 party (the issuer)..
-acceptssignificant insurance risk from another party (the policyholder)..
- byagreeingto compensate the policyholder..
-ifa specified uncertain future event (the insured event) adversely affects the policyholder

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11
Q

identify components of an insurance contract under IFRS 17

A
  • insurance components
    (non-financial risk that is the “normal” part of any insurance contract)
  • service components
    (Ex: claims adjudication with reinsurance protection)
  • investment components
    (amounts included in premiums that are returned customers, regardless the occurrence of an event)
  • embedded derivatives
    (not on syllabus)
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12
Q

what is the formula for contract liability in terms of LIC & LRC

A

insurance contract liability = LIC + LRC

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13
Q

what is the formula for LRCunder PAA

A

LRC = UEP - DAC

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14
Q

identify differences between IFRS 17 and current CIA practice for measurement of liabilities relating to LRC

A

Recall:LRC = Liability for Remaining Claims (essentially the premium liabilities)
criteria:
IFRS 17: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:
IFRS 17:entity 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:
IFRS 17:allows deferral of DAC that is directly attributable to the portfolio of insurance contracts
current:allowable deferral is different
Discounting of LRC:
IFRS 17:requires discounting if the contract has a significant financing component
(unless the time between the service provided and related premium due date is less than 1 year)
current:requires discounting
Discounting of LIC:
IFRS 17:ignore discounting and financial risk for LIC if:
- PAA is used for LRC
- LIC cash flows are received ≤ 1 year within incurred date of claims
current:requires discounting

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15
Q

identify differences between IFRS 17 and current CIA practice regarding discounting

A

Discounting of LRC:
IFRS 17: entity may choose not to discount
(for short-term policies, or for longer-term policies if the discounting effect is not significant)
current: requires discounting
Discounting of LIC:
IFRS 17: ignore discounting and financial risk for LIC if:
- PAA is used for LRC
- LIC cash flows are received ≤ 1 year within incurred date of claims
current: requires discounting

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16
Q

identify examples in Canadian P&C where PAA can & can’t be used to measure LRC

A

PAA ok:
- auto outside QC (since the policy term is generally ≤ 1 year)
- auto in QC (if PAA is a reasonable approximation to GMA)
PAA probably not ok:
- warranty
- mortagage default
(both may have terms > 1 year, or high year-to-year variability in claims)

17
Q

briefly describe 2 measurement considerations for contract liabilities in IFRS 17

A

level of aggregation:
- must identify portfolios of contracts
(contracts in a portfolio have similar risks and are managed together)
- each portfolio is further subdivided into groups
(a group is the unit of account for measurement of CSM)
contract boundary:
- must identify contract boundary for each contract
(this is normally the term of the policy)
- cash flow estimates include only cash flows related to claims incurred within the boundary

18
Q

do expenses need to be allocated to group in IFRS 17

A

yes

19
Q

do assumptions (other than expenses) related to measurements of liabilities need to be allocated to group in IFRS 17

A

no - allocate at whatever level is most appropriate for estimating cash flows

20
Q

identify differences between IFRS 17 and current CIA practice regarding contract boundary

A

Conservatism
- IFRS 17 is less conservative (IFRS 4 may include losses that IFRS 17 wouldn’t)
Rights & obligations
- IFRS 17 considers rights & obligations for both entity & policyholder (IFRS 4 considers only the entity)
Coverages
- IFRS 17 treatment of coverages may be different (the text example is for life, which you don’t have to know)
Repricing
- IFRS 17 doesn’t consider the intent of the entity (whether to reprice) in setting contract boundary
Extension for DAC
- concept doesn’t exist in IFRS 17 (acquisition costs are considered directly in measurement of liabilities)
Segragated funds (with material guarantee)
- concept doesn’t exist in IFRS 17
Segragated funds (supported by hedging strategy)
- hedging is irrelevant in IFRS 17 when determining contract boundary

21
Q

identify examples where IFRS contract boundary may be different from policy term under current practice

A

cancellable contracts:
- under IFRS 17: contract boundary = cancel date
(under current practice, policy term extends beyond cancel date if that would increase the liability)
title insurance: (covers defects in the title to land or buildings)
- under IFRS 17: contract boundary = period of ownership of land/building (coverage is triggered by discovery of defect)
(under current practice, policy term = term of contract since coverage is triggered by the defect itself, not its discovery)
onerous contracts:
- IFRS 17 must recognize liability of an onerous contract when signed
(under current practice the entity can wait until effective date to recognize liabilities)
reinsurance held:
- IFRS 17 requires reinsurance contracts held to be measured as separate contracts
(current practice determines policy term for underlying direct contract only)

22
Q

how does IFRS 17 define ‘estimate of future cash flow’

A

estimate of future cash flows
= probability-weighted mean of the full range of possible outcomes
(use all credible information available at the reporting date without undue cost or effort)

23
Q

identify differences between IFRS 17 and prior CIA practice regarding probability-weighted cash flows

A

MfADs(for non-financial risk)
IFRS 17 requires separate disclosure of risk adjustment for non-financial risk
(under current practice, the difference between “best estimate” of cash flow and “best estimate with PfAD” is not always quantified)
MfADs(for financial risk)
IFRS 17 includes financial risk in the present value of future cash flows
(under current practice, MfAD for interest rate risk is separate from the best estimate of PV for cash flows)
Policyholder options: (selection of limits and other coverage options can affect cash flows)
IFRS accounts for policyholder behaviour
(under current practice, the effect on cash flows is blurred)
Expenses:
IFRS 17 includes only expenses directly attributable to the portfolio
(under current practice, this is not a requirement)
Taxes:
IFRS 17 excludes taxes from cash flow estimates
(under current practice, taxes are included)

24
Q

what is the purpose of discounting

A

to account for the time value of money

25
Q

under Pre-IFRS17 practice, what 3 things do you need for the discounting calculation

A

assuming you have the nominal value of the liabilities, you need:
- discount rate
- discount rate MfAD
- payment pattern

26
Q

under IFRS 17, how is the discount rate selected when cash flowsdo notvary with returns on underlying items

A

discount rate is based on a liquidity-adjusted risk-free discount rate curve (or yield curve)

27
Q

briefly describe approaches for coming up with the discount rate curve under IFRS 17

A

bottom-up approach:
- adjust the risk-free discount curve by adding an illiquidity premium that reflects the liabilities
→ under current practice, there’s no requirement to identify an illiquidity premium
top-down approach:
- use the investment return on a reference portfolio of assets that’s “similar” to the liabilities
- this reference portfolio does not have to be based on assets held by the company
(Example: use the 10-year spot rate on a Canadian bond for a 10-year liability cash flow)
- then remove asset characteristics not relevant to the liability
(Example: remove credit and market risk)
→ under current practice, the rate would be tied more closely to assets held by the company

28
Q

briefly describe howfinancial riskis incorporated into discounting under IFRS 17

A

TRICK: you can build financial risk into the
- discount rate
- OR the cash flows
- OR a combination of both
→ under current practice, there is an explicit provision for reinvestment risk
(no such provision under IFRS 17)

29
Q

briefly describe how the discount rate is selected when cash flowsdovary with returns on underlying premiums

A

choose a discount rate that makes the value of the liability cash flows equal the fair market value of the underlying assets

30
Q

briefly describe how are cash flows handled when they vary with assumptions related tofinancial risk

A
  • either through adjustments to the discount rate or adjustments to the cash flows themselves
  • must adhere to market consistency
  • IFRS 17 suggests using of stochastic and risk-neutral measurement techniques and considering the costs of options and guarantees
31
Q

regarding non-financial risk, how is the ‘measurement objective’ different under IFRS 17 vs pre-IFRS17 practice

A

IFRS 17:
- compensation required by entity to bear uncertainty
current practice:
- amount required to provide for the effect of uncertainty

Exam 6c 2025 (20 decks)

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