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Exam 6c 2025 > IFRS17 - 2 > Flashcards

IFRS17 - 2 Flashcards

1
Q

What does Risk Adjustment (RA) for non-financial risk reflect?

A

RA adjusts PV(future cash flows) to reflect the compensation the entity requires for bearing uncertainty about the amount and timing of cash flows.

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2
Q

What is the basic formula for Fulfillment Cash Flows (FCF)?

A

FCF = PV(future cash flow) + RA

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3
Q

Identify 4 methods for calculating Risk Adjustment under IFRS 17.

A
  • quantile methods
  • cost-of-capital method
  • margin method
  • a combination of methods
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4
Q

What should be considered when transitioning from IFRS 4 to IFRS 17?

A
  • Consistency of current PfADs with required compensation for uncertainty
  • Inclusion of diversification benefits in current PfADs
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5
Q

identify 5 principles for calculating the non-financial risk adjustment in IFRS 17

A

risk adjustment should be higher for
- risks where there is less information
- low frequency / high severity risks
- longer duration contracts
- risks with wide probability distributions
risk adjustment should be lower with emerging experience

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6
Q

identify 2 further general considerations in calculating the risk adjustment in IFRS 17

A
  • pooling similar risks will lower the risk adjustment
    (law of large numbers → more risks implies lower variance)
  • pooling risks that are negatively correlated will lower the risk adjustment
    (because negatively correlated risks will offset each other)
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7
Q

are IFRS 17 measurement requirements based on the ‘unit of account’ or the ‘aggregate’ level

A

unit of account level

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8
Q

are IFRS 17 presentation requirements based on the ‘unit of account’ or the ‘aggregate’ level

A

aggregate level

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9
Q

are IFRS 17 disclosure requirements based on the ‘unit of account’ or the ‘aggregate’ level

A

aggregate level

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10
Q

How should Risk Adjustment be measured according to IFRS 17?

A

RA must satisfy overall requirements for measurement, presentation, and disclosure of insurance contracts.

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11
Q

What is the impact of diversification benefits on aggregate Risk Adjustment?

A

If units of account are diversified, aggregate RA should be lower.

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12
Q

How is reinsurance credit risk reflected under IFRS 17?

A

Through a reduction in expected cash flows.

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13
Q

What are the components of the cost-of-capital method for Risk Adjustment?

A
  • Projected capital amounts
  • Cost of capital rate(s)
  • Discount rates
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14
Q

Identify one advantage and one disadvantage of the cost-of-capital method.

A
  • Advantage: Allows allocation of RA at a more granular level
  • Disadvantage: More complex due to projection of capital requirements
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15
Q

What does the margin method for Risk Adjustment involve?

A

Select margins that reflect the compensation the entity requires for uncertainty related to non-financial risk.

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16
Q

Identify methods for calculating the Risk Adjustment for reinsurance held.

A
  • quantile methods
  • catastrophe models
  • proportional scaling
  • cost of capital
17
Q

What is a key consideration for catastrophe reinsurance risk adjustment?

A

Catastrophes are low-frequency, high-severity events that may require separate risk adjustment analysis.

18
Q

True or False: The expected ceded losses for catastrophe reinsurance may be zero at a typical selected confidence level.

A

True

19
Q

Fill in the blank: The appropriate time horizon for calculating IFRS 17 RA is the _______.

A

lifetime of the uncertainty in the insurance contract cash flows.

20
Q

What are the specific methods included in quantile techniques for calculating Risk Adjustment?

A
  • VaR (Value at Risk)
  • CTE (Conditional Tail Expectation)
21
Q

Identify one advantage and one disadvantage of quantile methods.

A
  • Advantage: Satisfies disclosure requirements regarding confidence level
  • Disadvantage: May introduce spurious accuracy if misrepresented
22
Q

What is the relationship between the Risk Adjustment and the Aggregate Risk Capital (ARC)?

A

RA increases the ARC.
the RA for reinsurance held will either increase the reinsurance contract asset or reduce reinsurance contract liability.

23
Q

In reinsurance reserve analysis, which two bases should be analyzed?

A
  • Gross
  • Net
24
Q

What is proportional scaling in the context of reinsurance held?

A

Use the same percentage of FCFs for the ceded RA as for the direct RA.

25
Q

Why might ceded losses for catastrophe reinsurance require a separate risk adjustment analysis from an entity’s direct losses?

A

Catastrophe reinsurance covers low-frequency, high-severity events

A standard quantile method may produce a risk adjustment that is too small or even 0.

26
Q

Describe a method for calculating a risk adjustment for ceded losses related to catastrophe reinsurance and high percentile events.

A

Use a cost-of-capital method with an assumption for required capital set at a higher percentile

This captures compensation required at higher levels of the treaty.

27
Q

What are the two different levels at which risk adjustment can be calculated?

A
  • Unit of account level (insurance contract or group of insurance contracts)
  • Aggregate level
28
Q

What is the difference between unit of account level and aggregate level in calculating risk adjustment?

A

Unit of account level calculates RA on a granular level, while aggregate level calculates a single RA for all contracts.

29
Q

For groups with less skewed distributions, which method can be used under a unit of account approach?

A

Use VaR (Value at Risk)

VaR is a quantile method.

30
Q

For groups with highly skewed distributions, which methods can be used under a unit of account approach?

A
  • Cost of capital method
  • Margins
31
Q

Under an aggregate approach, what are the primary methods for calculating risk adjustment?

A
  • Quantile methods
  • Cost-of-capital method
32
Q

What is the IFRS 17 disclosure requirement regarding risk adjustment?

A

Must disclose a confidence interval for the risk adjustment

This is for benchmarking against other entities.

33
Q

How do quantile methods affect the confidence interval for risk adjustment?

A

Quantile methods provide a confidence interval around the risk adjustment automatically.

34
Q

What is the basic concept behind the simplified cost-of-capital approach for calculating risk adjustment?

A

Target profit margin is allocated between reserve risk, underwriting risk, and other risks that are not relevant to the RA.

35
Q

What are the components of insurance contract liabilities under IFRS 17?

A
  • Liability for Incurred Claims (LIC)
  • Liability for Remaining Claims (LRC)
36
Q

How is the risk adjustment for LIC calculated?

A

RA for LIC = (expired premium) x (profit margin) x (capital allocation for reserve risk)

RA starts at (expired premium) x 10% x 30%.

37
Q

How is the risk adjustment for LRC calculated?

A

RA for LRC = premium x (profit margin) x [(capital allocation for U/W risk) + (capital allocation for reserve risk)]

RA for LRC = premium x 10% x [50% + 30%].

38
Q

What is a disadvantage of the simplified cost-of-capital approach?

A

The target profit margin may vary by portfolio or group.

Exam 6c 2025 (14 decks)

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