VALUATIONS

Question 1

What is the definition of an insurance contract? (IFRS 17 edition)

Answer 1

• Requires that one party accepts significant insurance risk from another party.
• Significant if, and only if, an insured event could cause the entity to pay additional amounts that are significant in any single scenario.
• Investment contracts with discretionary participation features (e.g. some with-profits or
  products with smoothed-bonus type funds), are also included in the scope of IFRS 17 if the entity also issues insurance contracts.

Question 2

What are the three different ways portfolios can be grouped

Answer 2

1. Loss making at inception
2. No significant probability of being loss-making
3. Neither 1 or 2

Question 3

What is the risk adjustment?

Answer 3

Adjustment to BEL to reflect compensation entity requires for bearing uncertainty in amount and timing of non-financial risks.
RA must be attributed to a group of contracts.
No specific way to calculate RA (could do cost of capital, value at risk or additions of margins)
Must disclose confidence level used to determine RA.

Question 4

Why would BEL be different IFRS 17 vs. prudential regulatory reporting purposes?

Answer 4

• the acquisition and maintenance expenses allowed to be included in expense assumptions
• discount rate used
• contract boundary
• tax-related flows included in fulfilment cashflows
• requirement to unbundle certain contracts under IFRS 17

Question 5

Contractual Service Margin (CSM)

Answer 5

• set up at inception for group of contracts and represents unearned profits
• these unearned profits are released in a clearly defined way
• some profits that come from cashflows which have been excluded in BEL also need to be allowed for in CSM