IFRS 17-2 Flashcards
Identify methods for calculating the RA (Risk Adjustment) under IFRS 17. (4)
- Quantile methods
- Cost of Capital
- Margin Method
- Combination of methods
Are IFRS 17 Measurement requirements based on the ‘unit of account’ or the ‘aggregate’ level.
Unit of Account level.
Are IFRS 17 Presentation requirements based on the ‘unit of account’ or the ‘aggregate’ level.
Aggregate level.
Are IFRS 17 Disclosure requirements based on the ‘unit of account’ or the ‘aggregate’ level.
Aggregate level.
How is reinsurance credit risk reflected under IFRS 17?
Through a reduction in expected cash flows.
Briefly describe the Quantile method for calculating the RA under IFRS 17.
- quantile methods assess the probability of the adequacy of the FCFs (Fulfilment Cash Flows)
- these probabilities are used to quantify the RA
- specific methods include VaR (Value at Risk) and CTE (Conditional Tail Expectation)
Identify 1 Advantage and 1 Disadvantage of the Quantile method for calculating the RA.
ADV: satisfies the disclosure requirements regarding confidence level corresponding to the RA
DIS: if misrepresented, it may introduce spurious accuracy
Briefly describe the Cost of Capital method for calculating RA under IFRS 17.
RA is based on the compensation an entity requires to meet a target return on capital and has 3 components:
1) Projected Capital Amounts: for the level of non-financial risk during the duration of the contract
2) Cost of Capital Rate(s): for the relative compensation required by the entity for holding this capital
3) Discount Rates: for the present value calculation
Identify 1 Advantage and 1 Disadvantage of the Cost of Capital method for calculating the RA.
ADV: allows allocation of the RA at a more granular level
DIS: the method is complex (projection of capital requirements is an input to the liability calculation)
Briefly describe the Margin method for calculating the RA under IFRS 17.
Select Margins that reflect the compensation that the entity requires for uncertainty related to non-financial risk.
Identify methods for calculating the risk adjustment (RA) for that are unique to Reinsurance Held. (2)
- catastrophe models
- proportional scaling
Briefly describe the ‘catastrophe models’ risk adjustment (RA) method.
- use the output from a CAT model tailored to an entity’s book of business
- select a percentile directly from the given distribution
Briefly describe the ‘proportional scaling’ risk adjustment (RA) method.
- use the same percentage of fulfilment cash flows (FCFs) for the ceded risk adjustment (RA) as for the direct RA
- but, the percentage could be modified to account for considerations such as: ceding commissions, expense allowances, or reinstatement premiums
Note: this method works well for proportional or quota-share reinsurance, but, it may also work for non-proportional reinsurance IF the ceding risk RA can consistently be expressed as a portion of the gross RA.
Why might ceded losses for CAT reinsurance need a separate risk adjustment (RA) analysis from an entity’s direct losses?
- catastrophe reinsurance covers low-frequency, high-severity events
THUS: a standard quantile method may produce a risk adjustment (RA) that is too small or even at 0.
Describe a method for calculating a risk adjustment (RA) for ceded losses related to CAT reinsurance and high percentile events.
Use the cost-of-capital method WITH the following assumption:
- required capital is set at a higher percentile.
- this in order to capture the compensation required at higher levels of the treaty.
