CIA.IFRS17-LRC

Question 1

Describe LRC

Answer 1

An entity’s obligation to:
(a) investigate and pay valid claims under existing insurance contracts for insured events that have not yet occurred; and
(b) pay amounts under existing insurance contracts that are not included in (a) and that relate to:
(i) insurance contract services not yet provided; or
(ii) any investment components or other amounts that are not related to the provision of insurance contract services and that have not been transferred to the liability for incurred claims.

Question 2

Describe the concept of contract boundary under IFRS17

Answer 2

Cash flows are within the boundary of an insurance contract if they arise from substantive rights and obligations that exist during the reporting period:

(i) in which the entity can compel the policyholder to pay the premiums or;

(ii) in which the entity has a substantive obligation to provide the policyholder with insurance contract services

Question 3

Formula carrying amount of CSM @ end of reporting period

Answer 3

carrying amount of CSM @ ‘‘end’’ of reporting period = (carrying amount of CSM @ ‘‘start’’ of reporting period) + adjustments

Question 4

Identify adjustments relevant to the CSM carrying amount (4)

Answer 4

• the effect of new contracts added to the group
• interest on the CSM carrying amount during the reporting period
• changes in FCFs relating to future services
• effect of currency exchange differences

Question 5

Define the term coverage units

Answer 5

the quantity of insurance contract services provided by the contracts in the group

Question 6

Formula Amortization of CSM

Answer 6

[(CU_rep)/(CU_rep + CU_end)] * CSM_beg

CU_rep = Coverage units in the reporting period
CU_end = Expected remaining coverage units at the end of the reporting period
CSM_beg = reporting period opening CSM

*Ending CSM = (CSM_beg) - (amortization of CSM)

Question 7

The determination of coverage units involves judgment and estimates, key principles to follow when using judgment (3)

Answer 7

• quantity of benefits provided relates to the amount that can be claimed by policyholder (not expected costs to be incurred)
• discount is optional
• coverage period extends to the end of the period in which insurance contracts services are provided

Question 8

Describe the CSM amortization pattern if the policy limit does not change over the coverage period

Answer 8

uniform

Question 9

Describe the CSM amortization pattern if the policy limit decreases over the coverage period

Answer 9

declining (less CSM is released toward the end)

*mortgage insurance

Question 10

Describe the CSM amortization pattern if the policy limit increases over the coverage period

Answer 10

increasing (more CSM is released toward the end)

*product warranty with replacement coverage (cost increase due to inflation)

Question 11

GMA Formula for FCFs at initial recognition

Answer 11

FCFs = cash inflows - cash outflows + effect of discounting - RA

Question 12

GMA Formula for LRC

Answer 12

LRC = (LRC excl. LC) + LC
LRC(excl. LC) = FCF + CSM

LC is only required for onerous contracts

Question 13

Describe the measurement of LC (onerous contracts) subsequent to initial recognition

Answer 13

if there are no changes in underlying assumptions:
→ LC is expected to be systematically decreased
if there are changes in underlying assumptions that are favourable:
→ allocate changes to the LC until it reaches 0 then a CSM may be re-established

Question 14

Formula PAA LRC (excl. LC) at initial recognition

Answer 14

LRC (ex. LC) at initial recognition =
+ Premiums
- insurance Acquisition cash flows (unless the entity chooses to recognize the payments as an expense)
+/- amounts arising from Derecognition of “certain” assets & liabilities

Question 15

Formula PAA LRC (excl. LC) at subsequent measurement

Answer 15

LRC (ex. LC) at subsequent measurement =

+ carrying amount at start of reporting period

+ Premiums received in period
(-) insurance revenue (premium earned for insurance contract services provided in that period)

(-) insurance Acquisition cash flows
+ amortization of insurance acquisition cash flows recognized as an expense in the reporting period

+ adjustments to a financing component

(-) investment components paid/transferred to LIC

***Simpler approach (given that there are no adjustments for financing or investment components):

LRC at subs. measurement = (prem received - insurance revenue recognize) - acquisition cost yet to be expensed

Question 16

Possible indicators that may inform the decision to conduct quantitative testing of PAA (5)

Answer 16

• a group of contracts in the portfolio that are know to be onerous at initial recognition
• past losses in the portfolio
• aggressive underwriting or pricing
• unfavourable experience trends
• unfavourable external conditions

Question 17

briefly describe the accounting steps if a quantitative assessment indicates a group of contracts is onerous

Answer 17

• recognize a loss in the insurance service expense immediately for the net outflow for the onerous group
• establish an LC as part of the LRC for the onerous group