CIA.IFRS17 Flashcards
what principles does IFRS 17 establish
or insurance contracts within the IFRS 17 standard:
Recognition
Measurement
Presentation
Disclosure
briefly describe the 3 building blocks for measuring liabilities under IFRS 17
Present Value of future cash flows
- similar to PV(liabilities) without PfADs
- but IFRS 17 includes provisions for financial risk, unlike with current CIA practice
Risk adjustment for non-financial risk
- similar to PfADs for non-economic risk
Contractual Service Margin (CSM)
- represents unearned profit from a group of insurance contracts (no front-ending of profits)
- current CIA standards do allow front-ending of profits
define the term Fulfilment Cash Flows (FCF)
= PV(future cash flows) + (risk adjustment for non-financial risk)
define the term ‘insurance contract’ under IFRS 17
a contract under which 1 party (the issuer)..
- accepts significant insurance risk from another party (the policyholder)..
- by agreeing to compensate the policyholder..
- if a specified uncertain future event (the insured event) adversely affects the policyholder
identify components of an insurance contract under IFRS 17
- 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)
identify differences between IFRS 17 and current CIA practice for measurement of liabilities relating to LRC (3)
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
identify differences between IFRS 17 and current CIA practice regarding discounting
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
identify differences between IFRS 17 and current CIA practice regarding contract boundary (CRR)
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)
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)
identify examples where IFRS contract boundary may be different from policy term under current practice
cancellable contracts:
- under IFRS 17: contract boundary = cancel date
(under current practice, policy term extends beyond cancel date if that would increase the liability)
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)
identify differences between IFRS 17 and prior CIA practice regarding probability-weighted cash flows
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 17 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)
under IFRS 17, how is the discount rate selected when cash flows do not vary with returns on underlying items
discount rate is based on a liquidity-adjusted risk-free discount rate curve (or yield curve)
briefly describe how financial risk is incorporated into discounting under IFRS 17
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)
briefly describe how the discount rate is selected when cash flows do vary with returns on underlying premiums
choose a discount rate that makes the value of the liability cash flows equal the fair market value of the underlying assets
briefly describe how are cash flows handled when they vary with assumptions related to financial risk
- 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
regarding non-financial risk, how is the ‘measurement objective’ different under IFRS 17 vs pre-IFRS17 practice
IFRS 17:
- compensation required by entity to bear uncertainty
current practice:
- amount required to provide for the effect of uncertainty
