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CAS Exam 6C > IFRS 17 > Flashcards

IFRS 17 Flashcards

1
Q

What principles does IFRS 17 establish?

A

For insurance contracts within the IFRS 17 standard:

  • Recognition
  • Measurement
  • Presentation
  • Disclosure
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2
Q

Briefly describe 3 building blocks of the measurement of insurance contract liabilities under IFRS 17.

A
  1. Present Value of future cash flows
    • similar to PV(liabs)
    • except, IFRS 17 includes acquisition expenses and all premiums, and excludes risk adjustment for financial risk
  2. Risk adjustement for Non-Financial Risk:
    • similar to PfADs for non-economic risks (claims dev, reinsurance recovery)
  3. Contractual Service Margin (CSM):
    • represents unearned profit from a group of insurance contracts (no front-ending of profits)
    • current CIA standards do allow for front-ending of profits
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3
Q

Define the term fulfilment cash flows or FCF.

A

FCF =

= IFRS building block 1 + IFRS building block 2

= PV (future cash flows) + risk adjustment for non-Financial Risk

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4
Q

When is the CSM amount established and what is the amount?

A

When FCF < 0 (profit is negative) amount

= CSM = -FCF

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5
Q

Briefly describe 2 valuation methods under IFRS 17

A
  • General Measurement Approach (GMA)
  • this is the default approach
  • Premium Allocation Approach (PAA)
  • simplified version of GMA
  • certain eligibility requirements must be met (assessed at contract inception)
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6
Q

Define the term Liability for Incurred Claims (LIC)

A

Insurer’s obligation to pay claims for events that have already occurred (basically claim liability)

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7
Q

Define the term Liability for Remaining Coverage (LRC)

A

Insurer’s obligation to provide insurance coverage for events that have not yet occurred (basically just the premium liability)

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8
Q

Identify examples where PAA may be used instead of GMA for measuring IFRS 17 liabilities. (2)

A
  • short term contracts (policy term <=1 year)
  • longer-duration contracts if PAA is a reasonable approximation to GMA over life of contract (both apply only to LRC (Liability for Remaining Coverage) component liabilities)
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9
Q

Define the term “insurance contract” under IFRS 17

A

a contract under which 1 party (the issuer)…

  • accepts significant insurance risk from another party (the PH)…
  • by agreeing to compensate the PH…
  • if a specific uncertain future event (the insured event) adversely affects the PH
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10
Q

Identify components of an insurance contract under IFRS 17. (4)

A
  • insurance components: non-financial risk that is the “normal” part of any insurance contract
  • service components: e.g. claims adjudication with reinsurance protection
  • investment components: amounts include in premium that are returned customers, regardless of occurrence of an event
  • embedded derivatives (not on syllabus)
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11
Q

What is the formula for contract liability in terms of LIC (Liability for Incurred Claims) & LRC (Liability for Remaining Coverage)?

A

insurance contract liability = LIC + LRC

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12
Q

What is the formula for LRC

A

LRC = UEP - (premium receivable) - DAC

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13
Q

Identify the categories for differences between IFRS 17 and current CIA practices for measurement of liabilities. (5)

A

HINT: Crit = x2 (DAC,Discount)

  • Criteria
  • DAC Deferral
  • DAC Amount
  • Discounting of LRC
  • Discounting of LIC
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14
Q

Identify differences between IFRS 17 and current CIA practices for measurement of liabilities (Item 1).

A

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

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15
Q

Identify differences between IFRS 17 and current CIA practices for measurement of liabilities (Item 2).

A

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

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16
Q

Identify differences between IFRS 17 and current CIA practices for measurement of liabilities (Item 3).

A

DAC amount:

IFRS 17: allows deferral of DAC that is directly attributable to the portfolio of insurance contracts

current: allowable deferral is different

17
Q

Identify differences between IFRS 17 and current CIA practices for measurement of liabilities (Item 4).

A

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

18
Q

Identify differences between IFRS 17 and current CIA practices for measurement of liabilities (Item 5).

A

Discounting of LIC

IFRS 17: ignore discounting and financial risk for LIC if:

  1. PAA is used for LRC;
  2. LIC Cash flows are received < 1 year within incurred date of claims

current: requires discounting

19
Q

Identify examples in Canadian P&C where PAA can or cannot be used to measure LRC.

A

PAA ok:

  • auto outside QC (since policy term is generally <= 1 yr)
  • auto in QC (if PAA is a reasonable approximation to GMA)

PAA probably not ok:

  • warranty
  • mortgage default (both may have terms > 1 year, or high year-to year variability in claims)
20
Q

Briefly describe 2 measurement considerations for contract liabilities in IFRS 17.

A

Level of aggregation:

  • must identify portfolio of contracts (contracts in a portfolio have similar risks and are managed together)
  • each portfolio is further subdivided into groups (a group is the unit of account for measurement of CSM)

Contract boundary (not on syllabus):

  • must identify contract boundary for each contract (this is normally the term of the policy)
  • cash flow estimates include only cash flows related to claims incurred within the boundary
21
Q

How does IFRS 17 define ‘estimate of future cash flows’?

A

Estimate of future cash flows:

the probability-weighted mean of the full range of possible outcomes (use all credible information available at the reporting date without undue cost or effort).

22
Q

Identify areas where there are differences between IFRS 17 and current CIA practices regarding probability-weighted cash flows. (5)

A
  • MfADs for non-financial risk
  • MfADs for financial risk
  • Policyholder options
  • Expenses
  • Taxes
23
Q

Identify differences between IFRS 17 and current CIA practices regarding probability-weighted cash flows. (Item 1)

A

MfADs for non-financial risk

IFRS 17: requires separate disclosure for risk adjustment for non-financial risk

Current: difference between ‘best estimat’ of cash flows and ‘best estimate with PfAD’ is not always quantified

24
Q

Identify differences between IFRS 17 and current CIA practices regarding probability-weighted cash flows. (Item 2)

A

MfADs for financial risk

IFRS 17: includes financial risk in the present value of future cash flows

Current: MfAD for interest rate risk is separate from the best estimate of PV for cash flows

25
Q

Identify differences between IFRS 17 and current CIA practices regarding probability-weighted cash flows. (Item 3)

A

Policyholder Options

IFRS 17: accounts for policholder behaviour

Current: the effect of cash flows is blurred

26
Q

Identify differences between IFRS 17 and current CIA practices regarding probability-weighted cash flows. (Item 4)

A

Expenses

IFRS 17: includes only expesnses that are directly attributable to the portfolio

Current: the above is not a requirement

27
Q

Identify differences between IFRS 17 and current CIA practices regarding probability-weighted cash flows. (Item 5)

A

Taxes

IFRS 17: excludes taxes from cash flow estimates

Current: taxes are included

28
Q

What is the purpose of discounting?

A

To account for the time value of money.

29
Q

Under current practice, what 3 things do you need for the discounting calculation?

A

Assuming you have the nominal value of the liabilities, you need the:

  1. discount rate
  2. discount rate MfAD
  3. payment pattern
30
Q

Under IFRS 17, how is the discount rate selected when cash flows do not vary with returns on underlying items?

A

The discount rate is based on a liquidity-adjusted risk-free discount rate curve (or yield curve).

31
Q

Identify approaches for determining the discount rate curve under IFRS 17. (2)

A

Bottom-up approach

Top-Down approach

32
Q

Briefly describe the Bottom-up approach for determining the discount rate curve under IFRS 17.

A

Bottom-up approach:

  • adjust the risk-free discount curve by adding an illiquidity premium that reflects the liabilities
    • under current practice, there’s no requirement to identify an illiquidity premium
33
Q

Briefly describe the Top-down approach for determining the discount rate curve under IFRS 17.

A

Top-down approach:

  • use the investment return on a reference portfolio of assets that’s ‘similar’ to the liabilities
    • Ex: use the 10-year spot rate on a Canadian bond for the 10-year liability cash flow
  • then remove asset characteristics not relevant to the liability
    • Ex: remove credit and market risk
  • under current practice, the rate would be tied more closely to the assets held by the company
34
Q

Briefly describe how financial risk is incorporated into discounting under IFRS 17.

A

TRICK: you can build financial risk into the:

  • discount rate; or
  • cash flows; or
  • a combination of both

under current practice, there is an explicit provision for reinvestment risk (there is no such provision under IFRS 17)

35
Q

Regarding non-financial risk, how is the ‘measurement objective’ different under IFRS 17 vs the current practice?

A

IFRS 17: compensation required by the entity to bear uncertainty

Current: amount required to provide for the effect of uncertainty

CAS Exam 6C (70 decks)

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