C2. Defrain, Lindbergh & Odomirok 24 Flashcards Preview

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Flashcards in C2. Defrain, Lindbergh & Odomirok 24 Deck (20):

List 4 requirements of Phase 1 or IFRS

1. Elimination of catastrophe and equalization provisions
2. Adequacy test of insurance liabilities and impairment test of reinsurance assets
3. Prohibition of offsetting insurance liabilities with reinsurance recoverables
4. Certain disclosures


Definition of an "insurance contract" under IFRS

A contract under which one party accepts a significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely effects the policyholder.


3 steps to determine liabilities according to IFRS:

1. Calculation of unbiased probability weighted expected cash flows
2. Application of discounting
3. Application of Margins


List factors that would require higher risk margins

-less is known about the estimate
-low frequency/ high severity
-longer duration
-wide probability distribution
-emerging experience increases uncertainty


Outline 3 approaches to determine risk margins:

1. Confidence level (VaR) technique: the needed load to the expected value to result in a specific probability that the insurer has sufficient funds to pay for the liabilities

2. Conditional Tail Expectation (CTE): probability weighted average of all scenarios in the tail - Mean estimate

3. Cost of capital method: the amount necessary to produce an adequate return, after factoring in the investment return.


List 3 reasons that private companies will need to understand IFRS accounting, even if they do not follow them, in order to remain competitive

1. Raising capital in a foreign market
2. Conducting transactions with an international company


List 2 concerns that the NAIC has about using IFRS as the basis for SAP

1. Transition costs
2. Complexity of reserve calculations


Explain why the IASB standard of significant insurance risk is weaker than the GAAP standard

GAAP requires that it is reasonably possible that the reinsurer may realize a significant loss.


What is IASB's definition of significant insurance risk

Significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance.


In IFRS 4, under what circumstances can an insurer change its accounting principles

If that change:
-Makes the financial statements more relevant to the user's decisions, without being less reliable; or
-Makes the statements more reliable, without being less relevant


Describe the liability adequacy test

The insurer needs to assess whether its insurance liabilities are adequate at each reporting date. This is based on current estimates of future cash flows, including the cost of handling the claims, and any options or guarantees.


Compare the GAAP to the IFRS treatment of offsetting:

Both do not allow offsetting


In GAAP, under what circumstances can an insurer change its accounting principles:

As long as they can justify that they are preferable to the current.


List 2 reasons that the volatility of results after IFRS is used should increase:

1. IFRS does not allow an unearned premium reserve, so the incoming revenue will not be smoothed over time
2. IFRS also does not recognize deferred acquisition costs


Compare the GAAP to the IFRS treatment of revenue recognition:

-GAAP records the revenue associated with the insurance premium over the duration of the contract.
-IFRS recognizes the present value of all premium and expenses as soon as the contract is signed


Compare the GAAP to the IFRS treatment of catastrophe reserves:

Neither allow


Reason that insurer ratings should not deteriorate after IFRS is implemented, despite the higher volatility of results:

Users should benefit from the increased transparency


Explain the implications of the IFRS requirement that insurance contracts that have both insurance and investment features be unbundled and accounted for separately.

As a result, some products, that may be less profitable on a stand alone basis, may need to be modified or discontinued. In addition, some products (eg life insurance contracts) may need to be modified (shortened) to reduce the volatility.


What categories must investment assets of insurers be grouped into under IFRS:

-Held to maturity: historic cost less amortization

-Available for sale: "marked to market". Changes in market value are recorded in reserves

-Held for trading: "marked to market". Changes in market value are recorded as income


Risk margin recommendations

1. Margins should be calculated using a consistent methodology over the life of the contract

2. Margins should be calculated using consistent assumptions to those made in the calculation of the liability

3. Margins should be consistent with sound insurance pricing

4. Margins should vary by product to reflect the difference in risk of different products