CIA.IFRS17-1 RA

Question 1

describe the concept of “risk adjustment” under IFRS17

Answer 1

RA adjusts PV(future cash flows) to reflect the compensation the entity requires for bearing uncertainty about the amount and timing of cash flows

Question 2

identify 4 methods for calculating RA under IFRS17

Answer 2

• quantile method
• cost of capital method
• margin method
• a combination of methods

Question 3

considerations to determine which RA estimation approach to use

Answer 3

TPC(Taipei China) Risky ->RA considerations
- consistency with how the insurer assesses risk from a fulfillment perspective
- practicality of implementation and ongoing re-measurement
- translation of RA for discloure to an equivalent CI measure

Question 4

considerations when using MfADs as the starting point for calculating RA

Answer 4

• is the current level of PfAD consistent with the compensation the entity requires for bearing uncertainty?
• are the diversification benefits included in current PfAD consistent with those would be reflected in IFRS17?
• how would the CI inherent in the current PfADs be determined?
• IFRS17 requires reinsurance contracts held to be measure as separate contracts. How would PfAD appropriate to the net liability be split between direct and ceded contracts?

Question 5

identify 5 principles for calculating the non-financial risk adjustment in IFRS17

Answer 5

RA should be higher for
- risks where there is less information
- low frequency/high severity risks
- long duration contracts
- risks with wide probability distributions
RA should be lower with emerging experience

Question 6

identify 2 further general considerations in calculating the risk adjustment in IFRS17

Answer 6

• pooling similar risks will lower the risk adjustment (LOLN -> more risks imply lower variance)
• pooling risks that are negatively correlated will lower the risk adjustment (because negatively correlated risks will offset each other)

Question 7

are IFRS17 measurement requirements based on the “unit of account” or “aggregate level”?

Answer 7

unit of account level

Question 8

are IFRS17 presentation requirements based on “unit of account” or “aggregate level”?

Answer 8

aggregate level

Question 9

are IFRS17 disclosure requirements based on “unit of account” or “aggregate level”?

Answer 9

aggregate level

Question 10

what does the entity’s perspective on diversification affect?

Answer 10

the amount of RA and the assessment of confidence interval of RA

Question 11

how are diversification incorporated?

Answer 11

based upon
- statistical or empirical analyses
- expert judgement
- causal relationship

Question 12

2 common methods to quantify the effect of diversification

Answer 12

• correlation matrices
• copulas

Question 13

what is the appropriate time horizon for calculating IFRS17 RA?

Answer 13

the lifetime of the uncertainty in the insurance contract cash flows

Question 14

how is reinsurance credit risk reflected under IFRS17?

Answer 14

through a reduction in expected cash flows

Question 15

describe the quantile method for calculating RA under IFRS17

Answer 15

• quantile method assesses the probability of adequacy of FCF
• these probabilities are used to quantify RA
• specific methods include VaR and CTE

Question 16

identify 1 advantage and 1 disadvantage of the quantile method for calculating RA

Answer 16

• adv: satisfies disclosure requirements regarding CI corresponding to RA
• disadv: if misrepresented, may introduce spurious accuracy

Question 17

describe the cost of capital method for calculating RA under IFRS17

Answer 17

RA based on the compensation an entity requires to meet a target return on capital, not based on regulatory or actual capital. 3 components:
- projected capital amounts: level of non-financial risk during the duration of the contract
- cost of capital rates: relative compensation required by the entity for holding this capital
- discount rates : to obtain PV(future compensation)

Question 18

identify 1 advantage and 1 disadvantage of the capital method for calculating RA

Answer 18

• adv: allows allocation of RA at a more granular level
• disadv: operationally complex because projection of capital requirement is an input to the liability calculation

Question 19

describe the margin method for calculating RA under IFRS17

Answer 19

select margins that reflect the compensation the entity requires for uncertainty related to non-financial risk

Question 20

identify methods for calculating risk adjustment for reinsurance held

Answer 20

• quantile methods
• CAT models
• proportional scaling
• cost of capital

Question 21

describe 2 IFRS17 risk adjustment methods that are specific to reinsurance held

Answer 21

1) CAT models:
-use output from CAT model tailored to an entity’s book of business
- select a percentile directly from the given distribution
2) proportional scaling:
- works well with proportional or quota share reinsurance
- use the same % of FCFs for ceded RA as for direct RA
- % could be modified for considerations such as ceding commissions, expense allowances and reinsurance premiums
- may also work with non-proportional reinsurance if ceded RA can consistently be expressed as a portion of gross RA

Question 22

consideration when using quantile method to estimate RA for reinsurance held

Answer 22

components not directly related to claims might be included in ceded & net data
i.e: reduction in recoverable due to netting of reinstatement premiums 保费净额结算

Question 23

why might ceded losses for CAT reinsurance need a separate RA analysis from an entity’s direct losses?

Answer 23

• CAT reinsurance covers low-frequency high-severity events
• a standard quantile method may produce a RA that is too small or even 0

Question 24

describe a method for calculating RA for ceded losses related to CAT reinsurance and high percentile events

Answer 24

use cost-of-capital method with an assumption for required capital set at a higher percentile
- captures compensation required at higher levels of treaty

Question 25

describe a way of combining RA methods for a “unit of account” approach

Answer 25

• for groups with less skewed distributions: use VaR
• for groups with highly skewed distributions: use cost of capital method or margins

Question 26

identify primary methods for calculating RA under an “aggregate approach”

Answer 26

• quantile methods
• cost of capital method

Question 27

does IFRS17 require disclosure of a confidence interval around RA?

Answer 27

yes

Question 28

identify the best RA method for incorporating a confidence interval

Answer 28

quantile methods

Question 29

what is the basic concept behind simplified CoC approach?

Answer 29

target profit margin is allocated between
- reserve risk
- underwriting risk
- other risks not relevant to RA

Question 30

identify a disadvantage of the simplified approach

Answer 30

the target profit margin may vary by portfolio or group

Question 31

app2 problem