CIA.IFRS17-1 Reinsurance

Question 1

what does it mean for an insurance contract to be onerous?

Answer 1

a contract is onerous at the date of initial recognition if there is a net outflow for the sum of
- FCFs
- acquisition cash flows
- cash flows arising from the contract at the date of initial recognition

Question 2

based on IFRS17, how shall an entity, at minimum, divide a portfolio into groups?

Answer 2

1) a group that is onerous at initial recognition (if any)
2) a group that has no significant possibility of becoming onerous (if any)
3) a group of any remaining contracts (if any)

Question 3

is an entity permitted to reassess composition of groups after initial recognition?

Answer 3

No
Group composition is established at initial recognition and shall not be reassessed (although it can be changed between onerous and non-onerous)

Question 4

does IFRS17 permit disaggregation of individual insurance contracts?

Answer 4

No (usually). Under IFRS17, the lowest unit of account is the insurance contract.
In most cases, it is not permitted to disaggregate individual insurance contracts.

Question 5

how are multi-line reinsurance contracts aggregated under IFRS17?

Answer 5

options:
- based on predominant exposure
- creating a portfolio/group for multi-line contracts
- separating groups into sub contracts and grouping those subcontracts together

Question 6

what are some possible indicators that may inform testing should be conducted to determine if contracts are onerous at initial recognition under PAA?

Answer 6

pg11
IFRS17 allows entities applying PAA to rely on assumption that no contracts in the portfolio are onerous at initial recognition
possible indicators:
- a group of contracts in the portfolio that are known to be onerous at initial recognition
- past losses in the portfolio
- aggressive underwriting or pricing
- unfavorable experience trends

Question 7

how is the liquidity of LRC evaluated for reinsurance contracts?

Answer 7

Based on the ability of reinsurance purchaser to cancel the reinsurance contract before its expiry date and to receive value

Question 8

identify components of LIC

Answer 8

• an unbiased current estimate of future CFs (not the same as FCF)
• an adjustment for discounting
• a risk adjustment

Question 9

identify considerations when estimating the risk of non-performance of a reinsurer

Answer 9

• financial strength of the reinsurers
• history of claims and coverage disputes with reinsurers
• risk of contagion across various reinsurance arrangements
• delays in payments and concentration risk
• length of timeover which liabilities are expected to be settled
• collateral available to mitigate risk

Question 10

what does risk adjustment for non-financial risk represent under the definition of reinsurance held?

Answer 10

the amount of non-financial risk being transferred by the holder of a group of reinsurance contracts to the issuers of those contracts

Question 11

identify 3 options for grouping data when estimating the present value of future cash flows and the RA

Answer 11

1) estimate gross & net losses then calculate ceded = gross -net
2) net = gross - ceded
3) gross = net + ceded

Question 12

how is the provision for reinsurer non-performance risk calculated?

Answer 12

measured as an estimate of the future cash flows of reinsurance held

Question 13

under IFRS17. how might insurance revenue for reinsurance contracts issued differ from earned premium?

Answer 13

-seasonality: if the release of risk differs from the passage of time
- reinstatement premiums: apply against insurance service expenses
- ceding commissions on proportional reinsurance treaties: reinsurer could classify as any of insurance revenue/insurance service expense/investment component

Question 14

when is an investment component considered distinct?

Answer 14

清楚的
if it is not highly interrelated with the insurance component of the contract and it could be sold separately using the same terms, in the same market, by the entity or another entity.

Question 15

does PAA eligibility for reinsurance contracts held need to be assessed separately from underlying insurance contracts?

Answer 15

yes

Question 16

how is LRC estimated under GMA and PAA?

Answer 16

GMA:
LRC = FCF related to future service +CSM

PAA:
LRC = premium received - insurance acquisition cash flows

Question 17

how is the CSM concept modified for reinsurance contract held?

Answer 17

• there is no unearned profit
• instead there is a net cost or net gain on purchasing the reinsurance

Question 18

describe the potential mismatch between revenues and FCFs when an entity uses GMA for LRC for reinsurance contract held

Answer 18

• revenues are recognized as they are earned
• FCF projections include projected CFs for policies to the end of the year

Question 19

if a group of contracts become onerous, when do the losses have to be recognized under IFRS17?

Answer 19

immediately, when the group becomes onerous

Question 20

briefly describe the accounting treatment of onerous groups in financial statements

Answer 20

in the statement of financial position: LC is booked as part of LRC
in the statement of financial performance: LC is recognized as insurance service expense

Question 21

How is LC defined?

Answer 21

as the expected net outflow of on onerous group

Question 22

when are onerous groups recognized in financial statements?

Answer 22

onerous groups are recognized when bound even if this is prior to the effective of the contract

Question 23

describe the accounting treatment of Facility Association’s residual market mechanisms

Answer 23

• UAF : functions as a levy therefore is not considered under IFRS17
• FARM: member companies account for their share of FARM insurance contracts as direct business
• RSP: member companies use reinsurance accounting where the reinsurer the the collective FA membership