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Exam 6 > IFRS - LRC > Flashcards

IFRS - LRC Flashcards

1
Q

what is a simple formula for insurance contract liabilities under IFRS17?

A

LIC+LRC

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2
Q

what is a simple formula for LRC under IFRS17?

A

LRC = (LRC ex LC)+LC
LC only required for onerous contracts

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3
Q

how does IFRS17 define LRC?

A

LRC is an entity’s obligation to:
a) investigate and pay valid claims under existing insurance contracts for insured events that have not yet occurred
b) pay amounts under existing insurance contracts not included in
- insurance contract services not yet provided
- any investment components or other amounts that are not related to the provision of insurance contract services & that have not been transferred to the liability for incurred claims

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4
Q

what is the definition of CSM?

A

unearned profit from a group of insurance contracts
a component of the carrying amount of the asset or liability for a group of insurance contracts representing the unearned profit the entity will recognize as it provides insurance contract services under the insurance contracts in the group

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5
Q

describe the concept of “contract boundary” under IFRS17

A

it distinguishes future cash flows to be considered in the measurement of the insurance contract from other future cash flows

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6
Q

what are policies subdivided into?

A

portfolios

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7
Q

what are portfolios subdivided into?

A

groups

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8
Q

what does it mean for a portfolio to be in an asset position?

A

if the expected cash inflow > cash outflow
liability position otherwise

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9
Q

what is a simple formula for LRC that uses CFs?

A

LRC = FCFs + CSM
(CSM only exists for non-onerous contracts)

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10
Q

what is the value of LIC at contract inception?

A

0
at contract inception, all liabilities are part of LRC

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11
Q

what is the value of paid claims at contract inception?

A

0
no claims have been incurred so no claims could have been paid

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12
Q

what is the value of LRC at contract termination?

A

0
all liabilities are part of LIC at contract termination

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13
Q

how much of the CSM has been released at contract inception?

A

none

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14
Q

what is the value of CSM at contract termination?

A

0
all CSM has been release by contract termination

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15
Q

what are some adjustments to be considered when using historical experience to estimate future claims?

A
  • loss trends
  • impacts from legislative changes
  • changes in mix of business
  • OLF
  • large losses and CAT
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16
Q

how can the timing of LRC cash flows on a group basis be estimated?

A
  • estimate payment pattern on a group basis
  • adjust AY payment pattern used for LIC to a pattern consistent with the average accident date of the group
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17
Q

identify the main steps in any discounting procedure (same for IFRS17 and CIA)

A
  • determine a payment patter
  • apply discount factors
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18
Q

identify a procedure for estimating the timing of LRC cash flows on a group basis under IFRS17

A
  • estimate a payment pattern on a group basis
  • adjust the AY payment pattern used for LIC to a pattern consistent with the average accident date of the group
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19
Q

formula for CSM at the end of the reporting period

A

carrying amount of CSM at end of reporting period = carry amount of CSM at start of reporting period + adjustments

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20
Q

identify adjustments relevant to the CSM carrying amount

A
  • the effect of new contracts added to the group
  • interest on CSM carrying amount
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21
Q

define the term coverage units according to IFRS17

A

the quantity of insurance contract services provided by the contracts in the group

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22
Q

what is the key concept that relates to coverage units to the CSM

A

coverage units determine how the CSM is released into profit or loss

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23
Q

how are coverage units determined?

A

by considering
the quantity of benefits provided
under a contract within its expected coverage period

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24
Q

what is the key formula for how CSM is amortized

A

proportion of CSM released during the quarter
= CUqtr / ( CUqtr + CUend )
CUqtr = # of coverage units in quarter
CUend = # of coverage units remaining at end of quarter

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25
Q

what is the key principle for determining coverage units based on judgement & experience?

A

to reflect the insurance contract services provided in each period

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26
Q

identify general considerations for counting coverage units

A
  • quantify of benefits relates to the amount that can be claimed by policyholder
  • discounting is optional when calculating quantify of benefits provided under the contract
  • coverage period extends to the end of the period in which insurance contract services are provided (unless claims in settlement are included in LRC rather than LIC)
27
Q

describe the CSM amortization pattern if the policy limit doesn’t change over the coverage period

A

uniform: contracts with same policy limit throughout the coverage period

28
Q

describe the CSM amortization pattern if the policy limit decreases over the coverage period

A

declining (less CSM is release towards the end)
e.g: mortgage insurance contracts

29
Q

describe the CSM amortization pattern if the policy limit increases over the coverage period

A

increasing
e.g: product warranty contracts with replacement coverage because replacement costs could increase due to inflation

30
Q

what is the simple formula for LRC?

A

LRC = LRC ex LC + LC

31
Q

what is the formula for LRC that explicitly uses FCF?

A

LRC = FCF+ CSM

32
Q

what is the one way of writing GMA formula for FCFs at initial recognition of the contract?

A

FCF = (future cash in-flows) - (future cash out-flows) + effect of discounting - RA

33
Q

is an entity required to track (LRC excluding LC) and LC separately?

A

yes because they want to keep non-onerous and onerous contracts separate

34
Q

describe the measurement of onerous contracts subsequent to initial recoganition

A
  • if there are no changes in underlying assumptions, LC is expected to be systematically decreased
  • if there are favorable changes in underlying assumptions, allocate changes to LC until it reaches 0, then reestablish CSM
35
Q

describe the measurement of non-onerous contracts that becomes onerous subsequent to initial recognition

A

reduce CSM to 0, then establish a LC
this would happen when unfavorable changes in the fulfilment cash flows exceed the carrying amount of CSM

36
Q

why do onerous and non-onerous contracts need to be tracked separately for accounting purposes?

A
  • non onerous contracts have a CSM, no LC
  • onerous contracts have a LC, no CSM
37
Q

describe PAA in 1 short phrase

A

PAA is a simplified version of GMA for measuring LRC (PAA doesnot apply to LIC)

38
Q

identify 2 things that make PAA simpler than GMA for LRC for non-onerous groups

A
  • PAA doesnot require estimation of FCFs
  • PAA doesnot require a CSM
    For onerous groups, LC must be measured based on FCF and therefore there’s no simplification
39
Q

briefly describe 2 eligibility criteria for using PAA to calculate LRC under IFRS17

A
  • can be used for short term contracts
  • can be used for longer duration contracts if PAA is a reasonable approximation to GMA over the contract term
40
Q

under PAA, how is LRC excluding LC calculated differently for onerous and non-onerous contracts?

A

no difference, onerous contracts have a LC term

41
Q

what is the formula for LRC under PAA at initial recognition?

A

PAD
+ Premiums
- initial Acquisition cash flows
+/- amounts arising from Derecognition of certain assets and liabilities

42
Q

what is the formula for LRC under PAA at subsequent measurement?

A

+carrying amount at start
- premiums received in period
- insurance acquisition cost
+ amortization of insurance acquisition CFs recognized as an expense in the reporting period
+ adjustment to financing component
- insurance revenue (premium earned for insurance contract services provided in that period)
- investment components paid or transferred to LIC

43
Q

excel practice problems

A
44
Q

review decision tree for determining whether a group of contracts is onerous under PAA

A

qualitative first, then quantitative

45
Q

indicators to conduct onerous contracts testing

A
  • group in the portfolio known to be onerous at initial recognition
  • past losses in portfolio
  • aggressive underwriting or pricing
  • unfavorable experience trends
  • unfavorable external condition
46
Q

describe the quantitative assessment of a potentially onerous group of contracts

A

1) calculate the difference: D = FCF - (LRC ex LC)
- D>0, onerous
- D<0, not onerous
2) if onerous, book LC on P&L
- increase LRC to FCF where LRC = FCF = (LRC ex LC) + LC

47
Q

describe the accounting steps if a quantitative assessment indicates a group of contracts is onerous

A
  • recognize a loss in insurance service expense immediately for the net outflow for the onerous group
  • establish LC as part of the LRC for onerous group
48
Q

describe the accounting steps required for LC at subsequent measurements

A

LC is released into the insurance service expense and amortized from the LRC over the duration of contracts

49
Q

review decision tree problem

A
50
Q

describe the difference between LRC under GMA & PAA for acquisition costs

A
  • GMA cannot recognize acquisition costs immediately
  • PAA can recognize acquisition costs immediately if coverage period of all contracts in group is <=1 year
51
Q

describe the difference between LRC under GMA & PAA for discounting

A
  • GMA: discounting required
  • PAA: discounting not required unless there is a significant financing component
52
Q

describe 2 differences between LRC under GMA & PAA aside from acquisition costs and discounting

A

1) application:
- GMA applies to any P&C contract
- PAA applies to P&C contracts with a coverage period <=1 year
2) cash flow projections:
- GMA: CF projections are required to estimate LRC
- PAA: CF projections are not required to estimate LRC

53
Q

describe the difference between LRC under GMA & PAA for initial measurement

A
  • GMA: LRC = PV(CF) + RA + CSM
  • PAA: LRC = premiums - initial acquisition costs unless recognized as expenses when incurred
54
Q

describe the difference between LRC under GMA & PAA for risk adjustment

A
  • GMA: RA is required for non-onerous contracts
  • PAA: RA is not required for non onerous contracts
55
Q

describe the difference between LRC under GMA & PAA for CSM

A
  • GMA: CSM is required for non-onerous contracts
  • PAA: CSM is not required for non onerous contracts
56
Q

if an underlying insurance contract is onerous, when must it be recognized in financial statements?

A

recognized when issued (even before coverage begins)

57
Q

if an underlying contract is issued but non-onerous, des it have to be recognized before coverage begins?

A

no

58
Q

if an underlying contract is in-force, does it have to be recognized in financial statements?

A

yes

59
Q

how is the concept of CSM modified for a group of reinsurance contratcs?

A

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

60
Q

what is a loss recovery component?

A

when an entity recognizes an LC on a group of underlying insurance contracts and these underlying contracts are covered by reinsurance contracts held -> a portion of the LC is offset by a gain on reinsurance contracts held. This offset is called a loss recovery component.

61
Q

do reinsurance contracts not entered into have to be recognized in financial statements?

A

no

62
Q

describe the steps in calculating the Loss Component under PAA within IFRS17

A

add FCF
1) determine UPR (Unearned Premium Reserve)
2) estimate future claims and loss adjustment expenses as:
- apply a selected ELR and ULAE factor to UPR by contract group
- this is the largest component of the FCFs
3) discount the result of step 2 to the evaluation date
4) apply RA, acquisition costs, other attributable expenses to the result of 3)
subtract (LRC ex LC)

63
Q

are regulatory bodies going to adapt their MCT guidelines upon implementation of IFRS17?

A

yes

64
Q

identify a key consideration in adapting MCT for the implementation of IFRS17

A

selection of ELR

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