IAA.RiskAdjs

Question 1

Identify reasons for adding risk adjustments to claim liability estimates under IFRS 17

Answer 1

• to REWARD the insurer for taking on risk

- to COVER adverse deviation in claims experience

Question 2

On initial recognition, how are insurance contracts measured in IFRS 17

Answer 2

FCF (fulfilment cash flows) = estimates of future cash flows + adjustments for the time value of money (and financial risk) + adjustment for non-financial risk

CSM (contractual service margin) = represents unearned profit from a group of insurance contracts

Question 3

What does non-financial risk measure in IFRS 17

Answer 3

non-financial risk measures the compensation required to make the entity indifferent between:
choice 1: fulfilling a liability with a RANGE of possible outcomes due to non-financial risks
choice 2: fulfilling a liability with FIXED future cash flows equivalent to the expected value of choice 1

Question 4

Identify 5 principles for calculating the non-financial risk adjustment in IFRS 17

Answer 4

risk adjustment should be HIGHER for
- risk where there is less information
- low frequency / high severity risks
- longer duration contracts
- risks with wide probability distributions
risk adjustment should be LOWER with emerging experience

Question 5

Identify 2 FURTHER general considerations in calculating the risk adjustment in FIRS 17

Answer 5

• pooling SIMILAR RISKS will lower the risk adjustment (law of large numbers -> more risks implies lower variance)
• pooling risks that are negatively correlated will lower the risk adjustment (because negatively correlated risks will offset each other)

Question 6

Identify an entities’ reporting/disclosure requirements for risk adjustments under IFRS 17

Answer 6

• must REPORT a liability for risk adjustment (this is added to the PV of expected cash flow)
• must DISCLOSE a confidence interval for the risk adjustment (for benchmarking against other entities)

Question 7

What is IFRS 17?

Answer 7

IFRS 17 is a

• new international standard for financial reporting
• effective date changed to Jan 1, 2023 (was pushed back again to allow more time to determine effects of change)
• applies to valuation of insurance contract liabilities
• different from current Canadian practice (Canada: PV + 3 different kinds risk provisions)
• uses CURRENT interest rates for calculating PV (instead of actual investment return rates)