IFRS 17-2

Question 1

Identify methods for calculating the RA (Risk Adjustment) under IFRS 17. (4)

Answer 1

• Quantile methods
• Cost of Capital
• Margin Method
• Combination of methods

Question 2

Are IFRS 17 Measurement requirements based on the ‘unit of account’ or the ‘aggregate’ level.

Answer 2

Unit of Account level.

Question 3

Are IFRS 17 Presentation requirements based on the ‘unit of account’ or the ‘aggregate’ level.

Answer 3

Aggregate level.

Question 4

Are IFRS 17 Disclosure requirements based on the ‘unit of account’ or the ‘aggregate’ level.

Answer 4

Aggregate level.

Question 5

How is reinsurance credit risk reflected under IFRS 17?

Answer 5

Through a reduction in expected cash flows.

Question 6

Briefly describe the Quantile method for calculating the RA under IFRS 17.

Answer 6

• quantile methods assess the probability of the adequacy of the FCFs (Fulfilment Cash Flows)
• these probabilities are used to quantify the RA
• specific methods include VaR (Value at Risk) and CTE (Conditional Tail Expectation)

Question 7

Identify 1 Advantage and 1 Disadvantage of the Quantile method for calculating the RA.

Answer 7

ADV: satisfies the disclosure requirements regarding confidence level corresponding to the RA
DIS: if misrepresented, it may introduce spurious accuracy

Question 8

Briefly describe the Cost of Capital method for calculating RA under IFRS 17.

Answer 8

RA is based on the compensation an entity requires to meet a target return on capital and has 3 components:

1) Projected Capital Amounts: for the level of non-financial risk during the duration of the contract
2) Cost of Capital Rate(s): for the relative compensation required by the entity for holding this capital
3) Discount Rates: for the present value calculation

Question 9

Identify 1 Advantage and 1 Disadvantage of the Cost of Capital method for calculating the RA.

Answer 9

ADV: allows allocation of the RA at a more granular level
DIS: the method is complex (projection of capital requirements is an input to the liability calculation)

Question 10

Briefly describe the Margin method for calculating the RA under IFRS 17.

Answer 10

Select Margins that reflect the compensation that the entity requires for uncertainty related to non-financial risk.

Question 11

Identify methods for calculating the risk adjustment (RA) for that are unique to Reinsurance Held. (2)

Answer 11

• catastrophe models

- proportional scaling

Question 12

Briefly describe the ‘catastrophe models’ risk adjustment (RA) method.

Answer 12

• use the output from a CAT model tailored to an entity’s book of business
• select a percentile directly from the given distribution

Question 13

Briefly describe the ‘proportional scaling’ risk adjustment (RA) method.

Answer 13

• use the same percentage of fulfilment cash flows (FCFs) for the ceded risk adjustment (RA) as for the direct RA
• but, the percentage could be modified to account for considerations such as: ceding commissions, expense allowances, or reinstatement premiums
  Note: this method works well for proportional or quota-share reinsurance, but, it may also work for non-proportional reinsurance IF the ceding risk RA can consistently be expressed as a portion of the gross RA.

Question 14

Why might ceded losses for CAT reinsurance need a separate risk adjustment (RA) analysis from an entity’s direct losses?

Answer 14

• catastrophe reinsurance covers low-frequency, high-severity events
  THUS: a standard quantile method may produce a risk adjustment (RA) that is too small or even at 0.

Question 15

Describe a method for calculating a risk adjustment (RA) for ceded losses related to CAT reinsurance and high percentile events.

Answer 15

Use the cost-of-capital method WITH the following assumption:

• required capital is set at a higher percentile.
• this in order to capture the compensation required at higher levels of the treaty.

Question 16

Describe a way of combining RA methods for a ‘unit of account’ approach.

Answer 16

• for groups with less skewed distributions: use VaR

- for groups with highly skewed distributions: use Cost of Capital method or Margin methods

Question 17

Identify the primary methods for calculating the RA under the ‘Aggregate Approach’. (2)

Answer 17

• quantile methods

- cost of capital method

Question 18

Does IFRS 17 require disclosure of a confidence interval around the RA.

Answer 18

Yes.

Question 19

Identify the best RA method for incorporating a confidence interval.

Answer 19

Quantile methods, since they provide a confidence interval around the RA automatically.

Question 20

What is the basic concept behind the simplified CoC (Cost of Capital) approach?

Answer 20

Target profit margin is allocated between:

• reserve risk
• underwriting risk
• other risks that are not relevant to the RA

Question 21

Identify a disadvantage to this simplified approach.

Answer 21

The target profit margin may vary by portfolio or group.