IFRS 17-LRC

Question 1

What is the basic formula for ‘insurance contract liabilities’ under IFRS 17?

Answer 1

Insurance Contract Liabilities = LIC + LRC

Question 2

What is a simple formula for ‘Liabilies for Remaining Claims’ (LRC) under IFRS 17?

Answer 2

LRC = (LRC excl. LC) + LC

where LC = loss component
Note: LC is required only for onerous contracts

Question 3

How does IFRS 17 define Liabilities for Remaining Claims (LRC)?

Answer 3

Liabilities for Remaining Claims (LRC) is an entity’s OBLIGATION to:

a) investigate and pay valid claims under existing insurance contracts for insured events that NOT yet occurred; and,
b) pay amounts under existing insurance contracts that are not included in a) and that relate to:
i) insurance contract services NOT yet provided; and,
ii) any investment components or other amounts that are NOT related to the provision of insurance contract services and that have NOT been transferred to the Liability for Incurred Claims (LIC)

Question 4

Describe the concept of ‘contract boundary’ under IFRS 17.

Answer 4

It defines the cash flows that should be included when measuring the insurance liability arising from a contract:

• the relevant cash flows are triggered by the contract during the term of the contract (ex: 1 year)
• the cash flows include premium paid by the policy holder AND payments from the insurer to the policyholder (in accordance with the contract)

Question 5

What are the subgroups of an aggregations of insurance contracts? (2)

Answer 5

Policies, or insurance contracts, are subdivided into ‘portfolios’ (ex: provinces), and portfolios are subdivided into ‘groups’ (ex: auto, prop, CGL, etc.).

Question 6

What does it mean for a portfolio to be either in an “asset position”, or in a “liability position”? (2)

Answer 6

• A portfolio is considered to be in an ASSET position when expected cash inflows are greater than expected cash outflows.
• A portfolio is considered to be in a LABILITY position when expected cash outflows are greater than expected cash inflows.

Question 7

What is the simple formula for Liabilities for Remaining Claims (LRC) that uses cash flows?

Answer 7

LRC = Fulfillment Cash Flows (FCFs) + Contractual Service Margin (CSM)
Note: CSM exists only for non-onerous contracts)

Question 8

At contract inception, what is the value of Liabilities for Incurred Claims (LIC)?

Answer 8

$0

- at contract inception, all liabilities are part of Liabilities for Remaining Claims (LRC)

Question 9

At contract inception, what is the value of Paid Claims?

Answer 9

$0

- at contract inception, no claims have been incurred, so no claims could have been paid out

Question 10

At contract termination, what is the value of Liabilities for Remaining Claims (LRC)?

Answer 10

$0

- at contract termination, all liabilities are part of Liabilities for Incurred Claims (LIC)

Question 11

At contract inception, how much of the Contractual Service Margin (CSM) has been released?

Answer 11

$0

Question 12

At contract termination, what is the value of the Contractual Service Margin (CSM)?

Answer 12

$0

- at contract termination, the entirety of the Contractual Service Margin (CSM) has been released

Question 13

Identify the main steps in any discounting procedure (note: this is the same for IFRS 17 and CIA). (2)

Answer 13

• determine the payment pattern

- apply discount factors

Question 14

Identify a procedure for estimating the timing of LRC cash flows on a group basis under IFRS 17. (2)

Answer 14

• estimate a payment pattern on a group basis
• adjust the AY payment pattern used for Liabilities for Incurred Claims (LIC) to a pattern consistent with the average accident date of the group
  Recall: a group is a subdivision of a portfolio.

Question 15

What is the formula for the ‘carrying amount of CSM at the END of the reporting Period’?

Answer 15

carrying amount of CSM at the END of the reporting Period

(carrying amount of CSM at START of reporting period) - adjustments

Question 16

Identify adjustment that are relevant to the Contractual Service Margin (CSM) carrying amount. (2)

Answer 16

• the effect of new contracts added to the group

- interest of the Contractual Service Margin (CSM) carrying amount during the reporting period.

Question 17

Define the term ‘coverage units’ according to IFRS 17.

Answer 17

The quantity of insurance contract services provided by the contracts in the group.
ex: could be equal to the # of policies

Question 18

What is the key concept that relates ‘coverage units’ to the CSM?

Answer 18

Coverage Units determine how the CSM is to be released into profit (or loss).

Question 19

How are Coverage Units determined?

Answer 19

Determined by considering, for each contract, the quantity of benefits provided under a contract within its expected coverage period.

Question 20

What is the Key Formula for how CSM is amortized?

Answer 20

Proportion of CSM released during time period:

=CU(rep. per.) / [ CU(rep. per.) + CU(remaining) ]
where, CU = # of coverage units

Question 21

What is the Key Principle for determining coverage units based on judgement and experience?

Answer 21

To reflect the insurance contract services provided in each period.

Question 22

Identify general considerations for counting coverage units. (3)

Answer 22

• quantity of benefits relates to the amount that can be claimed by the policy-holder
• discounting is optional
• 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)

Question 23

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

Answer 23

Flat/uniform pattern.

Question 24

Describe the CSM amortization pattern if the policy limit decreases over the coverage period.

Answer 24

Decreasing pattern (so, less CSM is released toward the end).

Question 25

Describe the CSM amortization pattern if the policy limit increases over the coverage period.

Answer 25

Increasing pattern (so, more CSM is released toward the end).

Question 26

Identify an example of an insurance product with a decreasing policy limit over the coverage period.

Answer 26

Mortgage default insurance.

Question 27

Identify an example of an insurance product with an increasing policy limit over the coverage period.

Answer 27

Product warranty with replacement coverage (replacement costs could increase due to inflation).

Question 28

What is the simple formula for LRC?

Answer 28

LRC = [LRC excl. LC] + LC | where, LC = Loss Component

Question 29

What is the simple formular for LRC, that explicity uses FCFs?

Answer 29

LRC = FCF + CSM

Question 30

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

Answer 30

LRC = [Future Cash Inflows] - [Future Cash Outflows] + [effect of discounting] - [Risk Adjustment (RA)] + CSM

Question 31

Is an entity required to track 'LRC excluding LC' and 'LC' separately?

Answer 31

Yes, because they want to keep non-onerous and onerous contracts separate.

Question 32

Describe the measurement of onerous contracts subsequent to initial recognition.

Answer 32

- if there are NO CHANGES in underlying assumptions: - > LC is expected to be systematically decreased - if there ARE CHANGES in underlying assumptions that are favourable: - > allocate changes to the LC until it reaches 0, then a CSM can be re-established

Question 33

Describe the measurement of non-onerous contracts that become onerous subsequent to initial recognition.

Answer 33

- reduce the CSM to 0 and establish an LC | this would happen when unfavourable changes in the FCFs exceed the carrying amount of the CSM

Question 34

Why are non-onerous groups of contracts 'good'?

Answer 34

Because they have net cash inflows.

Question 35

Why are onerous groups of contracts 'bad'?

Answer 35

Because they have net cash out-flows.

Question 36

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

Answer 36

- non-onerous contracts have CSM (but no LC) | - onerous contracts have LC (but no CSM)

Question 37

What do the acronyms 'GMA' and 'PAA' stand for?

Answer 37

- GMA: General Measurement Approach | - PAA: Premium Allocation Approach

Question 38

Describe PAA in 1 short phrase.

Answer 38

PAA is a simplified version of GMA for measuring LRC. | Note: PAA does not apply to LIC.

Question 39

Identify 2 things that make PAA simpler than GMA for LRC.

Answer 39

- PAA does not require estimation of FCFs | - PAA does not require a CSM

Question 40

Briefly describe 2 eligibility criteria for use PAA to calculate LRC under IFRS 17.

Answer 40

- PAA can be used if the term of the insurance contract is less than or equal to one year; or, - PAA can be used if the term of the insurance contract is great than one year, and PAA is a reasonable approximation of GMA over the contract term.

Question 41

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

Answer 41

There is no difference. However, onerous contracts will have an extra term for LC.

Question 42

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

Answer 42

LRC (excl. LC) @ initial recognition = + Premiums - Insurance Acquision Cash Flows (unless entity chooses to recognize the payments as an expense) +/- amounts arising from Derecognition of "certain" assets and liabilities.

Question 43

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

Answer 43

LRC (excl. LC) @ subsequent measurement = + Carrying amount at start of the reporting period + Premiums received in period - Insurance Acquision Cash Flows + amortization of insurance acquisition cash flows recognized as an expense in the reporting period + adjustments to financing component - insurance revenue (premium earned for insurance contract services provided in that period) - investment components paid/transferred to LIC

Question 44

Identify facts and circumstances for the qualitative assessment of whether a group of contracts is onerous. (5)

Answer 44

- 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 - unfavourable experience trends - unfavourable external conditions

Question 45

Describe the quantitative assessment of a potentially onerous group of contracts. (2)

Answer 45

1) calculate the difference: D = FCF - [LRC excl. LC] - if D > 0 -> group is onerous 2) if onerous -> book LC on "Profit and Loss" - increase LRC to FCF where, LRC = FCF = [LRC excl. LC] + LC

Question 46

Briefly describe the accounting steps if a quantitative assessment indicates that a group of contracts is onerous. (2)

Answer 46

- recognize a loss in the insurance service expense immediately for the net outflow for the onerous group - establish an LC as part of the LRC for the onerous group

Question 47

Briefly describe the accounting steps for the LC at subsequent measurements.

Answer 47

- the LC is released from insurance service expense and is amortized from LRC over the duration of the contracts. (so, LC = 0 by the end of the coverage period)

Question 48

Describe the difference between LRC under GMA and PAA for: acquisition costs.

Answer 48

GMA: cannot recognize acquisition costs immediately. PAA: can recognize acquisition costs immediately, IF the coverage period of all contracts in the group are less than or equal to 1 year.

Question 49

Describe the difference between LRC under GMA and PAA for: Discounting

Answer 49

GMA: discounting is required PAA: discounting is not required, UNLESS there is a significant financing component. Note: if the period between premiums being due and provisions of services is less than or equal to 1 year, then there should be no significant financing component.

Question 50

Describe 2 differences between LRC under GMA and PAA other than for acquisition costs and discounting.

Answer 50

Application: GMA: applies to any PandC contract PAA applies to PandC contracts with coverage period less than or equal to 1 year. Note: PAA must specifically tested if coverage period if more than 1 year Cash Flow Projections: GMA: for non-onerous contracts -> yes, cash flow projections are required to estimate LRC PAA: for non-onerous contracts -> no, cash flow projections are not required to estimate LRC

Question 51

Describe the difference between LRC under GMA and PAA for: initial measurement.

Answer 51

GMA: LRC = PV(Cash Flows) + RA + CSM PAA: LRC = Premiums - (initial acquisition costs UNLESS these are recognized as expenses when incurred)

Question 52

Describe the difference between LRC under GMA and PAA for: RIsk adjustment.

Answer 52

GMA: RA is required for non-onerous contracts PAA: RA is NOT required for non-onerous contracts

Question 53

Describe the difference between LRC under GMA and PAA for: CSM.

Answer 53

GMA: CSM is required for non-onerous contracts PAA: CSM is NOT required for non-onerous contracts

Question 54

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

Answer 54

Immediately when issued, even if this is before coverage begins.

Question 55

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

Answer 55

No.

Question 56

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

Answer 56

Yes.

Question 57

Do reinsurance contacts not entered into (not bound) have to be recognized in financial statements?

Answer 57

No.

Question 58

Briefly describe the steps in calculating the Loss Component (LC) under PAA within IFRS 17.

Answer 58

1) Determine the UPR (Unearned Premium Reserve). 2) Estimate future claims and LAE as follows: - apply a selected ELR and a ULAE factor to the UPR, by contract group (this is the largest component of the FCFs). 3) Discount the result in 2) to the evaluation date. 4) Apply the Risk Adjustment (RA), acquisition costs, other attributable expenses to the result in 3)

Question 59

Are regulatory bodies going to adapt their MCT quidelines upon implementation of IFRS 17?

Answer 59

Yes.

Question 60

Identify a key consideration in adapting MCT for the implemenation of IFRS 17.

Answer 60

How to select the ELR.