IFRS 17-1

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 (Fulfilment Cash Flows)
• acquisition cash flows
• cash flows arising from the contract at the date of initial recognition

Question 2

Based on IFRS 17, how shall an entity, at minimum, divide a portfolio into groups? (3)

Answer 2

a) a group that is onerous at initial recognition (if any)
b) a group that has no significant possibility of becoming onerous (if any)
c) 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 entire groups can change from non-onerous to onerous (and vice versa) at a subsequent valuation (but not contract by contract).

Question 4

Does IFRS 17 permit disaggregation of individual insurance contracts?

Answer 4

No (usually). Under IFRS 17, the lowest unit of account is the insurance contract.
- in most cases, it is not permitted to disaggregate individual insurance contracts.

Question 5

Identify components of LIC (Liability for Incurred Claims). (3)

Answer 5

• an unbiased current estimate of future cash flows (this is not the same as Fulfilment Cash Flows)
• an adjustment for discounting
• a risk adjustment

Question 6

Identify consideration when estimating the risk of non-performance of a reinsurer. (3)

Answer 6

• financial strength of the reinsurer
• history of claims and coverage disputes with reinsurers
• risk of contagion across various reinsurance agreements

Question 7

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

Answer 7

• estimate GROSS & NET losses then calculate CEDED = GROSS - NET
• estimate GROSS & CEDED losses then calculate NET = GROSS - CEDED
• estimate NET & CEDED losses then calculate GROSS = NET + CEDED

Question 8

Briefly describe the nature of actuarial input when estimating the RA (Risk Adjustment). (4)

Answer 8

• assist in assessing Risk Aversion of the entity
• assist in evaluating Variability inherent in the insurance contracts
• assist in assessing compensation for bearing risk
• provide Explanations of the process to management so they may execute their oversight role

Question 9

Under IFRS 17, how might insurance revenue for reinsurance contracts issued differ from earned premium? (3)

Answer 9

• 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: could be classified as any of insurance revenue, insurance service expense, or investment component

Question 10

How is the LRC estimated under GMA and PAA?

Answer 10

GMA:
- LRC = (FCF related to future services) + CSM

PAA:
- LRC = (Premiums received) - (Insurance acquisition cash flows)
where
- (premiums received) = (unearned premiums) - (premiums receivable)

Question 11

How is the CSM concept (Contractual Service Margin) modified for reinsurance contracts held?

Answer 11

• there is no unearned profit

- instead there is a net cost or a net gain on purchasing the reinsurance

Question 12

Describe the potential mismatch between (1) Revenues and (2) FCFs when an entity uses GMA for LRC for reinsurance contracts held.

Answer 12

1) Revenues are recognized as they are earned

2) FCF projections include projected cash flows for policies to the end of the year

Question 13

If a group of contracts become onerous, when do the losses have to be recognized under IFRS 17?

Answer 13

Immediately: when the group becomes onerous

Question 14

Briefly describe the accounting treatment of onerous groups in financial statements. (2)

Answer 14

• statement of Financial Position: LC (Loss Component) is booked as part of LRC
• statement of Financial Performance: LC is recognized as insurance service expense

Question 15

When are onerous groups recognized in financial statements?

Answer 15

Onerous groups are recognized when bound even if this is prior to the effective date of the contract.
(Note: ‘recognition’ means that the LC (Loss Component) liability is reflected in financial statements)

Question 16

Identify considerations under PAA for reclassifying a group from non-onerous to onerous. (5)

Answer 16

• judicial decisions (landmark cases)
• regulatory changes
• economic changes (trends, interest rates)
• RA changes (Risk Adjustment)
• expense allocations

Question 17

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

Answer 17

FARM & UAF: member companies account for their share of FARM and UAF insurance contracts as direct business
RSPs: member companies use reinsurance accounting where the ‘reinsurer’ is the collective FA membership