C35 CIA IFRS 17 - COMPARISON

Principles established by IFRS 17

RMPD

• Recognition

• Measurement

• Presentation

• Disclosure

Contract Liabilities → 3 Building Blocks of Measurement

• PV of future CFs

• RA for non-financial risk

  • Similar to PfADs from IFRS4

• CSM

When is CSM established?

CSM established when FCF < 0

• CSM = -FCF

Contractual Service Margin (CSM)

Unearned profit from group of insurance contracts

• To prevent front-ending of profits

• New concept in IFRS17

  • Front-ending profits allowed in IFRS4

• Released into income as services are provided

• Part of LRC

Valuation Methods

GMA → default

PAA → simplified

• Only for calculating LRC (NOT LIC!)

Insurance Contract Liability =

Insurance Contract Liability = LRC + LIC

• LIC = obligation to pay claims for events that already occurred

• LRC = obligation to provide covg for events that haven’t yet occurred

  • CSM is part of LRC

IFRS17 Def’n of Insurance Contract

Contract which issuer accepts significant insurance risk from policyholder

• Agree to compensate policyholder if insured event adversely affects policyholder

Reinsurance under IFRS17

• Reinsurance issued (assumed) → like normal direct contracts

• Reinsurance held (ceded) → separate from underlying direct contracts

• Contains lapse & expense risks

Lapse & Expense Risks → Direct vs Reinsurance

In direct contracts → NOT insurance risk

• Created by contract itself, not insured event

• Not under IFRS17 scope

When transferred to reinsurer → ARE insurer risks

• Under IFRS17 scope!

Components of an Insurance Contract under IFRS17

• Insurance components

• Service components

• Investment components

• Embedded derivatives

Calculating LRC → IFRS17 vs IFRS4

Criteria

• IFRS17: PAA eligible for short-term contracts

• IFRS4: simplified method allowed only if reasonable approx to explicit valuation approach

Discounting LRC/LIC

• IFRS17: can ignore under some conditions

• IFRS4: always required

Ex of contracts that are PAA eligible / NOT eligible

PAA Eligible → auto outside QC

• bc policy term usually <= 1 yr

NOT Eligible → Warranty

IFRS17 Measurement Considerations

Level of Aggregation

• Portfolios of contracts

• Further divided into groups → NOT required in IFRS4

Contract Boundary

• Must identify contract boundary for each contract

• Determines covg period

Contract Boundary → IFRS17 vs IFRS4

Conservatism

• IFRS17 less conservative

Rights & Obligations

• IFRS17 considers both entity & policyholder

• IFRS4 only considers entity

Repricing

• IFRS17 doesn’t consider intent to reprice in setting contract boundary

Contract boundary = policy term, EXCEPT

• Cancellable contracts

• Onerous contracts

• Reinsurance held

Discounting → IFRS17 vs IFRS4

IFRS17

• Considers illiquidity prem

• Does not depend on assets used to support the liabilities

IFRS4

• Discount rate depends on assets used to support the liabilities

How to incorporate financial risk in IFRS17?

Can be incorporated in:

• Discount rate

• CFs

• or both

Selecting Discount Rate in IFRS17

CFs that don’t vary w/ returns on underlying items

• Discount rate based on liquidity adjusted risk-free yield curve

• Use bottom-up or top-down approach

CFs that DO vary w/ returns on underlying items

• Choose discount rate s.t. value of liability CFs = fair market value of underlying assets

CFs that vary w/ assumptions on financial risk

• Adjust either discount rate or CFs themselves

• Should be consistent w/ market prices

RA for Non-Financial Risk

Insurer’s compensation required to bear uncertainty ab amt & timing of CFs

Non-Financial Risk → IFRS17 vs IFRS4

Measurement Objective

• IFRS17: compensation required to bear uncertainty

• IFRS4: amt to provide for effect of uncertainty

Scope

• IFRS17: RA for non-financial risks only

• IFRS4: PfAD includes both financial & non-financial risk

Grouping Contracts

• Onerous vs non-onerous

• Group similar underlying risks (products lines)