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Key differences from prudential reporting
IFRS 17 Liabilities: Generally higher due to inclusion of CSM on profitable contracts. |
Day-One Profits: |
Prudential Reporting: Recognizes profit immediately in own funds. |
IFRS 17: Defers profit recognition over the coverage period via CSM. |
GMM - Generalised Measurement Model
Default Model for most insurance contracts. |
Discounting Required when it materially affects provisions or as mandated by legislation. |
Need to disclose liability before discounting, and the assumptions used |
Consider for discount rate: |
Reflects the assets backing the liabilities |
Excluded assets - premium debtors |
Taxation - tax deductible |
Variability |
Performance Timing: Affects the timing of profit emergence, not actual performance. |
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Best Estimate Future Cashflows (BEL)
Includes: All cashflows within the contract boundary. |
Contract Boundary |
Period where the insurer is obligated to provide coverage. |
Ends when the insurer can reassess risk and reprice. |
Differences from Prudential Reporting: |
Includes acquisition and maintenance expenses. |
Different discount rates and contract boundaries. |
Includes tax-related flows. |
Requires unbundling certain contracts. |
Risk Adjustment (RA)
Compensation for uncertainty in amount and timing of cashflows. |
Similar to: Risk margin in prudential reporting. |
Methodology: Not prescribed; confidence level must be disclosed. |
Release: Recognized in profit as risk expires over time. |
Contractual Service Margin (CSM)
Represents unearned future profits on a group of contracts. |
Initial Recognition: |
For profitable contracts: CSM = -(BEL + RA) to make initial liability zero. |
For onerous contracts: CSM = 0; losses recognized immediately. |
Release Pattern |
Based on coverage units (e.g., benefit-weighted policies) |
Recognized in profit over the coverage period. |
Discounting
Adjusts cashflows to present value using appropriate discount rates. |
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PAA - Premium Allocation Approach
Simplified Model for short-duration contracts. |
Eligibility Criteria |
Contracts where: PAA measurement ≈ GMM measurement (not materially different) |
And Coverage period ≤ one year. |
Key Features |
Similar to: Unearned Premium Reserve (UPR). |
No Explicit: CSM or RA (implicit in the unearned premium). |
Onerous Contracts: Loss component recognized at inception, similar to an unexpired risk reserve |
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