Financial risk under IFRS 17
I have gone through this paper multiple times and still struggling with multiple parts of it one week before the exam
Question: Isn't financial risk now included under building block 1: PV of future cash flows automatically?
How I understand under current practice we use one single discount rate to calculate the PV of cash flows, then we add PfAD in investments which captures the uncertainty around the selection of the discount rates used. Under IFRS 17 there is no longer a need to apply a PfAD for investments because the cash flows and the new approach of selecting the discount curves under IFRS 17 already reflect the financial risk.
How I see it the PV of future cash flows under IFRS 17 is the same as the PV of cash flows + PfAD (investments) under current practice. Isn't this correct?
Comments
I completely understand your struggles with this reading. Let me try to ease your anxiety:
About your specific question on the inclusion of financial risk in building block 1:
If I had read only the first source text for IFRS 17, the one published by the CIA, I would conclude that all financial risk is indeed automatically included in building block 1. (So your statement would be correct.) The text says:
estimate of future cash flows
This is noted also in Section 7 of the wiki article CIA.IFRS17
This seems to imply that financial risk does not need to be considered separately as in current practice.
But the second source text on IFRS17, the one published by the International Actuarial Association, specifically includes an extra term for financial risk in bullet point (a).(ii) on page 20. It says that an adjustment to financial risk is included to the extent it is not included in the estimates of future cash flows.
There is a further explanation near the top of page 21 that defines a further risk adjustment as an amount A such that the company is indifferent between having the following on its balance sheet:
This is discussed in the context of non-financial risk, but this value of A seems like it can include both financial and non-financial risk.
Anyway, that's my understanding of it. I didn't include all of that in the wiki because it seemed like too much detail. To reiterate a point I made near the beginning of my answer is that if you know some basic bullet point lists, you should probably be ok on the exam this time around.
Thanks a lot for your response. Makes sense from this point of view.
It's really frustrating when it's not just the struggle of how much material we need to remember but there are additional hurdles like contradictions between the papers to jump through
anyway this is exam 6 for all of us!!!!
Sorry for the dumb question but is PV(Future CF)=Estimates of Future CF?
PV(Estimates of future cash flow) + Risk Adjustment = Fulfillment Cash Flow
Estimates of future cash flows are undiscounted
Thank you!
And probability weighted Cash flow=estimates of future cash flow that are undiscounted?
Correct
is non-financial under IFRS17 the same as non-economic risk under CIA?
pretty much, although you don't need to know the details of the exact difference between the two