Non-financial Risk

jjj820jjj820
in CIA.IFRS17

Hi Graham,

Could you please help me understand the following

MfADs: (for non-financial risk)
IFRS 17 requires separate disclosure of risk adjustment for non-financial risk
(under current practice, the difference between "best estimate" of cash flow and "best estimate with PfAD" is not always quantified)

Under current practice, aren't MfAD of Claim and R/I also needed to be calculated?

Thank you

Comments

  • grahamgraham

    Here's the way I understand that statement:

    • You're correct that under current practice, MfADs/PfADs for claims and reinsurance need to be calculated and added to the "best estimate" as a margin. But only the total is reported on the balance sheet. This means the reader might not know the breakdown between the "best estimate" and PfADs.
    • For example, if the best estimate of liabilities is 100 and PfADs is 3 then the balance sheet would show 103 but the reader would not know this was calculated as 100+3. (It could have been 99+4 or 101+2 or whatever.)
    • In IFRS 17 however, it is required that this extra margin is disclosed. In other words, IFRS would report the best estimate and margin separately as 100 and 3, instead of simply adding them together and reporting only the total value of 103.
  • jjj820jjj820

    Thank you Graham

  • elainezhao1elainezhao1
    edited October 2021

    thanks Graham! the explanation above is super clear! Can you also explain the financial risk part? Only mfad interest rate is disclosed in balance sheet separately? thanks!
    MfADs for financial risk ;
    IFRS 17: MfAD is included in PV( future cash flows)
    CIA: separate MfAD for interest rate risk from PV

  • grahamgraham

    If I understand your question correctly, for CIA current practice, we have an explicit MfAD for interest rate (discount rate.) For IFRS 17, an allowance for interest rate risk is implicit in the discount rate selection. There are different methods for selecting the discount rate. These are discussed here:

    There is no explicit term that captures the risk for changes in interest rates. Any allowance for this is embedded in the discount rate selection. For example, in the bottom-up approach, you need to select a liquidity premium and this liquidity premium would include and allowance for interest rate risk. Anyone looking at the final result however would not know how big or small this allowance was. (That's my understanding based on the source texts.)

  • elainezhao1elainezhao1

    thanks Graham! i have one more question.
    https://battleactsmain.ca/wiki6c/CIA.IFRS17-1
    "One difference with IRFS that I found surprising however is that the RA for reinsurance recovery does not have to be calculated separately as is done under current practice. The reinsurance counterparty risk would be included in the measurement of the estimates of future cash flows for reinsurance contracts held. That doesn't seem very transparent and might like a good way for a sneaky CEO to hide problems with reinsurers. :-)"

    as you mentioned in previous comment, does PFAD(reinsurance) be calculated separately?

  • grahamgraham

    The MfADs and PfADs are calculated separately and shown in the appointed actuary's report in the Unpaid Claims and Loss Ratio Analysis Exhibit (030). This is from the source text "OSFI Memorandum" and the wiki article is OSFI.MemoAA. Here's the link:

    This has historically been a very low-ranked reading (very lightly tested.) Here's the link to the "Unpaid Claims and Loss Ratio Analysis Exhibit (030)":

    See columns 08 -11 on the both pages and lines 17-19 on the second page. This exhibit is discussed briefly in the CIA.MfAD wiki article at the link below:

  • Tony88passTony88pass

    Hi Graham,

    Just to clarify, so under IFRS 17 the RA needs to be disclosed separately and the best estimate is essentially NU @ i' right? Comparing to under current practice the best estimate is NU @ i

  • grahamgraham

    I want to say yes because:

    • For IFRS 17, the interest rate risk is embedded in the best estimate, which would be NU @ i' (interest rate risk is included in the best estimate.)
    • Under current practice, the best estimate would not include the interest rate risk so it would just be NU @ i.
  • Tony88passTony88pass

    Thanks Graham

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