IFRS17-IC questions
1.
Treatment of Outflows:
→ Input from financial markets or external may be used in estimating cash inflows, but they have to be adjusted to reflect the insurer's characteristics
→ Stochastic projections are allowed but not necessarily required (Mainly for skewed risks)
→ Risk of departure from estimated policyholder behavior (anti-selection) should be considered in the Risk Adjustment
Can you please explain what the above points mean. How are the above three points an outflow of cash?
2.
The source goes into huge detail in 2.10 about the extent in which FCFs have to differentiate between contracts with different characteristics (age, gender, etc) Personally, I would skim it and just remember the following 2 points:
• It is up to the insurer's judgement to determine what characteristics of individual contracts are used to estimate FCFs.
• Only factors that can be reasonably collected without undue cost and that they are likely to materially impact the measurement of the FCFs of the groups should be collected.
I don’t understand what this means? Why do FCFs have to differentiate between contracts with different characteristics? Can you please explain possibly with an example.
3.
What are insurance acquisition cash flows?
“the costs of selling, underwriting and starting a group of insurance contracts that are directly attributable to the portfolio of insurance contracts to which the group belongs”
under this definition what does “starting a group of insurance contracts…” mean?
4.
Groups should not be subsequently reassessed because:
-Prevent the offsetting of onerous groups of contracts with profitable groups
-Report profits in appropriate reporting periods
What does this mean? Can you please explain with example?
Comments
In the context of IFRS17 cash outflows refer to things that you pay (i.e. claims, expenses, etc.) So for this, an example for the first point would be using market data (ex. industry experience) to estimate your losses and expenses. For the second point, similarly you can use stochastic methods to estimate your ultimate. For the third point, RA is applied to losses and you'd need to take into consideration the risk of departure from expected behaviour in it. For all three points, they mostly deal with losses which are part of the outflows. I also fixed some typos in the wiki.
Because under IFRS17, you are not supposed to group onerous contracts together with profitable contracts - As given above, an example would be estimating FCFs by gender if you expect males to be onerous and females to be profitable. You could create groups of contracts by gender, but that will be a judgement call from the insurer
I guess it probably means when you initially set up the contract at day 1 of coverage
If a group is onerous/profitable at day 1, it will not be reassessed subsequently. For example, let's say I decide to split Auto BI and Auto AB since BI is onerous and AB is profitable. If after 6 months I find out that Auto BI is now profitable, you wouldn't be able to now combine them into Auto (BI +AB). Basically when you set a group for a reporting period at day 1, the groups are set in stone and cannot be changed
A follow-up question on "Treatment of Outflows". From wiki page, the first bullet point is "Input from financial markets or external may be used in estimating cash inflows...". Should it be "cash flow" or "cash outflow" rather than "cash inflow"?
Source material uses "cash flow" instead of "cash inflow". If we'd like to be specific here, then it feels more like cash outflow, such as claim payments, given the context that input from financial markets is used when a contract has new elements on which the entity has no or limited experience.
Whoops this is a typo: It should be cash outflows -> The title is referring to treatment of cash outflows