Difference between revisions of "CIA.IFRS17-LRC"

Revision as of 23:11, 8 August 2023

Updates COMPLETE: (for Fall 2023) Added: Additional commentary in section 2 regarding level of aggregation for reinsurance Added: Additional commentary on identifying considerations when estimating the risk of non-performance of a reinsurer in section 3.2 Added: additional commentary on selecting RA for proportional and non-proportional reinsurance in section 3.2 Removed: Nature of actuarial input Removed: Commentary in section 4 Removed: identify considerations under PAA for reclassifying a group from non-onerous to onerous (section 5.4) Note: Section 6: UAF is now not treated under IFRS17

Reading: IFRS 17 – Actuarial Considerations Related to P&C Reinsurance Contracts Issued and Held

Author: Canadian Institute of Actuaries

# of pages: 27

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This reading is essentially a listing of miscellaneous topics and facts regarding the treatment of reinsurance under IFRS 17. There is also a lot of overlap with other IFRS readings, which is good. That means you can get through it a little more quickly than you might think and it also serves as a good review. My strategy is to spend roughly 4-5 hours doing the following:

read the first 1-2 paragraphs of each section to get a sense for what each is about (there are 7 sections)
select roughly 2 or 3 items from each section that look like good exam questions (not more than 20 items overall)
try to keep my focus on reinsurance topics since that's what this reading is supposed be about (although much of the reading seems to apply to primary insurance as well??)

There are no calculations in this reading. Certain methods of calculation are described verbally but I think a calculation question from this material is very unlikely. There is a good calculation question in CIA.IFRS17-DR (Discount Rates).

IMHO, the most likely sections to be tested are:

level of aggregation and onerous contracts (covered in Section 2)
more information about onerous contracts (covered in Section 6)
accounting treatment of FA (Facility Association) residual market mechanisms (covered in Section 7)

You can argue that the remaining sections also contain information important to actuaries but they seem less likely to be tested. No guarantee! (Just my opinion.)

Estimated study time: ½ day (not including subsequent review time)

BattleTable

No past exam questions are available for this reading.

reference	part (a)	part (b)	part (c)	part (d)

Full BattleQuiz

In Plain English!

Section 1: Introduction

This reading is specifically about reinsurance contracts under IFRS 17. The reinsurer "issues" the contract, and the primary insurer "holds" the contract. The introductory section in the source reading has no other useful information.

Note that a portion of this reading relates to how IFRS treats both insurance and reinsurance.

Section 2: Level of Aggregation

The concept of "level of aggregation" was introduced in the section on Measurement Considerations in the wiki article CIA.IFRS17 so take a moment to review that if necessary. It basically says that insurance contracts are aggregated first into portfolios and then into groups within each portfolio. For example, your company may have 100,000 insurance contracts aggregated into 10 portfolios of 10,000 contracts each. Each portfolio may then be further subdivided into 3 groups of 7,000, 2,000, and 1,000 contracts each. Portfolios could correspond to provinces and territories. Groups are created based on whether the contracts are considered onerous.

Question: what does it mean for an insurance contract to be onerous

An insurance contract is onerous at the date of initial recognition if there is a total net outflow for the sum of:

→ FCFs (Fulfilment Cash Flows)

→ acquisition cash flows

→ cash flows arising from the contract at the date of initial recognition

The key point is net outflow. It might help to recall the dictionary definition of "onerous" as something that's difficult and burdensome. An outflow of cash (instead of an inflow) is definitely a burden, and something we want to avoid! The concept of "onerous" is used to specify groupings of contracts under IFRS 17.

Question: based on IFRS 17, how shall an entity, at minimum, divide a portfolio into groups

(a) a group that is onerous at initial recognition (if any)

(b) a group that has no significant possibility of becoming onerous (if any)

(c) a group of any remaining contracts (if any)

These groups can be further divided any way the company wants (including based on cohort issue date) but according to the text:

An entity shall establish the groups at initial recognition, and shall not reassess the composition of the groups subsequently.

It strikes me as a little strange that composition of groups cannot be reassessed. It also seems to directly contradict the very next sentence:

At subsequent valuation, a group of insurance contracts issued that was deemed non-onerous at initial recognition may still become onerous subsequently (or vice versa) if the expectation regarding the future net cash flows of the group changes from positive to negative (or vice versa)

I think it probably means that a whole group can change from being onerous to non-onerous, and vice-versa, but that the set of contracts within each group cannot change. Anyway, the above comments apply to both insurance and reinsurance contracts. Note however that the level of aggregation for reinsurance contracts may differ from the level of aggregation of the underlying insurance contracts covered.

Question: does IFRS 17 permit disaggregation of individual insurance contracts

No (usually.) Under IFRS 17, the lowest unit of account is the insurance contract.
In most cases, it is not permitted to disaggregate individual insurance contracts.

An additional nuance for reinsurance contracts is the possibility of having a multi-line contract. The actuary can choose from several options for aggregating those contracts:

Aggregating based on predominant exposure
Creating a portfolio/group containing multi-line contracts
Separating reinsurance contracts into sub-contracts and assigning those sub-contracts to separate portfolios/groups

mini BattleQuiz 1

Section 3: Actuarial Calculations Related to Fulfilment Cash Flows

If you've read the CIA.IFRS17 wiki article then the basic IFRS 17 concepts will be familiar to you, but it doesn't hurt to do a quick review of some important concepts and abbreviations:

FCF: Fulfillment Cash Flows

→ basically the present value of an insurer's liabilities, including discounting and risk adjustments

RA: Risk Adjustment (for non-financial risk)

→ claims development ←shout-out to WC18 & bicbic!

LIC: Liability for Incurred Claims

→ insurer’s obligation to pay claims for events that have already occurred (earned business)

LRC: Liability for Remaining Claims

→ insurer’s obligation to provide insurance coverage for events that have not yet occurred (unearned business)

LC: Loss Component

→ expected net outflow of an onerous group (this is covered in more detail in Section 6: Onerous Contracts)

GMA: General Measurement Approach

→ an approach for measuring the LRC component of contract liabilities under IFRS 17

PAA: Premium Allocation Approach

→ a simplified approach (versus GMA) for measuring the LRC component of contract liabilities under IFRS 17

CSM: Contractual Service Margin

→ unearned profit from a group of insurance contracts (discussed more in CIA.IFRS17 - Overview)

Ian-the-Intern has been having trouble keeping all of of this straight in his head, but he's feeling more and more comfortable every day. It's just repetition. The reason it's confusing is that all of this IFRS material was dumped on him all at once and it's a lot to take in.

The title of this section, "Actuarial Calculations Related to Fulfilment Cash Flows", would lead you to believe it's a very important section but I think a better source for actuarial calculations is CIA.IFRS17-DR (Discount Rates) - Section 4. In that reading, there's an actual numerical example of calculating Fulfillment Cash Flows. The reading we're looking at now does not have any numerical examples and instead discusses actuarial calculations only in a conceptual way. I've pulled out some facts that seem important but I have not included everything that's in the source text. After you've familiarized yourself with what's listed below, you can skim the source text just so you have a sense for what's there.

From Section 3 (LIC)

Question: identify components of LIC (Liability for Incurred Claims)

an unbiased current estimate of future cash flows (future cash flows is different from Fulfillment cash flows)
an adjustment for discounting
a risk adjustment

From Section 3.1 (Discounting & Cash Flow)

The IFRS 17 adjustment for risk of non-performance by a reinsurer is similar to the PfAD for reinsurance recovery under current practice. The key difference is the provision for non-performance risk is included in the estimate of the present value of future cash flows for reinsurance contracts held. Any changes in estimates of the non-performance risk would not adjust the CSM, but rather flow directly into the P&L

Question: identify considerations when estimating the risk of non-performance of a reinsurer

financial strength of the reinsurers
history of claims and coverage disputes with reinsurers
risk of contagion across various reinsurance arrangements
delays in payments and concentration risk
length of time over which liabilities are expected to be settled
collateral available to mitigate risk

These are similar to what Alice would consider under current practice when evaluating her own reinsurers. Since Alice was careful when selecting reinsurers, reinsurer risk is low for her company. No reinsurer would dare dispute a claim from Alice. :-)

One difference with IFRS (shout-out to MW!) 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. :-)

For discounting, this is generally similar to direct insurance contracts where the discount rate used would be based on the risk free rate + a illiquidity premium which is defined as the ability of the policyholder to exit the policy before its expiry and receive the value due without significant exit costs. AIC is generally illiquid while ARC is considered liquid. The AIC is considered illiquid as there is little leeway for a policyholder to influence the timing of claim payments

From Section 3.2: (Estimation for the RA or Risk Adjustment)

There is a separate document that discusses estimating the RA for contracts in general. This section focuses on estimating the RA for reinsurance contracts. The next question below is not an IFRS-specific concept. It applies equally to current practice and has come up on previous exam questions related to reinsurance.

Conceptually the RA for reinsurance can be viewed as the compensation to keep rather than to ceded the risk. Reinsurance held will increase the ARC and is the opposite of the RA for direct insurance contracts. The release of RA for reinsurance held reduces profit rather than increasing it for insurance contracts issued.

Question: identify 3 options for grouping data when estimating the present value of future cash flows and the RA

estimate gross & net losses then calculate the ceded as gross - net
estimate gross & ceded losses then calculate the net as gross - ceded
estimate net & ceded losses then calculate the gross as net + ceded

These options are also discussed in CIA.IFRS17-DR (Discount Rates) and in that discussion, considerations are provided to help you determine which option is best. The following exam question is from an outdated reading but it shows you a type of question that can be asked relative to the above options:

E (2015.Fall #26)

For proportional reinsurance (QS treaties), you can expect that the ceded RA would be proportional to the gross RA. For non-proportional reinsurance (XoL treaties), the ceded RA is usually not proportional to the gross RA. In this case, the cost of reinsurance is usually viewed as evidence of the price the entity is willing to pay to be relieved of the risk and would be a good indicator on the compensation (RA) requirement.

mini BattleQuiz 2

Section 4: Insurance Service Results Considerations

Here is something that stood out for me because it highlights a fact about reinsurance under IFRS 17 that's different from the "normal" revenue stream of earned premium

Question: under IFRS 17, how might insurance revenue for reinsurance contracts issued differ from earned premium

For entities applying PAA, the revenue recognition requirements
Treatment of reinsurance cash flows that are contingent on claims of the underlying contracts
Treatment of amounts paid to the purchaser of reinsurance contracts, not contingent on claims of underlying contracts

I felt that the remainder of this section was too detailed and did not include it in the wiki.

Section 5: LRC: PAA and GMA Considerations

Recall that LRC stands for Liability for Remaining Claims and consists of obligations relating future services (the unexpired portion of the coverage period). The LRC can be estimated using the GMA or the PAA (General Measurement Approach or Premium Allocation Approach)

Question: how is the LRC estimated under GMA and PAA

GMA:

→ LRC = (FCF related to future services) + CSM

PAA:

→ LRC = (premiums received) – (insurance acquisition cash flows)

where

→ (premiums received) = (unearned premiums) – (premiums receivable)

There is a separate reading for PAA: CIA.IFRS17-PAA so we won't discuss it any further here. There is also a slightly more detailed formula at the following link for LRC under PAA in the wiki article CIA.IFRS17-LRC. The extra term given in the formula there is "minor term" and is probably equal to 0 most of the time anyway.

From Section 5.2 (PAA Eligibility)

PAA eligibility for reinsurance contracts is mostly similar to direct insurance. A couple of key differences:

One year risk attaching reinsurance policies are not automatically eligible for PAA
PAA eligibility for the reinsurance contract has to be assessed separately from the underlying policies
Contractual features may affect contract boundary and therefore PAA eligibility

From Section 5.3 (GMA Considerations)

I didn't want to leave this section blank in the wiki but these next 3 items of information feel very disconnected. It would help so much if there were numerical examples to illustrate these points. I would be shocked if any of what I've listed below appears on the exam. Unfortunately, I'll never know because exams will no longer be published. :-(

Question: how is the CSM concept (Contractual Service Margin) modified for reinsurance contracts held. (Click for an example) (shout-out to RL!)

there is no unearned profit
instead there is a net cost or net gain on purchasing the reinsurance

Question: describe a potential mismatch between revenues & FCFs when an entity uses GMA for LRC for reinsurance contracts held

revenues are recognized as they are earned
FCF projections include projected cash flows for policies to the end of the year

→ For example, at the end of the first quarter of a year, 25% of annual revenues would be recognized (assuming uniform writings) but FCFs at the same quarter-end must include projected cash flows for 100% of the policies expected to be written throughout the year. There is another example in this forum discussion.

And one last little tidbit:

Question: if a group of contracts become onerous, when do the losses have to be recognized under IFRS 17

immediately: when the group becomes onerous

(in other words, you can't wait until the cash outflows actually occur!)

mini BattleQuiz 3

Section 5.4: Onerous Contracts

For reinsurance contracts held, the concept of onerous groups does not exist. This section relates to insurance and reinsurance contracts issued. Topics covered include:

accounting for onerous groups
recognition of LC on onerous groups
assessment of onerous contracts under PAA

Recall that LC (Loss Component) is the expected net outflow of an onerous group.

Question: briefly describe the accounting treatment of onerous groups in financial statements

in the statement of financial position:

→ LC is booked as part of LRC

in the statement of financial performance:

→ LC is recognized as insurance service expense

Question: when are onerous groups recognized in financial statements

onerous groups are recognized when bound even if this is prior to the effective date of the contract

("recognition" means that the LC liability is reflected in financial statements)

The rest of this section has detailed information relating to groups whose liabilities are measured using PAA (Premium Allocation Approach) as well as the Loss Recovery Component. Recall from Valuation Methods under IFRS 17 that there are 2 approaches: GMA and PAA. Recall also that PAA is a simplified version of GMA that can be used if certain conditions are met. The last factoid from this section lists considerations in reclassifying a group of contracts from non-onerous to onerous under PAA:

Section 6: Accounting Treatment of Residual Market Mechanisms

Recall from Dutil.FA that Facility Association administers the following residual market mechanisms:

FARM (Facility Association Residual Market)

RSPs (Risk-Sharing Pools)

UAF (Uninsured Automobile Fund)

FA is a heavily tested topic and Alice thinks this next question would make a pretty good exam question.

Question: briefly describe the accounting treatment for each of FA's residual market mechanisms under IFRS 17

UAF': UAF functions more like a levy which means that IFRS17 would not apply

FARM: member companies account for their share of FARM and UAF insurance contracts as direct business

RSPs: member companies use reinsurance accounting where the "reinsurer" is the collective FA membership. Ceded contracts are accounted for as reinsurance held while assumed contracts are accounted for as reinsurance issued

mini BattleQuiz 4

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Difference between revisions of "CIA.IFRS17-LRC"

Revision as of 23:11, 8 August 2023

Contents

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In Plain English!

Section 1: Introduction

Section 2: Level of Aggregation

Section 3: Actuarial Calculations Related to Fulfilment Cash Flows

Section 4: Insurance Service Results Considerations

Section 5: LRC: PAA and GMA Considerations

Section 5.4: Onerous Contracts

Section 6: Accounting Treatment of Residual Market Mechanisms

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@@ Line 1: / Line 1: @@
-{| class='wikitable' style='background-color: lightblue;"
+{| class='wikitable' style='background-color: navajowhite;'
 |-
-|| <span style="font-size: 18px;">'''MODIFIED for 2023-Fall:''' Updates to this wiki article are in progress. Please check back later.</span>
+|| <span style="color: green;>'''Updates COMPLETE: (for Fall 2023)'''</span>
+* <span style="color: green;">'''Added:'''</span> Additional commentary in ''[[CIA.IFRS17-1_-_#Section_2:_Level_of_Aggregation | section 2]]'' regarding level of aggregation for reinsurance
+* <span style="color: green;">'''Added:'''</span> Additional commentary on identifying considerations when estimating the risk of non-performance of a reinsurer in ''[[CIA.IFRS17-1_-_#Section_3:_Actuarial_Calculations_Related_to_Fulfilment_Cash_Flows | section 3.2]]''
+* <span style="color: green;">'''Added:'''</span> additional commentary on selecting RA for proportional and non-proportional reinsurance in ''[[CIA.IFRS17-1_-_#Section_3:_Actuarial_Calculations_Related_to_Fulfilment_Cash_Flows | section 3.2]]''
+* <span style="color: red;">'''Removed:'''</span> Nature of actuarial input
+* <span style="color: red;">'''Removed:'''</span> Commentary in section 4
+* <span style="color: red;">'''Removed:'''</span> identify considerations under PAA for reclassifying a group from non-onerous to onerous (section 5.4)
+* <span style="color: purple;">'''Note:'''</span> Section 6: UAF is now not treated under IFRS17
 |}
-'''Reading''': IFRS 17 – Actuarial Considerations Related to Liability for Remaining Coverage in P&C Insurance Contracts
+'''Reading''': IFRS 17 – Actuarial Considerations Related to P&C Reinsurance Contracts Issued and Held
 '''Author''': Canadian Institute of Actuaries
-'''# of pages''': 50
+'''# of pages''': 27
-&nbsp;&nbsp;[https://www.battleactsmain.ca/vanillaforum/categories/CIA-IFRS17-LRC<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>]
+&nbsp;&nbsp;[https://www.battleactsmain.ca/vanillaforum/categories/CIA-IFRS17-1<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>]
 ==Pop Quiz==
@@ Line 16: / Line 23: @@
 ==Study Tips==
-{| class='wikitable' style='background-color: yellow;'
+This reading is essentially a listing of miscellaneous topics and facts regarding the treatment of reinsurance under IFRS 17. There is also a lot of overlap with other IFRS readings, which is good. That means you can get through it a little more quickly than you might think and it also serves as a good review. My strategy is to spend roughly 4-5 hours doing the following:
-|-
-|| Click for a long forum thread on the ''[https://battleactsmain.ca/vanillaforum/discussion/710/formula-for-fcf/p1 inconsistency in signs in FCF formulas]''.
-|}
-This is a very long wiki article but the good news is that the material duplicates much of what's already covered in the other IFRS 17 readings. For that reason, this will be a pretty good review.
-These are the sections you'll have to spend the most time on:
-* ''[[CIA.IFRS17-LRC#Section_4:_LRC_under_the_GMA_.E2.80.93_Insurance_contracts_issued | Section 4: LRC under the GMA – Insurance contracts issued]]''
+* read the first 1-2 paragraphs of each section to get a sense for what each is about ''(there are 7 sections)''
-* ''[[CIA.IFRS17-LRC#Section_5:_LRC_under_PAA_.E2.80.93_Insurance_contracts_issued | Section 5: LRC under PAA – Insurance contracts issued]]''
+* select roughly 2 or 3 items from each section that look like good exam questions ''(not more than 20 items overall)''
+* try to keep my focus on '''reinsurance topics''' since that's what this reading is supposed be about ''(although much of the reading seems to apply to primary insurance as well??)''
-There are also 2 types of calculation problems you need to learn in these subsections: ''(Randomized Excel practice problems are available.)''
+There are no calculations in this reading. Certain methods of calculation are described verbally but I think a calculation question from this material is very unlikely. There is a good calculation question in ''[[CIA.IFRS17-DR | CIA.IFRS17-DR (Discount Rates)]]''.
-* ''[[CIA.IFRS17-LRC#Section_4.7:_Coverage_Units | Section 4.7: Coverage Units]]''
+IMHO, the '''most likely''' sections to be tested are:
-* ''[[CIA.IFRS17-LRC#Section_5.2:_Subsequent_Measurement | Section 5.2: Subsequent Measurement]]''
-'''Note''': If you look at the source text, you'll see that it often refers to Appendices of a document called "IFRS 17". That document is <u>not</u> the document discussed in the wiki article ''[[CIA.IFRS17]]'', and the document referred to as "IFRS 17" is <u>not</u> on the syllabus. All you should have to know is what's specifically discussed in the actual source text.
+* level of aggregation and onerous contracts ''(covered in [[CIA.IFRS17-1#Section_2:_Level_of_Aggregation | Section 2]])''
+* more information about onerous contracts ''(covered in [[CIA.IFRS17-1#Section_6:_Onerous_Contracts | Section 6]])''
+* accounting treatment of FA (Facility Association) residual market mechanisms ''(covered in [[CIA.IFRS17-1#Section_7:_Accounting_Treatment_of_Residual_Market_Mechanisms | Section 7]])''
-{| class='wikitable' style='background-color: peachpuff;'
+You can argue that the remaining sections also contain information important to actuaries but they seem less likely to be tested. No guarantee! (Just my opinion.)
-|-
-|| <span style="color: purple;">'''Fun Fact:'''</span>
-: &rarr; This wiki article has an Easter egg!
-: &rarr; Shout-out in the wiki to the first 2 BattleActsers to slay it!
-* '''email to''': ''info@battleacts.ca''
-* '''subject line''': ''IFRS17-LRC Easter egg''
-* '''body line 1''': ''say what you saw!''
-* '''body line 2''': ''your name or initials as you would like them to appear below!''
-|}
-* <span style="color: purple;">'''shout-out #1:'''</span> &nbsp;&nbsp; <span style="font-size: 24px;">'''LL'''</span> slayed it first! <span style="font-size: 24px;">&#128516;</span> Way to go!!!
+'''Estimated study time''': &frac12; day ''(not including subsequent review time)''
-* <span style="color: purple;">'''shout-out #2:'''</span> &nbsp;&nbsp; <span style="font-size: 24px;">'''LLFDC'''</span> The beast is dead! <span style="font-size: 24px;">&#128518;</span> We are all free!
-{| class='wikitable' style='background-color: powderblue;'
-|-
-|| <span style="color: brown;">'''You guys found it so fast!'''</span>
-* Alice and Ian are giving 2 more honourable mentions!
-|}
-* <span style="color: brown;">'''honourable mention #1:'''</span> &nbsp;&nbsp; '''Francis''' slayed it! <span style="font-size: 24px;">&#129322;</span>
-* <span style="color: brown;">'''honourable mention #2:'''</span> &nbsp;&nbsp; '''the superactuary''' <span style="font-size: 24px;">&#129488;</span>
-{| class='wikitable' style='background-color: navajowhite;'
-|-
-|| <span style="color: brown;">'''The Easter egg was: FIREWORKS!'''</span>
-* Congratulations to the 4 beast-slayers above! ''(The rest of you can still have the thrill of discovering it!!)''
-|}
-'''Estimated study time''': several days ''(not including subsequent review time)''
 ==BattleTable==
@@ Line 84: / Line 59: @@
 |}
-[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-LRC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span>
+[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-1&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span>
 ==In Plain English!==
@@ Line 90: / Line 65: @@
 ===Section 1: Introduction===
-{| class='wikitable' style='background-color: yellow;'
+This reading is specifically about '''<u>re</u>insurance''' contracts under IFRS 17. The reinsurer "issues" the contract, and the primary insurer "holds" the contract. The introductory section in the source reading has no other useful information.
-|-
-|| Click for a long forum thread on the ''[https://battleactsmain.ca/vanillaforum/discussion/710/formula-for-fcf/p1 inconsistency in signs in FCF formulas]''.
-|}
-Recall that LIC and LRC stand for Liability for Incurred Claims and Liability for Remaining Coverage. Recall also that LIC refers to the "normal" claims liabilities for insured events that have already occurred. This wiki article '''focuses on LRC''', which is the IFRS 17 version of Canadian premium liabilities discussed in ''[[CIA.PrLiabs]]''. ''[[CIA.IFRS17#defn_LIC_LRC | Simple definitions of LIC & LRC]]'' were covered in the wiki article ''[[CIA.IFRS17]]'' and you can click the links for quick review. Here we cover a more detailed <u>definition of LRC</u> that <span style="color: red;">'''you should definitely memorize'''</span>. But first, the source reading has a convenient diagram that shows the components insurance contract liabilities:
-: [[File: CIA.IFRS17-LRC_(010)_insurance_contract_liabilities.png]]
-The abbreviation "LC" in the diagram stands for ''[[CIA.IFRS17-1#Section_3:_Actuarial_Calculations_Related_to_Fulfilment_Cash_Flows | Loss Component]]'' and you can click the link to see this and other basic definitions from a previous article. The key fact about LC is that it pertains to ''[[CIA.IFRS17-1#Section_2:_Level_of_Aggregation | onerous contracts]]'' and is dealt with separately from the "regular" part of LRC. Click for ''[[CIA.IFRS17-1#Section_6:_Onerous_Contracts | further background information on onerous contracts]]''.
-{| class='wikitable'
-|-
-|| '''Question''': how does IFRS 17 <u>define LRC</u> (Liabilities for Remaining Coverage)
-|}
-* LRC (Liabilities for Remaining Coverage) is an entity's <u>obligation</u> to:
-:: '''(a)''' investigate & pay valid claims under existing insurance contracts for insured events that have <u>not</u> yet occurred
-:: '''(b)''' pay amounts under existing insurance contracts that are <u>not</u> included in (a) and that relate to:
-::: <span style="color: red;">'''(i)'''</span> insurance contract services <u>not</u> yet provided
-::: <span style="color: red;">'''(ii)'''</span> any investment components or other amounts that are <u>not</u> related to the provision of insurance contract services and that have <u>not</u> been transferred to the liability for incurred claims
-{| class='wikitable'
+Note that a portion of this reading relates to how IFRS treats <u>both</u> insurance and reinsurance.
-|-
-|| That definition is wordy and Ian-the-Intern is having trouble making sense of it so let's break it down for him.
-|}
-: &rarr; The key word seems to be "not". It appears 5 times in the definition!
+===Section 2: Level of Aggregation===
-: &rarr; Part (a) is the '''main part''' of the definition and says that LRC is basically the same thing as the CIA premium liabilities you've already studied.
-:: ''(obligations for events that have <u>not</u> yet occurred)''
-: &rarr; Part (b) is much longer than part (a) but it just describes '''secondary obligations''' not covered under part (a).
-:: <span style="color: brown;">'''(i)'''</span> refers to obligations for services ''other than'' investigating and paying claims ''(no examples are provided)''
-:: <span style="color: brown;">'''(ii)'''</span> refers to other amounts that may be due policyholders such as an investment component, which is mentioned in the wiki article ''[[CIA.IFRS17]]'' in ''[[CIA.IFRS17#Section_4:_Separation_of_Contract_Components | Section 4: Separation of Contract Components]]''.
-{| class='wikitable'
+The concept of "level of aggregation" was introduced in the section on ''[[CIA.IFRS17#Section_6:_Measurement_Considerations | Measurement Considerations]]'' in the wiki article ''[[CIA.IFRS17]]'' so take a moment to review that if necessary. It basically says that insurance contracts are aggregated first into <u>portfolios</u> and then into <u>groups</u> within each portfolio. For example, your company may have 100,000 insurance contracts aggregated into 10 portfolios of 10,000 contracts each. Each portfolio may then be further subdivided into 3 groups of 7,000, 2,000, and 1,000 contracts each. Portfolios could correspond to provinces and territories. Groups are created based on whether the contracts are considered <u>onerous</u>.
-|-
-|| '''Memory trick''': To memorize the LRC definition, first notice that it's defined as an <u>obligation</u>. Then pay attention to the different places where the word <u>not</u> appears.
-|}
-===Section 2: Definitions===
-The definitions provided in this section of the source text are either obvious or are covered in other IFRS readings. The only term I'm going to mention here is ''[[CIA.IFRS17#Section_6:_Measurement_Considerations | contract boundary]]'', which was discussed briefly in a previous article. In that article, the contract boundary was described as the <u>term</u> of the contract, and any cash flows relevant to the insurance policy that occur during the policy term are included in the measurement of the liability. It's a simple concept that's described in a complicated way. Here's the definition as given in the source text, but I don't think I would bother memorizing it:
-<span id="contract_boundary"></span>
-* '''Contract boundary''': ''The contract boundary distinguishes future cash flows to be considered in the measurement of the insurance contract from other future cash flows. Per IFRS 17.34, “Cash flows are within the boundary of an insurance contract if they arise from substantive rights and obligations that exist during the reporting period in which the entity can compel the policyholder to pay the premiums or in which the entity has a substantive obligation to provide the policyholder with insurance contract services …”''
-{| class='wikitable'
-|-
-|| If you were asked to define '''contract boundary''' on the exam, I think this would be a pretty good way to answer it:
-|}
-* The '''contract boundary''' defines the <u>cash flows</u> that should be included when measuring the insurance liability arising from a contract.
-: &rarr; the relevant cash flows are triggered by the contract during the <u>term</u> of the contract ''(Ex: 1 year)''
-: &rarr; the cash flows include <u>premiums</u> paid by the policyholder & <u>payments</u> from the insurer to the policyholder in accordance with the contract
-===Section 3: Level of aggregation and financial statement presentation===
-The concept of ''[[CIA.IFRS17-1#Section_2:_Level_of_Aggregation | Level of Aggregation]]'' was already discussed in ''[[CIA.IFRS17-1]]'' so you can click on the link to review that. The most basic fact you need to know is:
-* all the <u>policies</u> owned by the insurer are subdivided into <u>portfolios</u> ''(Ex: portfolios could correspond to provinces)''
-* <u>portfolios</u> are further subdivided into <u>groups</u>
-So portfolios would generally contain multiple groups of policies.
-Anyway,  the only extra bits of information provided here are the concepts of '''asset position''' and '''liability position'''. It's pretty simple:
-* For a portfolio of contracts, if the expected cash <span style="color: green;">inflows</span> are <u>greater than</u> the expected cash <span style="color: red;">outflows</span>, then the portfolio is in an <span style="color: green;">'''asset position'''</span>.
-* For a portfolio of contracts, if the expected cash <span style="color: green;">inflows</span> are <u>less than</u> the expected cash <span style="color: red;">outflows</span>, then the portfolio is in an <span style="color: red;">'''liability position'''</span>.
-[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-LRC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 1]'''</span>
-===Section 4: LRC under the GMA – Insurance contracts issued===
-There are lots ''(and lots and lots and lots)'' of details coming up in sections 4 and 5 below. I would like to tell you not to panic, but sometimes pressing the panic button is the best course of action.
-:{| class='wikitable' style='background-color: navajowhite;'
-|-
-|| <span style="color: red;">'''This is what you should look like right now:'''</span> &nbsp;&nbsp;&nbsp;&nbsp; <span style="font-size: 32px;>&#128562;</span>
-|}
-If you don't look like that then you just don't understand the gravity of the situation! It's going to be tough going but Alice has a some advice for you:
-:{| class='wikitable' style='background-color: navajowhite;'
-|-
-|| <span style="color: green;">'''The BIG picture:'''</span>
-* There are 2 ways to calculate LRC or Liability for Remaining Coverage. (This is the IFRS 17 version of premium liabilities covered in [[CIA.PrLiabs]])
-* The <u>first</u> method is called GMA or General Measurement Approach and is the <u>harder</u> method.
-* The <u>second</u> method is called PAA or Premium Allocation Approach and is the <u>easier</u> method.
-<span style="color: green;">'''The presentation of these 2 methods is organized as follows:'''</span>
-* '''Section 4''' goes in to great detail about GMA and '''section 5''' goes into great detail about PAA.
-* The source text <u>does not</u> have a complete example of the GMA method.
-* The source text <u>does</u> have an example of the PAA method and Alice thinks that could be a likely exam question.
-|}
-If you find yourself getting lost in the details, just remember the big picture: These sections are explaining how to calculate LRC using these 2 different methods.
-====Section 4.1: Definitions====
-The ''[[CIA.IFRS17#Section_2:_IFRS_17_Overview | measurement of insurance contract liabilities under the General Measurement Approach]]'' was discussed earlier. It applies to both LIC & LRC ''(Liability for Incurred Claims & Liability for Remaining Coverage)'' and we referred to the 3 components of this measurement approach as '''building blocks'''.  Here, we're concerned primarily with the LRC component ''(although it seems the LIC component is measured the same way.)''
-Because the measurement of liabilities is so important, let's take a moment to review. Unfortunately, the presentation of this concept is slightly different from the presentation in ''[[CIA.IFRS17]]'' at the link in the previous paragraph. The following definition for LRC under the standard GMA approach is taken from the current reading and is a little clearer:
-:{| class='wikitable
-|-
-|| '''LRC &nbsp; = &nbsp; FCF &nbsp; + &nbsp; CSM'''
-|}
-:: ''where...''
-:: '''FCF''' ''(Fulfilment Cash Flows)'' is the sum of:
-::*estimates of future cash flows
-::* an adjustment to reflect the time value of money <u>and</u> financial risk ''(to the extent financial risk is not reflected in the estimates of cash flows)''
-::* a risk adjustment for non-financial risk
-:: '''CSM''' ''(Contractual Service Margin)'' represents unearned profit from a group of insurance contracts
-If you refer back to a prior reading that discusses ''[[CIA.IFRS17#Section_2:_IFRS_17_Overview | building blocks]]'' of measurement under IFRS 17, you'll see that the <u>first</u> and <u>second</u> bullet points under FCF above represent '''building block 1''' and the <u>third</u> bullet point ''(risk adjustment for non-financial risk)'' represents '''building block 2'''. The CSM is '''building block 3'''.
-Here is the part that Ian-the-Intern finds confusing:
-:{| class='wikitable' style='background-color: navajowhite; width: 750px;'
-|-
-|| <span style="backgrounc-color: green;">'''Possible point of confusion:'''
-* In CIA practice, financial risk is explicitly reflected in the MfAD and PfAD for financial risk. We first calculate the PV at the "best-estimate" interest rate and then again at a different (lower) interest to reflect the uncertainty in future rates (resulting in a higher PV.) The difference between these dollar-value estimates is the risk margin (PfAD) for financial risk.
-* In IFRS, it isn't as clear. Financial risk may be partly reflected in the estimates of cash flows but also partly in the PV calculation for the cash flows. The actual risk margin for financial risk may not be explicitly available.
-|}
-The last item in section 4.1 is a couple of diagrams for a <u>non-onerous</u> contract which may be more confusing than helpful. At contract inception, '''LRC = FCF + CSM''' as noted above, but the relative proportions of these components change over the contract term ''(or coverage period.)'' Referring to the diagrams below, let's start with the one on the <u>LEFT</u>. Here's how I would explain it in words:
-# At inception of the contract, <span style="background-color: yellow;">(total liabilities) + (paid amounts) = '''LRC''' = FCF<sub>LRC</sub> + CSM</span> ''(because at inception, all claims are "remaining" so there are no incurred claims and both LIC and paid claims are 0.)''
-# As the coverage period is "earned", the height of the </u>dark blue</u> portion of the diagram corresponding to FCF<sub>LRC</sub> gets smaller ''(this looks a lot like the earnings diagram for premium that you know from pricing)''
-# At the same time, the height of the 2 <u>lighter blue</u> portions of the diagram corresponding to (FCF<sub>LIC</sub> + paid claims) get bigger
-# At the end of the coverage period, <span style="background-color: yellow;">'''LRC''' = FCF<sub>LRC</sub> + CSM = 0 + 0 = 0</span> because there are no more remaining claims and FCF<sub>LRC</sub> is fully replaced by (FCF<sub>LIC</sub> + paid claims)
-# Note also that CSM = 0 at the end of the coverage period ''(this is indicated by the downward sloping line the <span style="color: green;">'''upper green'''</span> portion of the diagram
-The diagram on the <u>RIGHT</u> is just a more detailed version of the diagram on the left that breaks out the '''risk adjustment''' component of the LRC. This diagram is a little confusing however because the scale of the diagram makes it look like the risk adjustment is part of CSM, but <u>it isn't</u>. The risk adjustment component '''is part of FCF''', where at the beginning of the contract term, it's mostly from LRC and at the end, it's mostly from LIC.
-: [[File: CIA.IFRS17-LRC_(020)_FCF_diagram.png]]
-====Section 4.2: Allocations====
-When we considered "level of aggregation" when measuring contract liabilities in IFRS 17 we noted that <u>expenses</u> must be allocated to groups, but <u>other assumptions</u> may be applied at whatever level is most appropriate for estimating cash flows. This was discussed in In ''[[CIA.IFRS17#Section_6:_Measurement_Considerations | CIA.IFRS17 - Section 6: Measurement Considerations]]''.
-The current reading expands on the allocation concept for the additional items below:
-* LRC and CSM must be <u>determined</u> at the group level
-* FCFs may be determined at a different level, then <u>allocated</u> to groups
-The second bullet point means that FCFs ''(Fulfilment Cash Flows)'' can be determined at the portfolio level, ''or higher'', then allocated back to groups. That's all you have to know from this section.
-====Section 4.3: Estimates of Future Cash Flows====
-<span style="color: brown;">'''Section 4.3.1 (Contract Boundary)''':</span>
-* The definition of ''[[CIA.IFRS17-LRC#contract_boundary | contract boundary]]'' is repeated and then elaborated upon. This seems far too detailed for a reasonable exam question and I would not try to memorize anything from this section. For most P&C contracts, the contract boundary is delineated by the effective date and expiry date of the policy. One exception to this may be when a policy is canceled, in which case the contract boundary is delineated instead by the effective date and cancellation date.
-<span style="color: brown;">'''Section 4.3.2 (Measurement)''':</span>
-* The types of cash flows within the contract boundary include both <u>inflows</u> such as premiums and <u>outflows</u> such as claims and directly attributable expenses.
-* The largest cash outflow usually relates to future claims and claim adjustment expenses. This section discusses methods for estimating these cash flows, but these methods are just standard reserving methods and are similar to what is done under current CIA practice. The source text provides a list of adjustments to historical loss experience such as trends and impacts from legislative changes but again, these are the same as under current practice and are not unique to IFRS. In other words, I don't think these details would be a likely exam question.
-====Section 4.4: Effect of Discounting====
-* Discounting involves determining a <u>payment pattern</u> for the predicted cash flows and then applying <u>discount factors</u> to reflect the time value of money. The general concept is the same as under current CIA practice, but the determination of a specific discount rate follows a different procedure. This is discussed in detail in ''[[CIA.IFRS17-DR]]''. I could only see 1 reasonable exam question from this section:
 :{| class='wikitable'
 |-
-|| '''Question''': identify a procedure for estimating the <u>timing</u> of LRC cash flows on a group basis under IFRS 17
+|| '''Question''': what does it mean for an insurance contract to be <u>onerous</u>
-|}
-:* estimate a payment pattern on a group basis
-:* adjust the accident year payment pattern used for LIC to a pattern consistent with the average accident date of the group
-====Section 4.5: Risk Adjustment====
-* This section has no content. The source text refers the reader to an IFRS article that is not on the syllabus.
-====Section 4.6: Contractual Service Margin====
-* Recall that the CSM represents unearned profit from a group of insurance contracts. See ''[[CIA.IFRS17#Section_2:_IFRS_17_Overview | CIA.IFRS17 - Section 2: IFRS 17 Overview]]'' for a more detailed review of this concept. There is a detailed discussion ''(I think  too detailed for the exam)'' that lists 5 different <u>adjustments</u> that would be used in the formula below:
-::{| class='wikitable'
-|-
-|| carrying amount of CSM @ '''end''' of reporting period &nbsp; = &nbsp; (carrying amount of CSM @ '''start''' of reporting period) &nbsp; + &nbsp; adjustments
-|}
-* These adjustments include things like
-:: (i) the effect of new contracts added to the group
-:: (ii) interest on the CSM carrying amount during the reporting period.
-* There is a numerical example in the next section that's probably more important to spend study time on.
-[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-LRC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 2]'''</span>
-====Section 4.7: Coverage Units====
-This section is quite confusing so let's start with a simple example. The definition of coverage units is further down, but for now let's just say it represents <u>number of policies</u>. Suppose we have the following:
-* CSM @ beginning of quarter:
-: &rarr; CSM<sub>beg</sub> = $50,000 &nbsp;&larr; ''a certain proportion of this amount is released into profits during the quarter''
-To calculate how much of this CSM is released, we need the following information on coverage units:
-* coverage units provided in the quarter: <span style="color: green;">''(shout-out to JPD!)''</span>
-: &rarr; CU<sub>qtr</sub> = 1,000
-* coverage units remaining at end of quarter:
-: &rarr; CU<sub>end</sub> = 3,000
-Remember that the CSM ''(Contractual Service Margin)'' represents unearned profit from a group of insurance contracts. This unearned profit of $50,000 is released into profits over the life of the contract, but <u>how</u> is it released? Here's the key concept:
-:{| class='wikitable' style="background-color: navajowhite;"
-|-
-|| <span style="color: green;">'''KEY CONCEPT:'''</span> &nbsp; Coverage units <u>determine how</u> the CSM is released into profit ''(or loss.)''
-|}
-In particular, the CSM is <u>amortized</u> over the quarter in accordance with the beginning and ending values for coverage units. We'll demonstrate the amortization formula for our simple example as follows:
-* '''proportion''' of CSM released during the quarter
-:: = &nbsp; CU<sub>beg</sub> &nbsp; / &nbsp; ( CU<sub>beg</sub> + CU<sub>end</sub> ) &nbsp; <span style="color: red;">&larr; &nbsp; ''this is the key formula for amortization''</span>
-:: = &nbsp; 1,000 &nbsp; / &nbsp; ( 1,000 + 3,000 )
-:: = &nbsp; 1,000 &nbsp; / &nbsp; 4,000
-:: = &nbsp; 25%
-* '''amount''' of CSM released during the quarter
-:: = &nbsp; 50,000 &nbsp; x &nbsp; 25%
-:: = &nbsp; 12,500
-If you can follow the simple example above, you should be able to understand this example from the source text. It begins with CSM<sub>beg</sub> = $1,000 and demonstrates the amortization of that amount over the next 4 quarters. The '''ending CSM''' for each quarter is shown in column (6).
-{| class='wikitable' style="background-color: navajowhite; width: 1000px"
-|-
-|| <span style="color: red;">'''Note:'''</span> The terms '''CU<sub>beg</sub>''' and '''CU<sub>end</sub>''' are abbreviated versions of the description of those quantities in the table below.
-* Strictly speaking, what I've abbreviated as CU<sub>qtr</sub> actually represents the "coverage units provided in the reporting period". Also, CU<sub>end</sub> represents "expected coverage units remaining at the end of the reporting period". Just keep that in mind when you're going over the calculations below.
-* Instead of '''CU<sub>qtr</sub>''', a better way to symbolize that quantity might be '''CU<sub>n</sub>''' where '''n''' would represent the reporting period in which the coverage units are in effect. So in the table below, '''n''' would take on the the values: Q1 2023, Q2 2023, Q3 2023, Q4 2023.
-|}
-: [[File: CIA.IFRS17-LRC_(030)_CSM_amortization_1.png]]
-This example can be made more complicated in a few different ways, but I think a reasonable exam question would be to give you columns (1) and (2), and the beginning CSM value. From that you can construct the remainder of the table and show how the CSM is released into profit over subsequent quarters.
-:{| class='wikitable' style="background-color: navajowhite;"
-|-
-|| Click ''[[Coverage Units - Another Example]]'' for a second example of the above type of calculation.
 |}
-Here are 2 practice problems in Excel:
+:* An insurance contract is <u>onerous</u> at the date of initial recognition if there is a total '''net outflow''' for the sum of:
+:: &rarr; FCFs (Fulfilment Cash Flows)
-: [https://www.battleactsmain.ca/Excel/CIA.IFRS17-LRC_(030)_practice_coverage_units.xlsx <span style="color: white; font-size: 12px; background-color: indigo; border: solid; border-width: 2px; border-radius: 10px; border-color: indigo; padding: 1px 3px 1px 3px; margin: 0px;">'''Excel Practice: CIA.IFRS17-LRC - Coverage Units &  the CSM'''</span>]
+:: &rarr; acquisition cash flows
+:: &rarr; cash flows arising from the contract at the date of initial recognition
-Now that we've done an example, let's go back and look at some of the theory behind this. The first item we need to cover is the definition of "coverage units".
+The key point is '''net outflow'''. It might help to recall the dictionary definition of "onerous" as something that's difficult and burdensome. An outflow of cash (instead of an inflow) is definitely a burden, and something we want to avoid! The concept of "onerous" is used to specify groupings of contracts under IFRS 17.
 :{| class='wikitable'
 |-
-|| '''Question''': define the term <u>coverage units</u> according to IFRS 17
+|| '''Question''': based on IFRS 17, how shall an entity, at minimum, divide a portfolio into <u>groups</u>
 |}
-:* the <u>quantity</u> of insurance contract services provided by the contracts in the group
+:: '''(a)''' a group that is onerous at initial recognition (if any)
+:: '''(b)''' a group that has no significant possibility of becoming onerous (if any)
+:: '''(c)''' a group of any remaining contracts (if any)
-:{| class='wikitable'
+These groups can be further divided any way the company wants ''(including based on cohort issue date)'' but according to the text:
-|-
-|| '''Question''': <u>how</u> are coverage units determined
-|}
-:* determined by considering ''(for each contract)'' the quantity of the benefits provided under a contract within its expected coverage period
+* ''An entity shall establish the groups at initial recognition, and <u>shall not reassess</u> the composition of the groups subsequently.''
-This definition is saying that "coverage units" is a '''number''' that reflects '''number of services''' that are provided under a contract. This number is determined by counting the number of services provided by each contract within a group and then summing across all contracts with the group. Unfortunately, the source text doesn't give any examples of the "services" or "benefits" that would be be counted when calculating coverage units. That's why for the simple example above, I just assumed that coverage units equaled the number of insurance contracts.
+It strikes me as a little strange that composition of groups cannot be reassessed. It also seems to directly contradict the very next sentence:
-I think the most likely type of question from this section would be a numerical calculation as shown above, but just to be on the safe side, here's a little more of the theory. The text states that coverage units is <u>not</u> an accounting policy but involves judgment & estimates.
+* ''At subsequent valuation, a group of insurance contracts issued that was deemed non-onerous at initial recognition may still become onerous subsequently (or vice versa) if the expectation regarding the future net cash flows of the group changes from positive to negative (or vice versa)''
-:{| class='wikitable'
+I think it probably means that a whole group can change from being onerous to non-onerous, and vice-versa, but that the set of contracts within each group cannot change. Anyway, the above comments apply to both insurance and reinsurance contracts. Note however that the level of aggregation for reinsurance contracts may differ from the level of aggregation of the underlying insurance contracts covered.
-|-
-|| '''Question''':  what is the <u>key principle</u> for determining coverage units based on judgment & estimates
-|}
-:* to reflect the insurance contract services provided in each period
 :{| class='wikitable'
 |-
-|| '''Question''':  identify specific ways this key principle is applied
+|| '''Question''': does IFRS 17 permit <u>disaggregation</u> of individual insurance contracts
-|}
-:* quantity of benefits relates to the amount that can be claimed by the policy-holder ''(not the expected costs to be incurred by the entity)''
-:* discounting is optional ''(if discounting is applied, it is based on judgment but should be applied consistently)''
-:* coverage period extends to the end of the period in which insurance contract services are provided ''(unless claims in settlement are included in LRC rather than LIC)''
-Ian-the-Intern is having trouble making sense of coverage units so Alice simplified for him:
-: &rarr; more coverage units for a contract means more work for the insurer
-: &rarr; the work the insurer does is not necessarily related to expected claims or release of risk
-The source text has a table that actually helped me understand the concept of releasing CSM into profit. In our example above, the amortization pattern is completely determined by the coverage unit values in columns (1) and (2), and the numbers were such that the amortization pattern was <u>uniform</u>. We had 25% of the CSM released in each quarter. But of course if the numbers in columns (1) and (2) had been something different, the amortization pattern might <u>not</u> have been uniform.  The table show scenarios that could lead to a <u>non-uniform</u> amortization pattern.
-: [[File: CIA.IFRS17-LRC_(040)_CSM_amortization_types.png]]
-I could see an exam question asking you to describe the CSM amortization pattern for mortgage insurance, for example. You would have to realize that mortgage insurance generally has a decreasing policy limit over the coverage period so the CSM amortization pattern would be <u>decreasing</u>, not uniform.
-For more details, the source text refers the reader to external documents that are not on the syllabus.
-[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-LRC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 3]'''</span>
-====Section 4.8: Loss Component====
-<span style="color: brown;">'''Initial Recognition''':</span>
-This section starts by reviewing the definition of ''[[CIA.IFRS17-1#Section_2:_Level_of_Aggregation | onerous contract]]'' from a previous article. Make sure you know it. ''(Click the link to review.)'' Continuing on, recall the formula for '''LRC''' from ''[[CIA.IFRS17-LRC#Section_4.1:_Definitions | Section 4.1 - Definitions]]'' earlier in this article:
-:{| class='wikitable
-|-
-|| '''LRC &nbsp; = &nbsp; FCF &nbsp; + &nbsp; CSM'''
-|}
-Recall also from ''[[CIA.IFRS17-LRC#Section_1:_Introduction | Section 1: Introduction]]'' that the calculation of LRC can also be expressed as follows by splitting it into 2 components:
-:{| class='wikitable
-|-
-|| <span style="color: brown;">'''LRC'''<span> &nbsp; = &nbsp; <span style="color: brown;">'''(LRC excluding LC)'''</span> &nbsp; + &nbsp; <span style="color: brown;">'''LC'''</span>
-|}
-Remember from ''[[CIA.IFRS17-1#Section_3:_Actuarial_Calculations_Related_to_Fulfilment_Cash_Flows | here]]'' that <span style="color: brown;">'''LC'''</span> represents expected net outflows for <u>onerous</u> groups. So the term <span style="color: brown;">'''(LRC excluding LC)'''</span> seems like it should represent cash (in)flows for both <u>onerous</u> and <u>non-onerous</u> groups.
-{| class='wikitable' style="width: 1000px; background-color: navajowhite;"
-|-
-|| <span style="color: green;">'''Side note:'''</span> All these terms and concepts can be hard to keep straight but on the bright side, you can see how repetitive these IFRS readings are. Much of what's discussed in this particular reading simply repeats what's covered in other readings. In other words, there is less to learn that it appears. Anyway, back to the grind...
-|}
-The two formulas above for '''LRC''' look different so how are they reconciled? Well, the first formula is true for both onerous and non-onerous groups but we can break the '''FCF''' term down further. ''(Note that the term '''RA''' stands for Risk Adjustment)''
-* for <u>non-onerous</u> groups:
-: &rarr; &nbsp; '''LRC'''
-:: &nbsp;  = '''FCF''' &nbsp; + &nbsp; <span style="color: purple;">'''CSM'''</span>
-:: &nbsp;  = (Future cash inflows - Future cash outflows + effect of discounting - RA) &nbsp; + &nbsp; <span style="color: purple;">'''CSM'''</span>
-* for <u>onerous</u> groups, the <span style="color: purple;">'''CSM'''</span> is <u>floored at 0</u> and it drops out:
-: &rarr; &nbsp; '''LRC'''
-:: &nbsp;  = '''FCF'''
-:: &nbsp;  = (Future cash inflows - Future cash outflows + effect of discounting - RA)
-Click ''[[GMA LRC at Initial Recognition]]'' if you'd like to see the diagram from the source text that compares onerous and non-onerous contracts. Note that for onerous contracts, after the CSM is floored at 0, a loss is recorded in the financial statements and the LRC for the onerous contracts is simply equal to the FCF as shown in the formula above. This loss, '''LC''', is reflected in the LRC on the issue date of the insurance contracts.
-The diagram also provides a formula for FCF which might be useful to know:
-:{| class='wikitable
-|-
-|| '''GMA Formula''': &nbsp; FCF &nbsp; = &nbsp; (Future cash in-flows) &nbsp; &ndash; &nbsp; (Future cash out-flows) &nbsp; + &nbsp; (effect of discounting) &nbsp; &ndash; &nbsp; RA &nbsp;&nbsp;&nbsp;&nbsp; <span style="color: green;">&larr; ''shout-out to ML! (this formula does not have a CSM term)''</span>
 |}
-Note that CSM = 0 for onerous contracts.
+:* No (usually.) Under IFRS 17, the lowest unit of account is the insurance contract.
+:* In <u>most</u> cases, it is not permitted to disaggregate individual insurance contracts.
-<span id="GMA_subsequent_measurement"></span>
+An additional nuance for reinsurance contracts is the possibility of having a multi-line contract. The actuary can choose from several options for aggregating those contracts:
-<span style="color: brown;">'''Subsequent Measurement''':</span>
+:* Aggregating based on predominant exposure
+:* Creating a portfolio/group containing multi-line contracts
+:* Separating reinsurance contracts into sub-contracts and assigning those sub-contracts to separate portfolios/groups
-This subsection within Section 4.8 seems too detailed for a reasonable exam question. I've mentioned this before, but I really wish we had some examples of exam questions on this topic. ''(These IFRS readings were put on the syllabus after the CAS stopped releasing exams.)'' Not only is this subsection very detailed, it refers to external IFRS documents that are not on the syllabus. In any case, here are 3 broad factoids that aren't too hard:
+[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-1&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 1]'''</span>
-:{| class='wikitable
+===Section 3: Actuarial Calculations Related to Fulfilment Cash Flows===
-|-
-|| '''Question''': is an entity required to separately track the two components: '''LRC excluding LC''' and '''LC'''
-|}
-:* yes ''(because they want to keep non-onerous and onerous contracts separate)''
+If you've read the ''[[CIA.IFRS17]]'' wiki article then the basic IFRS 17 concepts will be familiar to you, but it doesn't hurt to do a quick review of some important concepts and abbreviations:
-:{| class='wikitable
+: '''FCF''': Fulfillment Cash Flows
-|-
+:: &rarr; basically the present value of an insurer's liabilities, including discounting and risk adjustments
-|| '''Question''': briefly describe the measurement of an <span style="color: red;">'''onerous'''</span> group of contracts <u>subsequent</u> to initial recognition
-|}
-:* if there are <u>no changes</u> in underlying assumptions:
+: '''RA''': Risk Adjustment (for non-financial risk)
-:: &rarr; LC is expected to be systematically decreased
+:: &rarr; claims development <span style="color: green;">&nbsp;&larr;''shout-out to WC18 & bicbic!''</span>
-:* if there <u>are changes</u> in underlying assumptions that <u>are favourable</u>:
-:: &rarr; allocate changes to the LC until it reaches 0 '''then''' a CSM may be re-established
-:{| class='wikitable
+: '''LIC''': Liability for Incurred Claims
-|-
+:: &rarr; insurer’s obligation to pay claims for events that have <u>already</u> occurred ''(earned business)''
-|| '''Question''': briefly describe the measurement of a <span style="color: green;">'''non-onerous'''</span> group of contracts that <span style="color: red;">'''becomes onerous'''</span> <u>subsequent</u> to initial recognition
-|}
-:* reduce CSM to 0 and establish an LC
+: '''LRC''': Liability for Remaining Claims
-:: ''(this would happen when unfavourable changes in the fulfilment cash flows exceed the carrying amount of the CSM)''
+:: &rarr; insurer’s obligation to provide insurance coverage for events that have <u>not yet</u> occurred ''(unearned business)''
-{| class='wikitable' style="background-color: navajowhite;"
-|-
-|| Alice had to take Ian-the-Intern aside for a heart-to-heart talk because he was getting super-confused. Here's what she told him:
-|}
-: When measuring LRC:
+: '''LC''': Loss Component
+:: &rarr; expected net outflow of an onerous group ''(this is covered in more detail in [[CIA.IFRS17-1#Section_6:_Onerous_Contracts | Section 6: Onerous Contracts]])
-:: <span style="font-size: 24px;>&#128512;</span> <span style="color: green;">'''Non-onerous'''</span> groups are good. They have net cash <u>inflows</u>!
+: '''GMA''': General Measurement Approach
-:: <span style="font-size: 24px;>&#128533;</span> <span style="color: red;">'''Onerous'''</span> groups are bad. They have net cash <u>outflows</u>.
+:: &rarr; an approach for measuring the LRC component of contract liabilities under IFRS 17
-: We have to track them separately for accounting purposes because:
-::* <span style="color: green;">'''Non-onerous'''</span> contracts have a CSM ''(but no LC)''
-::* <span style="color: red;">'''Onerous'''</span> contracts have an LC ''(but no CSM)''
-: CSM and LC are kind of like <span style="color: green;">'''DPAE'''</span> and <span style="color: red;">'''PDR'''</span> when we calculated the premium liabilities using the old CIA method. Policies where the UPR covers the expected losses have a <span style="color: green;">'''DPAE'''</span> (good) and policies where they don't have a <span style="color: red;">'''PDR'''</span> (bad) See ''[[CIA.PrLiabs]]'' for a review.
-{| class='wikitable' style="background-color: navajowhite;"
-|-
-|| [[File: Hot-chocolate.png | 50px | link=]] &nbsp; Alice also brought him a nice cup of hot chocolate so now he's happy. <span style="font-size: 24px;>&#128522;</span>
-|}
-'''Final comment''': There are a few more paragraphs of details in this subsection, and you can refer to the source text if you want, but Alice is 95% certain you can safely skip it.
+: '''PAA''': Premium Allocation Approach
+:: &rarr; a simplified approach ''(versus GMA)'' for measuring the LRC component of contract liabilities under IFRS 17
-[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-LRC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 4]'''</span>
+: '''CSM''': Contractual Service Margin
+:: &rarr; unearned profit from a group of insurance contracts ''(discussed more in [[CIA.IFRS17#Section_2:_IFRS_17_Overview | CIA.IFRS17 - Overview]])''
-===Section 5: LRC under PAA – Insurance contracts issued===
+Ian-the-Intern has been having trouble keeping all of of this straight in his head, but he's feeling more and more comfortable every day. It's just repetition. The reason it's confusing is that all of this IFRS material was dumped on him all at once and it's a lot to take in.
-<span style="background-color: yellow;">'''Keep this firmly in mind''':</span> This section is essentially a repeat of Section 4 except that here we discuss LRC <u>under PAA</u> ''(Premium Allocation Approach)'' whereas in the previous section we discussed LRC <u>under GMA</u> ''(General Measurement Approach.)''
+The title of this section, ''"Actuarial Calculations Related to Fulfilment Cash Flows"'', would lead you to believe it's a very important section but I think a better source for actuarial calculations is ''[[CIA.IFRS17-DR#Example | CIA.IFRS17-DR (Discount Rates) - Section 4]]''. In that reading, there's an actual numerical example of calculating Fulfillment Cash Flows. The reading we're looking at now does not have any numerical examples and instead discusses actuarial calculations only in a conceptual way. I've pulled out some facts that seem important but I have not included everything that's in the source text. After you've familiarized yourself with what's listed below, you can skim the source text just so you have a sense for what's there.
-This section of the source text is basically just a more detailed version of another IFRS reading, ''[[CIA.IFRS17-PAA]]''. You should at least skim that reading and go through the BattleQuiz there before continuing. There is only 1 BattleQuiz for that reading and only 6 BattleCards, but they will be helpful before trying to understand the numerical examples presented further down.
+'''From Section 3''' (LIC)
 :{| class='wikitable'
 |-
-|| As a quick knowledge check, you should absolutely know these basic facts before proceeding:
+|| '''Question''': identify components of LIC ''(Liability for Incurred Claims)''
 |}
-:* GMA stands for General Measurement Approach
+:* an unbiased current estimate of <u>future</u> cash flows ''(future cash flows is different from <u>Fulfillment</u> cash flows)
-:* PAA stands for Premium Allocation Approach
+:* an adjustment for discounting
-:* PAA is a '''simplified version''' of GMA for measuring LRC (PAA does not apply to LIC)
+:* a risk adjustment
-:{| class='wikitable'
-|-
-|| Okay, even Ian-the-Intern knows those things. Now, what is it about PAA that makes it simpler than GMA?
-|}
-:* PAA <u>does not</u> require estimation of FCFs (Future Cash Flows)
+'''From Section 3.1''' (Discounting & Cash Flow)
-:* PAA <u>does not</u> require a CSM (Contractual Service Margin)
-Ian-the-Intern is loving this! PAA really does look simpler, but what's the catch? Well, you cannot use PAA unless certain eligibility criteria are met, and assessing eligibility is the main topic in the reading ''[[CIA.IFRS17-PAA]]'', specifically ''[[CIA.IFRS17-PAA#Sections_2-8:_Details_on_Assessing_PAA_Eligibility | Sections 2-8: Details on Assessing PAA Eligibility]]''. There's a numerical example in that reading but you can come back to that later. For now, what you need to know are these basic facts about PAA eligibility from ''[[CIA.IFRS17#Valuation_Methods_under_IFRS_17 | CIA.IFRS17 - Valuation Methods under IFRS 17]]'':
+The IFRS 17 adjustment for risk of non-performance by a reinsurer is similar to the PfAD for reinsurance recovery under current practice. The key difference is the provision for non-performance risk is included in the estimate of the present value of future cash flows for reinsurance contracts held.
+Any changes in estimates of the non-performance risk would not adjust the CSM, but rather flow directly into the P&L
 :{| class='wikitable'
 |-
-|| PAA may be used for LRC when one of these eligibility requirements <u>assessed at contract inception</u> is met:
+|| '''Question''': identify considerations when estimating the risk of non-performance of a reinsurer
 |}
-:* can be used for short-term contracts ''(policy term &le; 1 year)''
+:* financial <u>strength</u> of the reinsurers
-:* can be used for longer-duration contracts <u>'''IF'''</u> PAA is a reasonable approximation to GMA over the life of the contract
+:* history of claims and coverage <u>disputes</u> with reinsurers
-:: ''(applies only to LRC component of insurance contract liabilities)''
+:* risk of <u>contagion</u> across various reinsurance arrangements
+:* <u>delays</u> in payments and <u>concentration</u> risk
+:* length of <u>time</u> over which liabilities are expected to be settled
+:* <u>collateral</u> available to mitigate risk
-It's actually a little more complicated than those simple bullet points above, but at least it gives you something easy to remember if you find yourself getting lost in the details. And it's another great example of how much all of these IFRS readings overlap.
+These are similar to what Alice would consider under current practice when evaluating her own reinsurers. Since Alice was careful when selecting reinsurers, reinsurer risk is low for her company. No reinsurer would dare dispute a claim from Alice. :-)
-Here's one last thing from the intro to Section 5 that I call the PAA Factoid: ''(It seems kinda important so pay attention!)''
+One difference with IFRS <span style="color: green;">''(shout-out to MW!)''</span> 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. :-)
-:{| class='wikitable' style='background-color: navajowhite;'
+For discounting, this is generally similar to direct insurance contracts where the discount rate used would be based on the risk free rate + a illiquidity premium which is defined as the ability of the policyholder to exit the policy before its expiry and receive the value due without significant exit costs. AIC is generally illiquid while ARC is considered liquid. The AIC is considered illiquid as there is little leeway for a policyholder to influence the timing of claim payments
-|-
-|| <span style="color: green;">'''PAA Factoid:'''</span> If a group of contracts qualifies for the PAA, the <u>LRC excluding the LC</u> (“LRC ex. LC”) is calculated the <u>same way</u> for <span style="color: red;">'''onerous'''</span> and <span style="color: green;">'''non-onerous'''</span> contracts.
-|}
-That makes things simpler &#128578;. Of course, the onerous group still has the LC ''(Loss Component)'' that you have to calculate. Remember ''[[CIA.IFRS17-LRC#Section_1:_Introduction | this useful diagram]]'' from the introduction?
+'''From Section 3.2''': (Estimation for the RA or Risk Adjustment)
-====Section 5.1: Initial Recognition====
+There is a separate document that discusses estimating the RA for contracts in general. This section focuses on estimating the RA for <u>reinsurance</u> contracts. The next question below is not an IFRS-specific concept. It applies equally to current practice <u>and</u> has come up on previous exam questions related to reinsurance.
-There are 2 formulas you should memorize for the calculation of LRC (excluding LC) under PAA. The first is the formula for LRC at <u>initial recognition</u> of the contract, and is covered below. The second is the formula for LRC at <u>subsequent recognition</u> and is covered in the next subsection.
+Conceptually the RA for reinsurance can be viewed as the compensation to keep rather than to ceded the risk. Reinsurance held will <u>increase</u> the ARC and is the opposite of the RA for direct insurance contracts. The release of RA for reinsurance held reduces profit rather than increasing it for insurance contracts issued.
 :{| class='wikitable'
 |-
-|| '''LRC (ex. LC) at initial recognition ='''
+|| '''Question''': identify 3 options for grouping data when estimating the present value of future cash flows and the RA
-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <span style="color: green;">+ '''P'''remiums</span> <br>
-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <span style="color: red;">- insurance '''A'''cquisition cash flows</span> ''(<u>unless</u> the entity chooses to recognize the payments as an expense)'' <br>
-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <span style="color: green;">+</span>/<span style="color: red;">-</span> amounts arising from '''D'''erecognition of "certain" assets & liabilities
 |}
-There is no example in the source text so any exam problem asking you to calculate this will probably be very simple. My memory trick for this formula is '''PAD''' and stands for:
+:* estimate gross & net losses <u>then</u> calculate the ceded as gross - net
+:* estimate gross & ceded losses <u>then</u> calculate the net as gross - ceded
+:* estimate net & ceded losses <u>then</u> calculate the gross as net + ceded
-* <span style="color: green;">'''P'''remiums</span>
+These options are also discussed in ''[[CIA.IFRS17-DR#Section_3:_Determining_Estimates_of_Future_Cash_Flows | CIA.IFRS17-DR (Discount Rates)]]'' and in that discussion, considerations are provided to help you determine which option is best. The following exam question is from an outdated reading but it shows you a type of question that can be asked relative to the above options:
-* <span style="color: red;">'''A'''cquisition cash flows</span>
-* '''D'''erecognition
-The only other part of the formula requiring an explanation is what's meant by "certain" assets in the term for <u>derecognition</u>. According to the text, the derecognized items would include:
+: [https://www.battleactsmain.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(26).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style='color: red;'>'''(2015.Fall #26)'''</span>
-* any asset for insurance acquisition cash flows
+For proportional reinsurance (QS treaties), you can expect that the ceded RA would be proportional to the gross RA.
-* any other asset or liability previously recognized for cash flows related to the group of contracts
+For non-proportional reinsurance (XoL treaties), the ceded RA is usually not proportional to the gross RA. In this case, the cost of reinsurance is usually viewed as evidence of the price the entity is willing to pay to be relieved of the risk and would be a good indicator on the compensation (RA) requirement.
-I think the term for derecognition is way too detailed for an exam question, so here's a really simple example:
+[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-1&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 2]'''</span>
-: '''Given''':
+===Section 4: Insurance Service Results Considerations===
-:* premiums from a group of contracts received at initial recognition &nbsp; = &nbsp; <u>900</u>
+Here is something that stood out for me because it highlights a fact about reinsurance under IFRS 17 that's different from the "normal" revenue stream of earned premium
-:* acquisition cash flows not recognized as an expense &nbsp; = &nbsp; <u>150</u>
-:* no relevant assets or liabilities have been derecognized
-: '''Find''': LRC (ex. LC) under PAA at initial recognition
-: '''Solution''':
-:* LRC (ex. LC)
-:: = &nbsp; P - A + D
-:: = &nbsp; 900 - 150 + 0
-:: = &nbsp; <span style="background-color: lightgreen;">'''750'''</span>
-The next section has a more substantial example of calculating LRC under PAA at subsequent measurement.
-====Section 5.2: Subsequent Measurement====
-Here's the second formula you should probably memorize:
 :{| class='wikitable'
 |-
-|| '''LRC (ex. LC) at subsequent measurement ='''
+|| '''Question''': under IFRS 17, how might <u>insurance revenue</u> for reinsurance contracts issued differ from earned premium
-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <span style="color: green;">+ carrying amount at start of reporting period</span><br>
-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <span style="color: green;">+ '''P'''remiums received in period</span><br>
-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <span style="color: red;">- insurance '''A'''cquisition cash flows</span><br>
-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <span style="color: green;">+ amortization of insurance acquisition cash flows recognized as an expense in the reporting period</span><br>
-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <span style="color: green;">+ adjustments to a financing component</span><br>
-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <span style="color: red;">- insurance revenue (premium earned for insurance contract services provided in that period)</span><br>
-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <span style="color: red;">- investment components paid/transferred to LIC</span><br>
 |}
-The way I remember this formula is as follows:
+:* For entities applying PAA, the revenue recognition requirements
+:* Treatment of reinsurance cash flows that are contingent on claims of the underlying contracts
+:* Treatment of amounts paid to the purchaser of reinsurance contracts, not contingent on claims of underlying contracts
-* The 1<sup>st</sup> term is obvious: ''carrying amount from last period''
+I felt that the remainder of this section was too detailed and did not include it in the wiki.
-* The 2<sup>nd</sup>  & 3<sup>rd</sup> terms are '''P''' & '''A''', ''same as the formula for initial recognition.''
-* The 4<sup>th</sup> term is amortization of the previous term
-* The 5<sup>th</sup> & 7<sup>th</sup> terms are related: ''financing & investment components'', but are probably zero anyway ''(they are indeed zero in the text example)''
-:: ''(These components are discussed very briefly in [[CIA.IFRS17-LRC#Section_5.6:_Financing_and_Investment_Components | Section 5.6: Financing and Investment Components]])''
-* The 6<sup>th</sup> term is very important and <u>will not</u> be zero: ''insurance revenue (which is mainly earned premium)''
-You also have to remember which terms are added and which are subtracted. If you always write the formula as above then you can just remember the sequence:
+===Section 5: LRC: PAA and GMA Considerations===
-:{| class='wikitable'
+Recall that LRC stands for Liability for Remaining Claims and consists of obligations relating future services ''(the unexpired portion of the coverage period)''. The LRC can be estimated using the GMA or the PAA ''(General Measurement Approach or Premium Allocation Approach)''
-|-
-|| &nbsp; <span style="color: green;">'''+'''</span> <span style="color: green;">'''+'''</span> <span style="color: red;">'''&ndash;'''</span> <span style="color: green;">'''+'''</span> <span style="color: green;">'''+'''</span> <span style="color: red;">'''&ndash;'''</span> <span style="color: red;">'''&ndash;'''</span>
-|}
-Or you can try to understand what the formula is doing and then deduce which terms should be added and which should be subtracted. It helped me to compare it to the formula for premium liabilities or policy liabilities related to the UPR (Unearned Premium Reserve). You can review that in ''[[CIA.PrLiabs#Basic_Formulas | Basic Formulas]]'' in the ''[[CIA.PrLiabs]]'' wiki article:
-: <strong>DPAE =</strong> <span style='color: green; font-weight: 700;'>UPR</span> <span style='color: red;'>'''- PolLiabs(UPR)'''</span> + <span style='color: green; font-weight: 700;'>UEComm</span>
-And if you rearrange it:
-: <strong>PolLiabs(UPR) =</strong> <span style='color: green; font-weight: 700;'>UPR</span> <span style='color: red;'>'''- DPAE'''</span> + <span style='color: green; font-weight: 700;'>UEComm</span>
-It looks to me like "UPR" corresponds to "premiums received" in the LRC formula, and "DPAE" corresponds to "insurance acquisition cash flows". There won't be a perfect correspondence between the CIA version of premium liabilities and the IFRS version of LRC because CIA and IFRS represent different accounting frameworks. Remember also that <u>unearned</u> revenue, like UPR or UEComm (Unearned Commission), are liabilities. Similarly, <u>deferred</u> expenses, like DPAE, are assets.
-I hope the above discussion helped at least a little bit so that you aren't just memorizing a big long formula that otherwise makes no sense! There's an example of calculating ''[[LRC under PAA - Source Text]]'' in the source text. You can click the link to see it. The only thing that might throw you off in that example is that the given information is labelled differently from the terms given in the formula. Alice was kind enough to create an Excel spreadsheet that lays out the solution in a step-by-step manner. You're welcome. &#129299; I put it in a separate wiki page so as not to clutter up the presentation. The link is below:
-* ''[[LRC under PAA - Alice's Example]]''
-'''Update: 2022-09-23''': Calculation of LRC at initial recognition was added to the problems below. <span style="color: green;">''(shout-out to jjj820 for the idea!)''</span>
-: [https://www.battleactsmain.ca/Excel/CIA.IFRS17-LRC_(060)_practice_LRC_PAA_v3.xlsx <span style="color: white; font-size: 12px; background-color: indigo; border: solid; border-width: 2px; border-radius: 10px; border-color: indigo; padding: 1px 3px 1px 3px; margin: 0px;">'''Excel Practice: CIA.IFRS17-LRC - LRC under PAA'''</span>]
-And here's the quiz...
-[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-LRC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 5]'''</span>
-====Section 5.3: Onerous Groups of Contracts====
-The source text states that IFRS 17 <u>does not</u> prescribe actuarial responsibilities regarding the identification and measurement of onerous groups of contracts. I find that a little surprising. Anyway, the source text then provides what they call <u>practical guidance</u> on the following topics:
-* '''Qualitative assessment''': facts and circumstances indicating onerous contracts
-* '''Quantitative assessment''': calculation of fulfilment cash flows and deriving the LC
-* '''LC reporting'''
-This is a long section with several subsections but I've extracted what I think is the most likely testable information. There is a diagram at the beginning, a decision tree, that provides a nice visual summary ''(see below.)''
-No example of how to apply it is provided so an exam question is probably not likely, but I wouldn't rule it out. In fact, I think you could make a pretty good exam question based on this. You could be given information about a group of contracts and be asked to use the decision tree to assess whether the group is onerous. If it is indeed onerous, then you could be asked how the onerous contract is treated in the financial statements. That would be the box at the very bottom that starts with "Book LC (Loss Component) on P&L." This is explained a little further below the diagram.
-{| class='wikitable' style="width: 750px; text-align: center;"
-|-
-|| '''Decision tree for onerous contracts''' (how to determine if a group is onerous and what to do if it is)
-|}
-:[[File: CIA.IFRS17-LRC (070) onerous contract decision tree.png]]
-{| class='wikitable' style="width: 750px; text-align: center;"
-|-
-|| [https://www.battleactsmain.ca/fireworks_01.php <span style="font-size: 24px;">&#128526;</span>]
-|}
-<span style="color: brown;">'''Qualitative Assessment: Facts and Circumstances'''</span>
-The top box in the decision tree asks you to decide based on "facts & circumstances" whether the group of contracts is onerous, but IFRS 17 does not specify what this means. There are some things that can be considered however.
 :{| class='wikitable'
 |-
-|| '''Question''': identify facts & circumstances that could be used to <u>qualitatively assess</u> whether a group of contracts is onerous
+|| '''Question''': how is the LRC estimated under GMA and PAA
 |}
-:* a group of contracts in the portfolio that are known to be onerous at initial recognition
+:* '''GMA''':
-:* past losses in the portfolio
+:: &rarr; LRC &nbsp; = &nbsp; (FCF related to future services) + CSM
-:* aggressive underwriting or pricing
-:* unfavourable experience trends
-:* unfavourable external conditions
-If these circumstances exist, the group of contracts is more likely to be onerous. Ian-the-Intern has created an actual example at the end of this section to help make this more understandable. For now, just try to absorb them. I'm not sure if I would recommend memorizing them specifically because they are all common sense.
-<span style="color: brown;">'''Quantitative Assessment'''</span>
+:* '''PAA''':
+:: &rarr; LRC &nbsp; = &nbsp; (premiums received) &ndash; (insurance acquisition cash flows)
+::: ''where''
+:: &rarr; (premiums received) &nbsp; = &nbsp; (unearned premiums) &ndash; (premiums receivable)
-According to the decision tree, if a qualitative assessment of facts & circumstances indicates a possibility of the group being onerous, then a <u>quantitative assessment</u> is required.
+There is a separate reading for PAA: ''[[CIA.IFRS17-PAA]]'' so we won't discuss it any further here. There is also a slightly more detailed formula at the following link for ''[[CIA.IFRS17-LRC#Section_5.1:_Initial_Recognition | LRC under PAA]]'' in the wiki article ''[[CIA.IFRS17-LRC]]''. The extra term given in the formula there is "minor term" and is probably equal to 0 most of the time anyway.
-:{| class='wikitable'
+'''From Section 5.2''' (PAA Eligibility)
-|-
-|| '''Question''': describe the <u>quantitative assessment</u> of a potentially onerous group of contracts
-|}
-:# calculate the difference: ''' &nbsp; D &nbsp; = &nbsp; FCF &nbsp;&ndash;&nbsp; (LRC ex. LC) '''
+PAA eligibility for reinsurance contracts is mostly similar to direct insurance. A couple of key differences:
-:#* D &gt; 0 &nbsp; &rarr; &nbsp; group is onerous
-:#* D &le; 0 &nbsp; &rarr; &nbsp; group is <u>not</u> onerous
-:# if onerous &nbsp; &rarr; &nbsp; Book LC on P&L
-:#* increase LRC to FCF
-:#: ''[ where &nbsp; LRC &nbsp; = &nbsp; FCF &nbsp; = &nbsp; (LRC ex. LC) + LC ]''
-The answer above is just rewriting the part of the decision tree below the "qualitative assessment" box. It seems like a reasonable course of action but the source text doesn't really tell you how to calculate FCF and (LRC ex. LC). There's an ''[[CIA.IFRS17-DR#Example | example of calculating FCF]]'' in another wiki article, ''[[CIA.IFRS17-DR]]'', but it's long and complicated. And unless I've missed something I couldn't find a specific example of calculating the LC (Loss Component.)
+:* One year risk attaching reinsurance policies are not automatically eligible for PAA
+:* PAA eligibility for the reinsurance contract has to be assessed separately from the underlying policies
+:* Contractual features may affect contract boundary and therefore PAA eligibility
-<span style="color: brown;">'''Loss Component Reporting'''</span>
-Note the title of this subsection: ''Loss Component <u>Reporting</u>''. In other words, this section '''doesn't''' cover the ''Loss Component <u>Calculation</u>''. That's discussed briefly in ''[[CIA.IFRS17-LRC#Section_7:_Illustrative_Example_-_Loss_Component_Calculation | Section 7: Illustrative Example - Loss Component Calculation]]''.
+'''From Section 5.3''' (GMA Considerations)
-This section is long, but there are a few obviously important facts about the LC you should definitely know. ''(Wake up Ian-the-Intern. He needs to know this too.)''
+I didn't want to leave this section blank in the wiki but these next 3 items of information feel very disconnected. It would help so much if there were numerical examples to illustrate these points. I would be shocked if any of what I've listed below appears on the exam. Unfortunately, I'll never know because exams will no longer be published. :-(
 :{| class='wikitable'
 |-
-|| '''Question''': briefly describe the <u>accounting steps</u> required if a quantitative assessment indicates a group of contracts is onerous
+|| '''Question''': how is the CSM concept (Contractual Service Margin) modified for reinsurance contracts held. ''[[CIA.IFRS17-IC#CSM_for_reinsurance | (Click for an example)]]'' <span style="color: green;">''(shout-out to RL!)''</span>
 |}
-:* recognize a loss in the insurance service expense <u>immediately</u> for the net outflow for the onerous group
+:* there is no unearned profit
-:* establish an LC as part of the LRC for the onerous group
+:* instead there is a net cost or net gain on purchasing the reinsurance
-This is saying that onerous groups need to go on the books immediately. You can't' wait until adverse experience actually occurs - you've got to prepare so you don't get any nasty surprises later on. This represents a conservative approach to accounting, which is very sensible for an insurance company. Note also that '''LRC excluding LC''' and '''LC''' must be tracked separately in the accounting system. This is the same treatment the LC receives under GMA, which you can ''[[CIA.IFRS17-LRC#GMA_subsequent_measurement | review here]]''.
 :{| class='wikitable'
 |-
-|| '''Question''': briefly describe the <u>accounting steps</u> required for the LC at subsequent measurements
+|| '''Question''': describe a potential mismatch between revenues & FCFs when an entity uses GMA for LRC for reinsurance contracts held
 |}
-:* the LC is released from the insurance service expense and <u>amortized</u> from the LRC over the duration of the contracts
+:* revenues are recognized as they are earned
-:: ''(so LC = 0 by the end of the coverage period.)''
+:* FCF projections include projected cash flows for policies to the <u>end</u> of the year
-<span style="color: brown;">'''Ian-the Intern's Decision Tree Example'''</span>
+:: &rarr; For example, at the end of the first quarter of a year, 25% of annual revenues would be recognized (assuming uniform writings) but FCFs at the same quarter-end must include projected cash flows for 100% of the policies expected to be written throughout the year. There is ''[https://www.battleactsmain.ca/vanillaforum/discussion/701/5-3-2-potential-timing-mismatch-reinsurance-contract-held-evaluated-under-the-gma another example in this forum discussion]''.
-Part of Ian-the-Intern's training is thinking up practice problems so here's what he came up with:
+And one last little tidbit:
 :{| class='wikitable'
 |-
-|| '''Problem 1''': Given the following information about a group of contracts, asses whether the group is onerous and take appropriate action (if any)
+|| '''Question''': if a group of contracts become onerous, when do the losses have to be recognized under IFRS 17
-:* company has been stable and profitable for the past 10 years
-:* no unfavourable trends are projected
-:* FCF = 100
-:* LRC ex. LC = 105
-:* LC = 0
-: ''[[Decision Tree Example 1 Answer (CIA.IFRS17-LRC) | Answer]]''
 |}
-:{| class='wikitable'
+:* immediately: when the group becomes onerous
-|-
+:: ''(in other words, you can't wait until the cash outflows actually occur!)
-|| '''Problem 2''': Given the following information about a group of contracts, asses whether the group is onerous and take appropriate action (if any)
-:* company is growing by implementing aggressive underwriting and pricing
-:* no unfavourable trends are projected
-:* FCF = 100
-:* LRC ex. LC = 80
-:* LC = 20
-: ''[[Decision Tree Example 2 Answer (CIA.IFRS17-LRC) | Answer]]''
-|}
-:{| class='wikitable'
+[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-1&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 3]'''</span>
-|-
-|| '''Problem 3''': Given the following information about a group of contracts, asses whether the group is onerous and take appropriate action (if any)
-:* company is growing by implementing aggressive underwriting and pricing
-:* no unfavourable trends are projected
-:* FCF = 100
-:* LRC ex. LC = 110
-:* LC = 0
-: ''[[Decision Tree Example 3 Answer (CIA.IFRS17-LRC) | Answer]]''
-|}
-Based on the above example problems Ian-the-Intern created, Alice rated him as '''Outstanding Performer''' on his summer performance evaluation. <span style="font-size: 24px;">&#128515;</span>
+===Section 5.4: Onerous Contracts===
-[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-LRC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=6<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 6]'''</span>
+For reinsurance contracts <u>held</u>, the concept of onerous groups does not exist. This section relates to insurance and reinsurance contracts <u>issued</u>. Topics covered include:
-====Section 5.4: Premium====
+* accounting for onerous groups
+* recognition of LC on onerous groups
+* assessment of onerous contracts under PAA
-This section elaborates on the 6th term in the LRC formula given in ''[[CIA.IFRS17-LRC#Section_5.2%3A_Subsequent_Measurement | Section 5.2]]''. The 6th term in the formula is "insurance revenue", which is similar to earned premium in current accounting methods. This section discusses whether insurance revenue should be recognized ''(or earned)'' uniformly based on the passage of time, or in some other way if the release of risk differs significantly from the passage of time. This would be the case for seasonal coverage such as boats in the summer and snowmobiles in the winter.
+Recall that LC (Loss Component) is the expected net outflow of an onerous group.
-There don't appear to be any testable facts here.
-====Section 5.5: Acquisition Costs====
-You can safely skip this section. The only testable fact appears in the ''[[CIA.IFRS17-LRC#Summary_Comparison_of_the_GMA_and_PAA_LRC | Summary Comparison of the GMA and PAA LRC]]'' a little further down in this wiki article. All it says is:
-* '''under GMA''': <u>cannot</u> recognize acquisition costs immediately
-* '''under PAA''': <u>can</u> recognize acquisition costs immediately <u>if</u> the coverage period of all contracts in the group &le; 1 year
-====Section 5.6: Financing and Investment Components====
-<span style="color: brown;">'''Financing Component'''</span>
-This is a short section that won't take you long. The main fact is this:
 :{| class='wikitable'
 |-
-|| '''PAA simplification''': In PAA, you <u>do not</u> have to reflect the time value of money on the LRC <u>unless</u> there is a significant financing component.
+|| '''Question''': briefly describe the <u>accounting treatment</u> of onerous groups in financial statements
 |}
-If you look further down in this wiki article at ''[[CIA.IFRS17-LRC#LRC_initial_measurement | Initial Measurement of LRC]]'', you'll see the GMA formula for LRC has a PV or Present Value component, but the PAA formula for LRC does not. The text didn't highlight this but I think that, and the above statement are connected, and that's how I remember this.
+:* in the statement of financial <u>position</u>:
+:: &rarr; LC is booked as part of LRC
-Anyway, you might be wondering what's meant by "significant financing component". The text gives a nice simple explanation:
+:* in the statement of financial <u>performance</u>:
+:: &rarr;  LC is recognized as insurance service expense
-* ''<u>If</u> the period between premiums being due and the provision of service is &le; 1 year, <u>then</u> the group is deemed not to have a significant financing component.''
-If the period is > 1 year, it's still possible there's no significant financing component, but you'd have to provide evidence of such. This section has a small numerical example of calculating LRC when a financing component exists, but I think you can skip it. It's basically the same as the ''[[CIA.IFRS17-LRC#Section_5.2:_Subsequent_Measurement | example from Section 5.2]]'' except here the financing component is non-zero. The LRC formula is the same.
-<span style="color: brown;">'''Investment Component'''</span>
-An "investment component" refers to the amounts an insurance contract requires the entity to repay to a policyholder in all circumstances, regardless of whether an insured event occurs. But P&C contracts typically do not have investment components - that's more of a life insurance item - so there's nothing to learn here.
-====Summary Comparison of the GMA and PAA LRC====
-The source text has a table showing 8 differences between GMA and PAA for LRC. <span style="color: red;">'''You should memorize 4 of them. '''</span> ''(You can memorize all 8 if you want but 4 should be enough to answer any likely exam questions.)'' Click below to see the table:
-: [https://www.battleactsmain.ca/pdf/CIA.IFRS17-LRC_compare_GMA_PAA.pdf <span style="color: white; font-size: 12px; background-color: green; border: solid; border-width: 2px; border-radius: 10px; border-color: green; padding: 1px 3px 1px 3px; margin: 0px;">'''''Comparison of GMA to PAA for LRC (page 36 source text)'''''</span>]
-I found this table a little bit confusing because the discussion mixes onerous and non-onerous contracts. Also, the item labelled ''Loss Component'' is not a difference between GMA and PAA because in both cases, the table states: ''Yes, if onerous''. And if the contract is non-onerous, there is no loss component anyway. Anyway, Alice tried explaining it to Ian with concrete examples by looking at these 3 potential exam questions below.
-'''Side note''': Whenever Alice tries to make sense of something confusing, she makes up her own questions, then tries to answer them by carefully analyzing the source text. That's her way of doing '''active reading'''. ''(Passive reading would be to keep reading it over and over, hoping it will eventually start to make sense. <u>Spoiler alert</u> That doesn't work nearly as well!)''
-{| class='wikitable' style='background-color: navajowhite;'
-|-
-|| <span style="color: green;">'''Alice's awesome time-saving study tip!'''</span> &nbsp; Make sure you can answer '''Question A''' below. <br> ''(Questions B & C are much less likely to be asked so skip them if you're pressed for time.)''
-|}
 :{| class='wikitable'
 |-
-|| '''Question A (easy):''' identify any 2 <u>differences</u> between GMA and PAA for LRC
+|| '''Question''': when are onerous groups <u>recognized</u> in financial statements
-|}
-:: &rarr; You can select any 2 of the 8 differences described in the table. For example:
-::: '''Application''':
-:::* GMA: applies to any P&C contract
-:::* PAA: applies to P&C contracts with a coverage period of 1 year or less ''(PAA must be specifically tested if coverage period is more than 1 year)''
-::: '''Cash Flow Projections''':
-:::* GMA: for non-onerous contracts &rarr; '''yes''' ''(cash flow projections are required to estimate LRC)''
-:::* PAA: for non-onerous contracts &rarr; '''no''' ''(cash flow projections are <u>not</u> required to estimate LRC)''
-:{| class='wikitable'
-|-
-|| '''Question B (hard):''' describe the <u>differences</u> between GMA and PAA for LRC for '''onerous contracts'''
-|}
-:: &rarr; This is tricky but if you study the table carefully, you'll see there are only 2 differences for onerous contracts.
-::: '''Option to Immediately Recognize Acquisition Costs''': ''(this difference applies to both onerous & non-onerous contracts)''
-:::* GMA: no
-:::* PAA: yes, if the coverage period of all contracts in the group is one year or less
-::: '''Onerous Contract Test at Initial Recognition''':
-:::* GMA: quantitative test is always required
-:::* PAA: quantitative test is indicated by a qualitative assessment of facts & circumstances
-:: &rarr; Another way of looking at this is that PAA is advantageous primarily for non-onerous contracts.
-:{| class='wikitable'
-|-
-|| '''Question C (hard):''' describe any 2 <u>differences</u> between GMA and PAA for LRC that pertain <u>only</u> to '''non-onerous contracts'''
-|}
-:: &rarr; If I've interpreted the table correctly, there are 4 differences that pertain only to non-onerous contracts.
-<span id="LRC_initial_measurement">
-::: '''Initial Measurement''':
-:::* GMA: &nbsp; LRC &nbsp; = &nbsp; PV(Cash Flows) + RA + CSM &nbsp; <span style="color: purple;">&larr; '''''same formula for <u>both</u> onerous contracts and non-onerous contracts'''''</span>
-:::* PAA: &nbsp; LRC &nbsp; = &nbsp; premiums &ndash; (initial acquisition costs UNLESS recognized as expenses when incurred) &nbsp; <span style="color: brown;">&larr; '''''non-onerous contracts'''''</span>
-::: '''Cash Flow Projections''':
-:::* GMA: cash flow projections are required for non-onerous contracts
-:::* PAA: cash flow projections are <u>not</u> required for non-onerous contracts
-::: '''Risk Adjustment''':
-:::* GMA: RA is required for non-onerous contracts
-:::* PAA: RA is <u>not</u> required for non-onerous contracts
-::: '''CSM''':
-:::* GMA: CSM <u>is</u> required for non-onerous contracts
-:::* PAA: CSM <u>is not</u> required for non-onerous contracts
-:: <span style="color: red;">'''&rarr; The 4 remaining items in the table <u>would not be acceptable answers</u> because the are not specific only to non-onerous contracts:'''</span>
-:::* '''Application''' applies to <u>BOTH</u> onerous and non-onerous contracts
-:::* '''Option to Immediately Recognize Acquisition Costs''' applies to <u>BOTH</u> onerous and non-onerous contracts
-:::* '''Revenue''' applies to <u>BOTH</u> onerous and non-onerous contracts
-:::* '''Onerous Contract Test at Initial Recognition''' applies <u>only</u> to onerous contracts
-:: &rarr; And recall that the following item is not actually a difference between GMA and PAA even though it's listed in table:
-:::* '''Loss Component''' applies <u>only</u> to onerous contracts ''(because non-onerous contracts don't have a loss component)''
-[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-LRC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=7<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 7]'''</span>
-===Section 6: Considerations for Reinsurance Contracts Issued and Held===
-This section is quite long at 7 pages, and crazy detailed. There are some numerical examples but they don't look like reasonable exam questions. Recall that the IFRS 17 readings cover over 200 pages of material and should account for 7-10% of the points on the exam according to the syllabus. The exam typically has about 70 points so 7-10% translates to 5.0 - 7.0 points in total. That means up to 3 questions of 2.0 point each. If you were to rank the topics within the IFRS 17 readings, this section would be way down the list and I think you can safely ignore almost all of it.
-The only thing I might consider looking at is the table I've included below. It specifies when underlying insurance contracts and reinsurance contracts are recognized in financial statements. Note that underlying contracts are just "normal" insurance contracts an insurer carries on their books. I think it's common sense and if you thought about it, you could probably guess which cells should be "yes" and which cells should be "no" without having to memorize it. In fact, Alice remembers this table as follows:
-:{| class='wikitable' style='background-color: navajowhite;'
-|-
-|| <span style="color: green;">'''Alice's 1-sentence summary:'''</span> If an underlying insurance contract is <span style="color: red;">'''onerous'''</span>, it must be recognized <u>even before coverage begins</u>.
 |}
-This just reflects a conservative accounting philosophy. If a contract looks like it might lose money, you want to get it on the books right away to avoid a nasty surprise later. The <span style="background-color: yellow;">'''highlighted cells'''</span> indicate rows where the answer is different for the underlying contract versus the reinsurance contract.
+:* onerous groups are recognized when <u>bound</u> even if this is prior to the effective date of the contract
+:: ''("recognition" means that the LC liability is reflected in financial statements)''
-: [[File: CIA.IFRS17-LRC_(100)_contract_recognition.png]]
+The rest of this section has detailed information relating to groups whose liabilities are measured using PAA (Premium Allocation Approach) as well as the Loss Recovery Component. Recall from ''[[CIA.IFRS17#Valuation_Methods_under_IFRS_17 | Valuation Methods under IFRS 17]]'' that there are 2 approaches: GMA and PAA. Recall also that PAA is a simplified version of GMA that can be used if certain conditions are met. The last factoid from this section lists considerations in reclassifying a group of contracts from non-onerous to onerous under PAA:
-Here's what you should notice from the table. I just put it in my own words because it makes more sense to me that way. First of all, there are 4 variables:
+===Section 6: Accounting Treatment of Residual Market Mechanisms===
-* underlying contract is issued
+Recall from ''[[Dutil.FA#Intro | Dutil.FA]]'' that Facility Association administers the following residual market mechanisms:
-* underlying contract is in effect
-* reinsurance contract is signed (entered into)
-* reinsurance contract is in effect
-The table tells you whether the underlying contract and the reinsurance contract must be recognized in the primary insurer's financial statements. Here's my interpretation of the table:
+: '''FARM''' (Facility Association Residual Market)
+: '''RSPs''' (Risk-Sharing Pools)
+: '''UAF''' (Uninsured Automobile Fund)
-: '''Rows 1 and 2''': If the underlying contract is <span style="color: green;">'''non-onerous'''</span> and has been issued, it <u>does not</u> have to be recognized in financial statements <u>until</u> the coverage period begins. ''(In other words, non-onerous contracts don't need to be recognized in advance.)''
+FA is a heavily tested topic and Alice thinks this next question would make a pretty good exam question.
-: '''Rows 3 and 4''': If the underlying contract is <span style="color: red;">'''onerous'''</span> and has been issued, then both the underlying contract and the reinsurance contract <u>must</u> be recognized, even before coverage begins. ''(If no reinsurance contract has been entered into, then obviously it can't be recognized. That's the "no" answer in row 4.)''
-: '''Rows 5 and 6''': If the underlying contract is in force then it must be recognized. If a reinsurance contract has been entered into, then it must be recognized also. So policies in force must be recognized in financial statements regardless of whether the contract is <span style="color: red;">'''onerous'''</span> or <span style="color: green;">'''non-onerous'''</span>.
-===Section 7: Illustrative Example - Loss Component Calculation===
-This looks like it should be an important section because it supposedly contains an illustrative example. Unless I missed something however, the text within this section refers to an appendix that is not provided. ''(There is an appendix called "Appendix 1" but that seems to be about something different.)'' The only example provided in the main text is the calculation of AAD or Average Accident Date but that uses integration ''(calculus)'' so it shouldn't be asked given the exam is now in CBT format.
-The only thing that could reasonably be asked from this section is a very general description of how the LC (Loss Component) is calculated. It's quite similar to the calculation of premium liabilities under the current CIA methodology.
 :{| class='wikitable'
 |-
-|| '''Question''': briefly describe the steps in calculating the LC under PAA (Premium Allocation Approach) within IFRS 17
+|| '''Question''': briefly describe the <u>accounting treatment</u> for each of FA's residual market mechanisms under IFRS 17
 |}
-:: <span style="color: green;">'''Add FCF'''</span> (Calculated using these 4 steps)
+:: '''UAF'''': UAF functions more like a levy which means that IFRS17 would not apply
-::: '''(1)''' Determine the UPR (Unearned Premium Reserve).
+:: '''FARM''': member companies account for their share of FARM and UAF insurance contracts as <u>direct</u> business
-::: '''(2)''' Estimate future claims and loss adjustment expenses as follows:
+:: '''RSPs''': member companies use <u>reinsurance accounting</u> where the "reinsurer" is the collective FA membership. Ceded contracts are accounted for as reinsurance held while assumed contracts are accounted for as reinsurance issued
-::::* <u>apply</u> a selected ELR and an unallocated loss adjustment expense (ULAE) <u>factor</u> to the UPR by contract group
-::::: ''(this is the largest component of the FCFs)''
-::: '''(3)''' Discount the result of step 2 to the evaluation date.
-::: '''(4)'''  Apply the RA (Risk Adjustment), acquisition costs, other attributable expenses to the result of step 3
-:: <span style="color: red;">'''Subtract (LRC ex. LC)'''</span>
-That should be all you have to know from section 7. <span style="color: green;">''(shout-out to dogechow!)''</span>
-<span id="LRC_Excel_ex01"></span>
-{| class='wikitable' style='background-color: navajowhite;'
-|-
-|| <span style="color: green;">'''Update (Oct 01, 2022):'''</span> A very easy practice problem based on the Excel appendix to this reading. More examples will be added.
-* '''Update (Oct 03, 2022):''' As were going through the Excel exhibit, we found errors that made it pointless to continue. The first error is that the FCF formula (Fulfillment Cash Flows) given in the first worksheet of the Excel workbook did not match the FCF formula used in the worksheet where the example calculation was done. I wrote to the exam committee on Oct 02, 2022 and am waiting for their response. The formula for FCF is obviously very important so if that part of the calculation is not correct, there is no point in creating any more practice problems. '''Note''': The simple example below should still be valid however because the value of FCF is not calculated - it is part of the given information.
-|}
-{| class='wikitable'
-|-
-|| Here's the problem: ''(This version of the problem is simpler than the steps for calculating LC under PAA listed above.)''
-|}
-: [[File: CIA.IFRS17-LRC_(150)_Excel_ex010_easy.png]]
-{| class='wikitable'
-|-
-|| Here's the solution:
-|}
-: [[File: CIA.IFRS17-LRC_(151)_Excel_ex010_easy_answer.png]]
-{| class='wikitable'
-|-
-|| End of example: Here are some practice problems.
-|}
-: [https://www.battleactsmain.ca/Excel/CIA.IFRS17-LRC_(100)_practice_LRC_Excel_01_(EASY).xlsx <span style="color: white; font-size: 12px; background-color: indigo; border: solid; border-width: 2px; border-radius: 10px; border-color: indigo; padding: 1px 3px 1px 3px; margin: 0px;">'''Excel Practice: CIA.IFRS17-LRC - FCF and LRC'''</span>]
-===Section 8: MCT Considerations===
-The source text states the following:
-* ''The Office of the Superintendent of Financial Institutions Canada, l’Autorité des marchés financiers, and other provincial regulatory authorities have indicated their intention to adapt the insurance capital guidelines (Minimum Capital Test or MCT Guidelines) applicable to P&C entities effective with the implementation of IFRS 17.''
-This section quite short and discusses in general terms how to select the ELR ''(Expected Loss Ratio)'' for MCT. I couldn't see anything that would make a good exam question and I think the topic of how MCT will need to be adjusted for IFRS 17 is more appropriately discussed in a dedicated MCT reading like the one currently on the syllabus, but updated accordingly.
-[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-LRC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=8<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 8]'''</span>
+[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-1&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 4]'''</span>
-[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-LRC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span>
+[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=IFRS17-1&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span>
 ==POP QUIZ ANSWERS==