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IFRS 4 – Insurance Contracts Disclosure req'ts
Info that - explains amounts in f.s. from insurance contracts
- helps users of f.s. to evaluate risks from insurance contracts
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Disclosure on amounts from insurance contracts
for A, L, income and expense - Accounting policies
- Recognised amounts
- Process to determine assumps with greatest effect on recognised amounts
- Effect of changes in assumps
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Disclosure for users to evaluate nature and extent risks from insurance contracts
- policies and processes for managing risks from contracts
- insurance risk:
- UW risk
- Concentration risk
- Reinsurance risk
- Regulatory risk
- financial risks:
- credit risk
- liquidity risk
- market risk
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CIA disclosure - Assumptions to calculate insurance A & L
- Model assumptions: should represent reality.
- Data assumptions: to relieve data insufficiency or unreliability
- Other assumptions on legal, eco, demographic, social environment that model / data assumptions depend on
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CIA disclosure - Examples of model / data/ other assumptions
- Model assumptions:
- Methods for developing claims
- Reporting patterns and initial ELR
- Approach to review premium liab
- Discounting assumptions
- Data assumptions:
- Source of data
- Use of industry data
- Other assumptions:
- Trend and inflation
- Rate level change
- Impact of tort reform.
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Considerations in determining concentration risk
- Diversification
- UW limits
- Reinsurance
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Liability adequacy test
- To ensure adequacy of liabilities net of DAC, use
- current estimate of future contractual CFs,
- claims handling / admin expenses, and
- investment income from assets backing such liabilities
- Deficiency charged to P/L by writing off DAC and setting a deficiency provision if needed
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Types of Insurance risks
- UW risk: exposure to loss from risk selection
- Concentration risk
- Reinsurance risk from:
- contract disputes
- coverage gaps in reinsurance agreement
- possibility of default
- Regulatory risk
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Disclosure requirement on insurance risk
- sensitivity:
- Quantitative (sensitivity analysis):
- how P/L and equity would've been affected if changes in relevant risk variable had occurred at end of reporting period
- method and assumptions used in preparing sensitivity analysis
- changes in methods and assumptions from previous period
- Qualitative:
- info about terms of contracts that have a material effect on amount, timing and uncertainty of future CFs
- concentration:
- how concentrations are determined
- shared characteristics (e.g., business segment, LOB, geo region, type of insured event, currency)
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Considerations in determining the concentration risk
- diversification
- UW limits
- reinsurance.
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Disclosure requirement on Sensitivity to insurance risk
- how concentrations are determined
- shared characteristics (e.g., LOB, region)
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Sensitivity tests on insurance risk - Examples
- increase tail LDFs
- incorporate occ of an adverse event
- change MfAD
- change reinsurance coverage
- increase unpaid claims
- increase premium written
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Types of financial risks
- Interest rate risk: affects fixed income portfolio (MV)
- Credit risk: counterparty unable to pay in full when due. exposure from:
- Investments in term deposits, bonds, preferred shares
- Reinsurers’ share of liabilities
- Amounts due from reinsurers on claims already paid / p.h./ intermediaries
- Liquidity risk: liquidity mgt is to ensure sufficient cash to meet obligations as they fall due
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Policies and procedures to manage reinsurance risk
- Appropriate treaty,
- Regular review of effectiveness of reinsurance agreements
- Monitor credit quality of counterparties
- Require deposits by reinsurers
- Deal mainly with registered reinsurers
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Policies and procedures to manage credit risk
- Diversify portfolio to minimize risk, small portion in each corporate issuer
- Limits on quality of investments
- Ratings from credit rating agencies
- Investment guidelines on min / max limits for each asset
- Reinsurance with counterparties with good credit rating
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