IFRS 17: Implications for the actuarial analysis of liability for incurred claims

This article originally appeared in the CIA (e)Bulletin.

The CIA’s IFRS 17 blog (log in required) serves as a repository for everything about IFRS 17, including documents, links to important websites, and updates from the committees working hard to help members prepare for this significant change.

This article reprints a January 2019 blog post that answered two questions on actuarial analysis of liability for incurred claims (LIC).

List of acronyms

LIC = Liability for incurred claims
LRC = Liability for remaining coverage

Please note that the answers provided do not represent official CIA or IAA guidance but rather will be used to generate meaningful discussion around IFRS 17.

Q1: Is actuarial analysis by portfolios or groups of contracts required?

A1: Under IFRS 17 (paragraphs 14 through 23), an entity shall identify portfolios of contracts (defined by IFRS 17 as insurance contracts subject to similar risks and managed together), and shall divide portfolios into groups of contracts (which are described in IFRS 17 as sets of insurance contracts resulting from the division of a portfolio of insurance contracts based on whether they are onerous or have a significant possibility of becoming onerous at initial recognition, and based on issue date).

Nevertheless, an entity may estimate the fulfilment cash flows at a higher (or lower) level of aggregation than the group or portfolio level (e.g., consistent with current valuation approaches), subject to the ability to allocate (or aggregate) to groups and/or portfolios, as appropriate for financial statement presentation under IFRS 17.

In making decisions about the aggregation/segmentation of data for purposes of estimating the LIC, the actuary would be guided by actuarial principles and general standards of practice, including considerations such as homogeneity and credibility set out in subsection 1620 of CIA standards of practice pertaining to assumptions.

Q2: Is actuarial analysis by policy period required?

A2: This question arises from the requirement, under some circumstances, to calculate the liability for incurred claims (LIC) for individual groups (or to allocate to groups the LIC derived at a portfolio level). Groups represent cohorts of policies issued within a period of not more than a year, and reflect distinctions between onerous contracts and others, as detailed in IFRS 17 (paragraph 16).

IFRS 17 (paragraph 78) requires an entity to reflect all the rights and obligations arising from a group of insurance contracts (i.e., Liability for remaining coverage (LRC) and LIC, combined) as a single asset or liability. In general, both the LRC and LIC would be in a liability position for most P&C groups (and both would be in an asset position for groups of reinsurance held), and so no additional analysis is required to determine the liability or asset position of the LRC and LIC on a combined basis.

If the liability or asset position is not obvious, it may be necessary to estimate the LRC and LIC for individual groups.

If the actuary chooses to estimate the LIC using data organized by accident period, it is acceptable under IFRS 17 (paragraph 24) to allocate the resulting estimates (in aggregate for the portfolio, or by accident period) to groups for the purposes of combining the LIC for a given group with the LRC for the same group.

Note that the International Accounting Standards Board (IASB) has recommended changing the asset/liability identification from a group basis to a portfolio basis, in which case generally no allocation would be required.

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