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IFRS 17 – The Second Amendment


This year, there were 2 all Premier League ties, which is reasonably likely to occur according to our model. If we see 0 next year though, the conspiracy surrounding heated balls is sure to rear its head again …

The Excel model used in these projections can be downloaded here. Feel free to try out your own scenarios and let us know of any interesting observations or feedback on the model.  On the published version we have protected the VBA code, but if you would like a copy of the unprotected version do get in touch with us via our contact page and we’d be happy to send you a copy.

Adam Smith

April 2019

Adam Smith

IFRS 17 – Dis-count Dracula

Well then, what options does IFRS 17 give me when it comes to discounting?

Flat Rate or Curve?

Either – but preferably a curve. IFRS 17 does not explicitly specify whether an entity must use a single discount rate or a discount yield curve. The standard’s text itself uses the terms “rate” and “curve” interchangeably, so technically, either is acceptable. However, in practice, a yield curve will almost always be used – especially in the business of long-term insurance – as this will be much more accurate and representative from a finance point of view. Nevertheless, in the rare case where constructing a yield curve is impossible, the option of using a single discount rate to value a contract is available, and not contrary to the standard.

Accounting Procedures

The discount rates / curves assumed will change from year to year as they are updated, creating differences in valuations over time. Under IFRS 17, the income / expenses resulting from changes in the discounting assumptions can be accounted for in either Profit and Loss, or Other Comprehensive Income. Both are acceptable under the standard so long as consistency is maintained.

We have held a specific group of assets to support a group of insurance liabilities. Can’t we just use the returns of these backing-assets as the discount rate for this group?

Absolutely not! (I’m sorry, but unfortunately it is true☹) Whilst IFRS 4 was more than happy to let you use the yield of the insurance contract’s backing-assets as the discount rate, IFRS 17 is not going to let you get off so easily.

Returns on financial assets are always greater than the “risk-free rate of return” (usually denoted by the return on Government Bonds). This excess return (or risk premium) is due to numerous reasons, the most prominent two being the following:

The view of IFRS 17 is that insurance contracts are illiquid for the policyholder – the contracts cannot be resold onto an open market, and usually cannot be surrendered without paying a penalty. However, they involve little-to-no credit risk. Therefore, insurance contracts should be discounted at the Risk-Free Rate plus an Illiquidity premium. Notably, the discount rate used should be exclusive of the Credit-Risk Premium which asset yields will typically have. That said, as illustrated in the chart below, the following relationship holds:

Risk Free Rate < IFRS 17 Discount Rate < Yield of Backing-Assets

Note: The risk-free yields and asset returns in the above chart (and others below) are hypothetical – these yields are not taken from any data source.

So essentially, if we are to discount using the yield of the insurance contract’s backing-assets, we would be understating the present value of the contract’s liability by discounting too harshly – and so IFRS 17 forbids this practice.

And what approaches does IFRS 17 put forward for deriving these rates?

Well the idea is that we must find some rate in between the risk-free yield and the yield of backing-assets. IFRS 17 gives us two approaches – either start with the risk-free rate and add a derived illiquidity premium (called the bottom-up approach), or start with the yield of backing-assets and “strip-down” the credit risk premium (called the top-down approach).

So in the botton-up approach shown here, the difference between the two yield curves represents the illiquidity premium:

and in the top-down approach, the difference between the curves represents the credit risk premium:


Importantly, the entity does not have to show that the rate or curve used can be derived through both approaches – only one approach needs to be used. IFRS 17 acknowledges that these approaches may result in different final rates / curves and does not require the entity to show they reconcile. The only accounting requirement is for the approach used to be stated in the accounting notes[2].

Clearly, if the top-down approach is used, a reference portfolio – that is, the portfolio of assets you start from – needs to be chosen. IFRS 17 has no specific requirements for reference portfolios, only a note that the more similar a reference portfolio is (in terms of cashflow amounts, timing, liquidity, risk etc.) to the group of insurance contracts we are valuing, the fewer adjustments need to be made when deriving the discount rate / curve. In most cases, there should be a sensible reference portfolio available to choose.

That’s all well and good but stripping out the credit risk premium from an asset’s return, or estimating the illiquidity premium itself, doesn’t sound like a trivial task. How should I go about this?

A good point! Unfortunately, IFRS 17 itself provides you with no help here. The standard just specifies that the discount rate must be the risk-free rate plus a premium for illiquidity, and then leaves you alone to figure out how to actually estimate this. Fortunately, there are some non-IFRS sources that have recommendations and ideas, but we should be clear that these are in no way part of the standard. There is no explicit requirement to use the techniques below to derive discount rates in order to sign off your statements as IFRS-compliant.

As examples, the following section consists of two recommended methods from the International Actuarial Association (IAA).

Estimating an illiquidity premium for the bottom-up approach

The IAA recommends using covered bonds. These are a kind of derivative product whereby the issuer promises a set of cashflows to the holder (as per a normal bond), except the cashflows are covered by the issuer being explicitly obliged to hold assets (such as mortgage loans) which provide cash for the issuer to pay the holder. That is, the bond payments are “covered” by other cashflows from assets the issuer holds, and hence the bonds are very safe with respect to credit risk. The market for covered bonds is not that significant (compared with corporate or government bonds) making covered bonds less liquid. The difference between a 10-year covered bond yield and a 10-year (risk-free) Treasury bond yield therefore represents an estimate of an illiquidity premium at the 10-year term (but the yield curve would still be below that of, say, a corporate bond, which includes an element of credit risk).

Estimating a credit-risk premium for the top-down approach

The IAA recommends using credit default swaps (CDSs) – these are essentially insurance products against credit default. A holder of a bond takes out a CDS with a counterparty, the bond-holder pays the CDS issuer premiums, and the CDS issuer pays out the value of the loan credit in the event of default – thereby taking on the credit risk. A portfolio consisting of a group of assets plus a corresponding group of CDSs (to remove all credit risk) should thereby have a yield whose excess return represents an illiquidity premium only. CDSs can be used in this way to strip-down credit risk from a reference portfolio.

Is there anything else I should consider for discounting?

Discounting Real vs Nominal Cashflows

As it has always been, cashflows which are linked to inflation (ie real cashflows) must be discounted at real discount rates – the risk-free rate in this context being the rates on index-linked government bonds, with the the relevant illiquidity premiums then added. Cashflows independent of inflation (nominal cashflows) are discounted at nominal rates of interest as usual. Alternatively, inflation-linked cashflows can be projected with inclusions for inflationary increase, and then discounted at nominal rates.

Negative Discount Rates

It follows that in the era of very low interest rates, there is a possibility of having to resort to negative discount rates when discounting real cashflows (a very low nominal interest rate can lead to a negative real interest rate after adjusting for inflation). IFRS 17 doesn’t specify that discount rates have a floor of zero and using negative discount rates is not non-compliant or out of the question! In practice, negative discount rates are still extremely exceptional. In our opinion, firms should not use them unless they believe it is absolutely necessary, and if doing so should provide strong justifications for doing so in the notes.

Discounting Over Very Long Terms

Active and observable markets for bonds usually do not contain products with terms greater than 30 years (for example, the 30-year UK Treasury bond is the longest-term gilt which is regularly traded). Many Life Insurance products have term lengths out-stripping this. IFRS 17’s only requirement is that “if data is available for an observable market, then this data must be used”. Any current methods of extrapolation which are already in use (eg constant spot rates, constant forward rates, flat curve after 30 years) are also permitted to be used under IFRS 17.

Time for the recap…

Stay tuned for APR’s next article in the IFRS 17 series. See you then!

Ajay Kotecha

February 2019

Ajay Kotecha

[1] Whilst not all government bonds are fully liquid and risk free, they are treated as such in the majority of cases and generally used as the benchmark for all other asset classes.

[2] See IFRS 17 paragraph B84.

Making Use of a 1% Charitable Causes Scheme – Teach First Futures


James Nicholl

January 2019

IFRS 17 – The Risk Adjustment Bureau

I don’t have time for long-winded introductions, I think I might be going into shock.

Quite. Here are the basics:

Talking about IFRS17 always calms me down. The RA sounds a little like the Solvency II Risk Margin?

There are similarities, as we shall see. However, don’t forget, the IFRS are put in place to ensure proper reporting, not solvency, so the big picture purpose of the RA and the SII Risk Margin are very much distinct.

Having said that, interestingly it is actually acceptable to simply set the RA equal to the Solvency II Risk Margin. However, the design of both the Risk Margin and the Matching Adjustment have been criticised for being too generic and not representing the economics of any one business. Since the risks included in the RA, as well as the confidence intervals used, are up to the insurer, the RA can reflect an individual business’s circumstances. It may therefore be seen as a welcome reporting figure by businesses, if it is truly representative of the business.

Another distinction between the RA and the RM is policy grouping. Under IFRS, the RA is applied across groups of policies with similar characteristics. Grouping of policies is an important IFRS concept so here’s a summary:

At this point, each policy belongs to a group, and the RA is applied to each group separately. Note that these groups are different from the policy groups used in SII, which is a big part of why the analysis of the SII SCR, Risk Margin etc, is not directly applicable to IFRS17, and requires some manipulation.

Despite the above, the SII Risk Margin is at least a more suitable proxy for the RA than the SCR is. This is because the RA should be higher for contracts with longer durations.

Got it. Is there anything else I should know about the RA then?

There is always more to learn. Now that you have a broad idea of the purpose of the RA, I shall take you through the characteristics it should show.

Imagine that contract X is an insurance contract. The risks and other characteristics for contract X have been assessed, and used to calculate its RA. It is desirable that making the changes listed below to contract X should increase the RA.

  1. Exposing Contract X to a risk with a very low frequency and high severity.
  2. Increasing the duration of Contract X.
  3. Exposing Contract X to risks with a wider probability distribution than its current risks.
  4. Reducing the information that we have about the assumptions important to contract X.

I should repeat that it’s also desirable that, as time passes, the RA should be reduced. This is because there is less scope for future uncertainty.

You’ve talked a lot about the RA being calculated – how is this done in practice?

You’re asking all the right questions today – give yourself a gold star . There are three main calculation methodologies companies could use to calculate the level of RA they should be holding, and the idea is that the company should use their judgment when deciding on which to use. As we’ll see, the method used should depend on the portfolio and the outcome distributions themselves, suggesting there is no ‘preferred’ method. However, it may be that the industry comes to prefer a certain method with time.

We’ll go through the options here for the technically minded of you or you’re welcome to skip to the next section – we won’t tell anyone.

Value at risk (VaR)

This calculates the RA as the:

Minimum increase in the expected liability that is not exceeded with:

The VaR RA will then be something like “the value of the increase in liabilities that you won’t exceed in x% of situations over a period of y years”.  VaR is similar to finding the lower x% cut-off point of a normal distribution.  The confidence level itself is not prescribed and is left to the judgement of the insurer. However, since the confidence level must be disclosed, it seems likely that the market will converge to a common standard.

If you feel a sense of déjà vu stealing over you, it is because this is basically the Solvency II SCR method. Of course, the SCR method has a prescribed confidence interval of 99.5% over a one-year horizon, but it is not inconceivable that firms may wish to adapt their SCR calculations to use for the RA. They would of course need to adjust the confidence interval used, and possibly adapt their model to consider more than the one time period that the SCR considers. As always, care must be taken when using models for anything other than their originally intended use.

Conditional Tail Expectations (CTE) – also referred to as ‘Tail Value at Risk’

VaR considers all the events in your confidence interval, but nothing more. However, you’ll remember from our list of desirable characteristics above, that events which are very unlikely, but very serious, should increase the RA held. VaR won’t meet this criterion – but fear not, CTE to the rescue!

CTE increases the RA by the:

∑ (Increase in liabilities given an extreme event has occurred × Probability of extreme event)

An ‘extreme event’ is one which lies outside your confidence interval, ie the probability of seeing an extreme event for a 99.5% confidence interval is 0.5%. Doing the calculation above gives the total expected increase in the liabilities, given than an extreme event has happened. Note that we need to take into account all foreseeable extreme events in order to properly account for the extremities.

This method is often chosen where outcome distributions are skewed, have fat tails or are non-normal, since it will account for the potentially large losses which occur outside your confidence interval.

For a given confidence level, the CTE will give a higher RA than the VaR, since it takes some account of the liabilities above the 99.5% mark, rather than just taking the 99.5% value. So, this is a more prudent method, provided all else is equal.


Diagram illustrating the Conditional Tail Expectations, or Tail Value at Risk. It is the expected loss given that we are in a given percentile.  (OK, so it’s not as fancy as our usual graphs, but hopefully you get the picture…)

Cost of Capital – CoC

This method is distinct from the other two we have examined, but similar to the one used to calculate the Risk Margin in Solvency II. The cash flow losses at a chosen confidence level are calculated and adjusted for the time value of money. This capital amount is then multiplied by a cost of capital rate (to account for the lost opportunity incurred in having to hold extra capital). This may be chosen by insurers who wish to use their work on the Risk Margin to calculate the Risk Adjustment, although as we have discussed above it may not be appropriate.

You mentioned that confidence intervals are not prescribed?

Well remembered. The insurer does have a choice here. It might be that many choose to use a 99.5% interval in order to lift some of their calculations directly from Solvency 2 analysis. Of course, it’s not nearly that simplistic, and there are a few things to consider when setting confidence intervals and deciding how many of your SII calculations to use.

I think I’m getting it. You said you’d tell me about the allocation between CSM and RA.

The release of the CSM and RA are ultimately what generates the profits. If one is increased, the other decreases. As you pointed out earlier, this means it may not matter how much is assigned to each of the CSM and RA, if they are expected to be released at broadly the same rate.

However, profits are released in line with insurance coverage (from the CSM) rather than risk exposure (as it would be from the RA). One might expect that as insurance coverage decreases, risk exposure will decrease at the same rate, but this is not always the case. Hence, if the pattern of release from both building blocks is expected to be different, the insurer may prefer to have more of a CSM and less of an RA, or vice-versa.

Ultimately, the amounts in the RA, CSM etc will affect the company accounts. The company may therefore wish to choose a method which presents a particular picture in the accounts.

That all makes sense, but now I’m flagging. Any chance I could go home and let my family know where I’ve been for the past month?

Sure thing, champ. A quick roundup then:

Deven Rickaby

December 2018

Another Fine Set of Exam Results

Once upon a time this value would have immediately been realised as profit but in the new world it’s held back to be released over the contract’s lifetime. This aims to smooth profits and act as a buffer for changing assumptions, and it should mean that profit emerges in line with the actual service that the insurance company provides.

Note that if the contract is onerous at inception (ie not expected to make a profit), the CSM is set to zero. We can’t have a negative CSM, which would effectively be an asset that defers loss and spreads it over time. It’s in line with accounting principles to recognise losses up front and this is the reason for the asymmetric treatment of profits and losses. The aim of the CSM is to defer profits only in this way, but to recognise losses up front.

Assuming that the product in question is not onerous (ie the insurer expects to make a profit on it), then the idea is that some CSM is released each year as profit so that it runs off to zero over the life of the contract. Provided reality matches the expectations at outset, the total profit will not change but is spread over time.

Let’s consider the example illustrated in the chart below, which considers a 10-year product with £1,000 of expected profit at outset. Under IFRS 4 you would see the £1,000 profit in year 1 with no further profit during the term[1]. Under IFRS 17, £100 of the profit might be released each year from the CSM, which itself runs off to zero as the full £1,000 is released after 10 years.

That’s all well and good, but I know full well that reality is rarely the same as expectations.

This is where we start to see how the CSM is potentially able to significantly improve the smoothness of profits. This happens because it can be adjusted during the contract term as assumptions are updated.

Suppose that three years into our 10-year product example, the insurance company decides that its mortality assumption is too light and wishes to update it for the remaining term. Suppose that the change in assumption means the product is expected to pay out £500 more than was originally projected.

Under the IFRS 4 an insurance company would update their assumption (to increase mortality rates) which would increase the value of the expected future cashflows and lead to a loss of £500, which must be recognised at that point. However, under IFRS 17, the CSM allows them to take a different approach. The expected future cashflows will increase and at this point the CSM will be recalculated, absorbing the cashflow increase as long as it is large enough to do so. Provided the CSM remains greater than zero, no loss will be reported, but the profit released in future years will be reduced as the CSM has shrunk.

The graph illustrates the difference in profit for the two approaches – existing and IFRS 17 approach. It shows how much smoother the profit release is in the latter case, avoiding the significant loss in year 3.

In our example there, the product remained profitable, but an assumption update could lead to an increase in cashflows greater than the CSM. To see how this would affect our earlier example, let’s say that this time the increase in liabilities is £900 in year 3. In this case, there will be a loss of £100 reported (remember that the CSM cannot be negative); this is the £900 offset by the £800 CSM available in year 2 immediately before the update. The CSM then falls to zero. Even in this case, the profit emergence appears much smoother than the IFRS 4 alternative.

An important thing to note is that the CSM only gets updated when insurance assumptions change. Changes in financial assumptions, such as future investment returns, will not affect the CSM and will come through immediately in the statement of profit and loss.

Finally, bear in mind that past experience doesn’t feed directly into the calculation of CSM either. Returning to our example, suppose that in year three there were more deaths than expected, creating a loss for the insurance company as claims were higher than the reserves held for claims in that year. This loss cannot be offset by the CSM. It must be recognised in the P&L then and there. There may be some small second-order impact on the CSM (for example, as fewer policies remain in-force) but the CSM is not used to absorb that loss. However, if as a result of this experience the insurer chooses to update its future assumptions, then the CSM is affected, as described earlier.

In summary, the CSM is designed to spread profits out over the contract lifetime and, where possible, to absorb expected future losses due to insurance assumption updates for future periods.

OK, I think I’ve got it. That seems very much in keeping with the “timing” principle you kept going on about. Can I go home and put my feet up now?

Hold your horses. It’s not quite as simple as that.

The new standard specifies that for the purposes of calculating the CSM, contracts have to be split into groups with a different CSM set up for each group. The standard specifies some subcategories. As a minimum, contracts must be split into:

A. Onerous contracts, which are expected to be loss-making from inception
B. Contracts which are expected to be profitable and have no significant chance of becoming loss-making
C. All other contracts (ie those which are expected to be profitable but which may become onerous in future)

The idea of this is to separate out unprofitable contracts, so that losses can’t be offset by profits from other business. Remember, we cannot have a negative CSM so at inception we should see a loss for group A (with zero CSM) but no profit or loss for groups B and C (they will however each have a positive CSM). The profit has been deferred over time whereas the loss has been recognised up front. This could discourage companies from creating “loss-leader” products, now that the losses can’t be hidden in amongst more profitable products.

On top of this, they must also be grouped into cohorts according to contract inception date, where the dates in each group must be no more than one year apart, and into portfolios of similar risks.

This means the insurer likely has several groups for each year of in-force business that exists, and will have more added each year. The CSM calculation must be made separately for each of these.

We now know how to set the CSM up. What happens next, when we run it off?

What a good question, and unfortunately there’s no single right answer. In our earlier example we just had the CSM run off in a straight line, releasing the same amount of profit each year, but it won’t surprise you to know that in reality things will be a little more complex. The IFRS 17 standard is principles-based and states that the driver for run-off (called “coverage units”) should consider “the quantity of benefits provided under a contract and its expected coverage duration”.

Ultimately, then, it will be up to insurers to determine what approach they want to use to run down the CSM over time, provided they are using some sensible measure that takes account of the amount of benefit (or “contractual service”) they are providing over any time period. There are a number of plausible candidates that could fit this specification, for example:

Each of these would lead to a different release of CSM and therefore profit, so companies who choose different methods for calculating coverage units could have profits that look very different, even if their underlying contracts were identical. This is potentially a big inconsistency between accounts, though over time companies’ approaches may converge.

What happens to contracts that were written in the past?

The approach to calculating CSM that we have described might work fine for new contracts, but the situation is not so straightforward for historical contracts, some of which could be decades old.

An insurance company must take one of three approaches with each of its groups of historical contracts:

They must use the full retrospective approach where possible, which involves going back and calculating expected future cashflows, a risk adjustment and a CSM as if it were contract inception date and ignoring any additional information gained with hindsight. If that approach is impractical, they may choose between the other two options; the modified retrospective also calculates the various elements as at contract inception but with some simplifications, whereas the fair value approach calculates values as at today.

For either of the retrospective approaches, the company will calculate the CSM as at contract inception and then partially run it off to the present day. Remember that the company must do all their calculations as if they’d done them at the time, which means the CSM must be run off according to historical assumptions, even if they are now known to be inaccurate. Assumptions for running off the remainder of the CSM in future may be updated, as per our earlier example. The fair value approach, however, results in a CSM as at today, which is then run off from the present day only.

This is fascinating. Please tell me there’s more.

I’m glad you’re finding this all so gripping. We could discuss the CSM for days, but I think this is a good place to pause and take stock of what we’ve learned:

Join us again next month when we’ll be looking at the risk adjustment (if we don’t get distracted trying to come up with wittier titles for our articles).

Next month? I can’t possibly contain my excitement for that long!

It will be worth the wait – trust us.

Sammy Ford

October 2018

Sammy Ford

[1] In fact, the initial profit released under IFRS 4 would be calculated using prudent assumptions, so assuming reality matches up to best estimate expectations, some further profit would be released during the term as these prudent margins are unwound. We’re ignoring that here to focus on the CSM only.

IFRS 17 – The Building Blocks Approach


I see two new terms there that I’m not familiar with. I assume we are going to concentrate on those.

Eagled eyed, once again. Both the Risk Adjustment and the Contractual Service Margin are new concepts introduced by IFRS 17. Since these are both key concepts, we will devote separate articles to each to give them the full attention they deserve, although we will explain them briefly below. But in this article we are going to concentrate on the measurement of the future cashflows and time value of money.

Combined, these two elements give the present value of future cashflows (“PVFCFs”). Under IFRS 4 the equivalent was the statutory reserve and under Solvency II the equivalent is known as BEL (best estimate liabilities). In reality PVFCFs are much closer to SII BEL (both use best estimate assumptions after all) and do not bear much resemblance to the prudent statutory reserves from IFRS 4.[2]

Under IFRS 17 all future cashflows that relate to the contractual service should be included in the PVFCF. This contractual service element is a key point in IFRS 17 and deserves some attention, so we shall circle back to this.

However, under IFRS 17 this means the insurer must include any premiums and claims that either party will be contractually obliged to pay. If a policy is reviewable at a certain point and either party can break the contract at this point, then this is treated as the “contract boundary” and any cashflows beyond this should not be considered even if the insurer expects the contract to be renewed.

Any acquisition expenses or maintenance expenses that can be attributed directly to the policy and are part of providing the service on the contract must also be included. These expenses are termed ‘qualifying expenses’ No allowance for overheads or non-qualifying expenses should be made in the future cashflows unless it can be shown that these relate directly to a particular group of polices. This is a deviation from previous treatments when all acquisition expenses would be allocated back to policies.

The future cashflows (all potential obligations of either the insurer or policyholder) are then projected using best estimate assumptions of future experience, ie mortality, lapses etc: no more prudence margins under IFRS 17. This gives you a best estimate value for the future cash inflows and outflows. Of course, as actuaries we know of the time value of money so we discount these to get the present value. Once again, we are joining the 21st century and using a discount curve as opposed to the flat rate that was allowed under IFRS 4.

OK so we don’t have prudence any more – what happens if the insurer gets it wrong or is just unlucky and they have to pay out more than they thought in their best estimate PVFCF?

Good question. Under IFRS 4 this was allowed for by using prudence assumptions. This made the reserves higher than the insurer thought they would need and meant they could cover these costs without suffering losses.

Under IFRS 17 we have a Risk Adjustment which is an additional liability item above the PVFCFs that is designed to allow for uncertainty in both timing and magnitude of future claims. This will act as an extra liability to absorb unexpected claims. Of course, if the unexpected claims are a lot larger than allowed for, even this will not be enough and the insurer will suffer a loss – but hey, if this risk wasn’t there then there would be no need for insurance in the first place! We will cover the Risk Adjustment in more detail, including how an insurer calculates it, in a future article.

Alright. So the PVFCF (future cashflows and time value of money) and Risk Adjustment make up the liabilities under IFRS 17. Is there anything else?

There’s one other liability item we haven’t covered yet, the Contractual Service Margin (CSM). This is basically a view of the future profits on the insurance contract, and is only set up if a contract is projected to be profitable based on the best estimate cashflow projection at inception. It is set up at policy inception and is then released over the life of the contract – the whole idea being to release the profits more in line with the insurance provided by the policy.

The Contractual Service Margin is only created for policies that are expected to be profitable at inception, ie the PV of cash inflows is greater than the PV of cash outflows and the Risk Adjustment. You may see the combined PV future cashflows and Risk Adjustment being referred to as the “fulfilment cashflows”. The CSM is calculated as the amount needed to set the net PV cashflows at inception to zero. How this is then released over time will be covered in our next article.

This seems very actuarial. I thought IFRS 17 is an accounting standard and was focused on profit reporting.

Very true, IFRS 17 is indeed a profit reporting standard.  However, there always has been a strong connection between actuarial numbers and the profit reported for insurance firms. Indeed, now the main elements of an insurance company’s revenue on their insurance contracts are:

There are of course many items that make up the profit of an insurer but these are the biggest items. They are driven off actuarial numbers, and this will require a lot more integration of accounting and actuarial teams to ensure they are sufficiently explained and understood.

This is now all starting to get a bit involved, so let’s pause here and recap they key points so far before my colleague takes over next month to start explaining the CSM in more detail.

Bitesize chunks are always a good idea, so bring on the recap.

The BBA should be the go-to liability valuation model unless contracts are short-term (PAA) or contain significant discretion or linked asset pools (VFA).

Under the BBA the liabilities are made up of four key items:

All clear so far?

Yep – see you next month.


James Nicholl

September 2018

[1] OK so the insurer does not necessarily need to have sold the insurance contract. They may have acquired it from another insurance company. The key point here is that the insurer is liable for the claims on the polices.

[2] In terms of assumptions and overall size of the final reserves. In the UK, as we have been using cashflow modelling for a while the calculation methodology IFRS 4 was likely more similar to IFRS 17 than the final numbers would suggest.

[3] If the expected assumptions are correct then this should be zero but in practice this doesn’t happen. In this case this item will be negative (a loss) if the claims and expenses exceed the reserve held for them and positive if vice versa.

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In this article Asees explores the rise and decline of DB Pension Schemes, and considers the impact of this on secure retirement for future generations.

APR’s Favourite Excel Shortcuts

Love it or hate it, Microsoft Excel has been a central part of an actuary’s work for decades. However, its a tool that often isn’t used to its full potential; Heather Wallace’s list of our favourite Excel shortcuts should help rectify that!

Impacts of the new Personal Injury Guidelines in Ireland

In this article David O’Mahony examines how the new personal injury guidelines have been affecting the Irish General Insurance market and considers the likely future impacts of the changes.