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SA3- Valuation bases (Financial statements (IFRS 17 (Measurement
One out…
SA3- Valuation bases
Financial statements
Accounts based on local GAAP.Comprise:
- Balance sheet
- P&L- divided into technical account (earned prem, incurred claims, operating expenses, investment income) and non-technical account
- Notes
Should give true and fair view
IFRS 17
Portfolios
Grouping of contracts into ones of similar risks and issues no more than a year apart.Then separate contracts into:
- onerous when measured at initial recognition (beginning of coverage or premium receipt)
- profitable at initial recognition and have no significant risk of becoming onerous
- could become onerous subsequently
Disclosure
Covers the additional information that insurers are required to disclose in the notes to financial statements. Info around amounts in financial statements, significant judgements and nature and extent of the risks within contracts
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Discounting
Advantages
- show best estimate of true profitability
- enable more meaningful comparison of short-tail and long-tail classes
- more realistic emergence of profits
- encourages more considered contingency reserves
- increases apparent solvency
Disadvantages
- need to estimate future interest rates
- need to estimate claim payment pattern
- no implicit margin so less prudent
- not all funds available to invest e.g. broker balances
- accelerates tax payments
- may be sign of weakness
Financial statements and discounting
Under UK GAAP can discount if final settlement not expected for four years
Deciding on rate
Prudence given assets held
Tax- don't need to deduct since claims tax deductible
Consistency over time is simpler
Business written- greater rate for longer tailed as more risky investments?
Remember not actually changing profit in long run but will allocate for assets to free reserves than technical reserves now
Management may take different actions
Statutory returns
Accounts submitted to regulators e.g. SFCR
Exact base depends on regulation e.g. under Solvency II can discount but must be on best estimate basis. Also no UPR or DAC
Management accounts
Purpose
- determine profitability of each class
- determine need for rating revisions
- project company's financial position
Normally will be best estimate. Liabilities may be discounted at appropriate rate of discount. Management may set up explicit contingency reservesMay use variety of bases to indicate sensitivity of results, investigate worst case scenarios