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Level of Aggregation Group of Contracts – basic unit of account for CSM accounting
Portfolio
Cohort
Profitability
Measurement model www.actuariesindia.org<br>
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Group of Contracts Portfolio
Cohort
Profitability
Measurement model www.actuariesindia.org<br>
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Portfolio Portfolio
component of entity at which the statement of financial position is expected to be provided
Interpretation of “similar Risks” and “managed together”
Contracts in different product lines would not be expected to have similar risks
LOBs are natural portfolios
Decision on “managed together” www.actuariesindia.org<br>
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Portfolio Portfolio
Guidance by IFRS 8 – Whose operating results are reviewed to make decisions about the resources to allocate and assess its performance
May need further factors to assess performances – Distribution channel or major partner, or a product line www.actuariesindia.org<br>
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Group of Contracts Portfolio
Cohort
Profitability
Measurement model www.actuariesindia.org<br>
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Cohort Annual vs Quarterly
Quarterly performance can be tracked (group biz)
Need to weigh this against too many groups and the associated complexity www.actuariesindia.org<br>
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Group of Contracts Portfolio
Cohort
Profitability
Measurement model www.actuariesindia.org<br>
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Profitability Testing of Onerousness
Where do you test the onerousness?
Actuarial software
IFRS17 solution system
ETL
Other means
What other means are possible? www.actuariesindia.org<br>
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Profitability Prior tagging of profitability is required
Cash flows and Risk adjustment tagged at GOC is used for CSM
Unless tagged, separate GOC can’t be created for onerous contracts
Can be based on ‘reasonable and supportable information’
A few choices can be followed
VNB / VNB at risk
CSM at risk for range of policies covering portfolio
Create a rule engine to decide the tagging for every contract www.actuariesindia.org<br>
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Group of Contracts Portfolio
Cohort
Profitability
Measurement model www.actuariesindia.org<br>
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Measurement Model Default model is GMM
VFA eligibility testing
Testing required to be done at contract level.
But may accept one assessment for homogeneous contracts in same market conditions and priced on same basis
First condition is to be fulfilled at fund level, but other two conditions need to be tested at lower level.
A set of KPIs need to be defined at inception
Is profit sharing based on investment returns
Is profit sharing including minimum guarantee deemed substantial?
Are the fixed cash flows significant?
Is the financial guarantees embedded out-of-money deemed substantial? www.actuariesindia.org<br>
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Measurement Model - VFA Substantial
Need to be defined with formula specified with a range to decide the eligibility.
For example: Yes if >55%, no if <50% and need further analysis otherwise
Further analysis may involve several scenarios or stochastic simulations to assess the average or variability in the sharing
Contracts within a product ideally shall be eligible/not eligible
Eligibility is expected to be consistent year-on-year www.actuariesindia.org<br>
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Measurement Model - MGMM If VFA test is not passed
“indirect participation”
Indirect Participation – Modified GMM
The cashflow model needs to incorporate the basis for determination of benefit at inception
The process for capturing the adjustment to CSM should be clearly outlined in the model
Mutualization – System to accommodate the mutualization adjustments to FCF & CSM on subsequent measurement at higher level than GOC and then allocate back to GOCs www.actuariesindia.org<br>
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Measurement Model - PAA PAA Eligibility test required for contracts with more than one year term
Contracts of life insurers can be easily modelled using GMM
Testing may be useful for Non-life contracts
Clear KPI’s on base LR and sensitivity to assess the eligibility
Sensitivity on discount rates also required to judge the variability
Products eligible for PAA expected to demonstrate consistently year-on-year
Reinsurance Annual treaties are expected to be eligible for PAA www.actuariesindia.org<br>
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Group of Contracts Once you establish Group of Contracts, you need to align the other cash flows to arrive at desired financial results – either at group level or further down
Sub Groups
Risk Adjustment
Reinsurance
Allocation of expenses www.actuariesindia.org<br>
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Group of Contracts Sub Groups
Risk Adjustment
Reinsurance
Allocation of expenses www.actuariesindia.org<br>
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Sub groups GOC may contain more than one product sharing similar risks
Require sub-groups (Actuarial group) with each product as group for the actuarial reasons – Cash flows & Assumptions
In addition to actuarial cash flows, other business transaction such as Incurred claims including NDIC, actual premiums & allocation of expenses to compare the actual vs expected would be more reasonable at these Actuarial groups
Clear mapping with these actuarial groupings to GOC in order to account the changes to CSM / OCI at GOC level www.actuariesindia.org<br>
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Group of Contracts Sub Groups
Risk Adjustment
Reinsurance
Allocation of expenses www.actuariesindia.org<br>
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Grouping – Risk Adjustment Risk adjustment (RA) shall be calculated at GOC to account for CSM
However, Risk adjustment require stress testing of cash flows for each risk and allow for diversification
Stress testing / diversification would normally done at entity level
Need process / system to allocate the risk adjustments to the actuarial groups and to aggregate at GOC level
Seamless process to allocate the impact of variances / change in assumptions on Risk adjustment to actuarial groups and GOC to account for subsequent measurements www.actuariesindia.org<br>
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Group of Contracts Sub Groups
Risk Adjustment
Reinsurance
Allocation of expenses www.actuariesindia.org<br>
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Grouping – Reinsurance Discussion about reinsurance held
Level of aggregation – in addition to LOB, the additional factors would normally be type of coverage (proportional v/s non-proportional, loss occurring v/s risk attaching)
Grouping – portfolio, net gain/loss, measurement model, cohort
For cash flow purposes – actuarial groups lower than GOC
Contract boundaries & measurement models are different with underlying
Loss recovery - One-to-one mapping is not possible with underlying actuarial groups / GOC.
Need a process / system to establish the relationship for loss recovery with corresponding underlying GOC www.actuariesindia.org<br>
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Group of Contracts Sub Groups
Risk Adjustment
Reinsurance
Allocation of expenses www.actuariesindia.org<br>
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Allocation of expenses - GOC Identification of directly Attributable expenses – by nature of expense / head of expenses
Set process to identify directly attributable expenses – Acquisition, policy service and claims related
Start with expenses identifiable at policy or GOC
Process to identify the overheads which are directly attributable – Acquisition, policy service and claims related
Decide on and separate the pre-coverage acquisition
Other directly attributable into acquisition / maintenance
Establish ETL process to allocate the expense – directly attributable acquisition (non pre-coverage), directly attributable maintenance expenses and general expenses www.actuariesindia.org<br>
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Conclusion Design is very critical
Requires lot of clarity and understanding
Its not purely technical decision
Its also influenced by the way the business is driven
Some of the decisions may be irreversible
Or very expensive to reverse
Hence its important to be as perfect as possible with your design www.actuariesindia.org<br>
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Questions www.actuariesindia.org<br>
