Insurance Contract Liabilities

Study guides: Exam 6C, Exam GI-201

Insurance Contract Liabilities are the obligations an insurer carries under the insurance contracts it has issued. Under IFRS 17 they are the sum of the Liability for Remaining Coverage (LRC) — future service not yet provided — and the Liability for Incurred Claims (LIC) — claims that have already occurred, whether reported or not.

\text{Insurance Contract Liability} = \text{LRC} + \text{LIC}

• LIC is the actuary's traditional territory: case reserves, IBNR, and the associated adjustment expenses, measured as the present value of fulfilment cash flows plus a risk adjustment.
• LRC under the PAA is essentially the unearned premium net of deferred acquisition cash flows, plus a Loss Component where the group is onerous.
• They are measured on completely different bases and confusing them is the single most common IFRS 17 error. The LRC is premium-driven and released as coverage is provided; the LIC is claim-driven and released as claims are paid.
• Valuation must be in accordance with Accepted Actuarial Practice — the requirement in s. 365 of the Insurance Companies Act — which for a Canadian insurer means the Standards of Practice and the CIA's educational notes on IFRS 17 application.
• Reinsurance is not netted. Reinsurance Contracts Held are a separate asset with their own measurement, so the balance sheet shows gross liabilities and a reinsurance asset rather than a net figure. This inflates both sides relative to the old presentation and is deliberate: it makes reinsurance counterparty exposure visible.
• The Appointed Actuary opines on these liabilities in the Statement of Actuarial Opinion, and they flow directly into Capital Available and hence the MCT ratio.

Building the Liability At December 31 a PAA insurer has: unearned premium \$46 million, unamortised acquisition cash flows \$11 million, undiscounted case reserves and IBNR of \$208 million, an effect of discounting of -\$14 million, a risk adjustment of \$17 million, and reinsurance recoverable on unpaid claims of \$35 million (risk adjustment on reinsurance held \$3 million).

Present the insurance contract liabilities.

Answer Liability for remaining coverage:

\begin{align*}
\text{LRC} &= \$46\text{M} - \$11\text{M} \\
&= \$35\text{M}
\end{align*}

assuming no group is onerous; otherwise a Loss Component is added.

Liability for incurred claims:

\begin{align*}
\text{LIC} &= \$208\text{M} - \$14\text{M} + \$17\text{M} \\
&= \$211\text{M}
\end{align*}

Total insurance contract liabilities:

\$35\text{M} + \$211\text{M} = \$246\text{M}

Separately, as an asset, reinsurance contracts held:

\$35\text{M} + \$3\text{M} = \$38\text{M}

Note that the reinsurance risk adjustment adds to the asset rather than subtracting: it represents the risk the reinsurer relieves the cedant of, so it increases the value of the reinsurance held. Candidates routinely sign this wrong. The asset is then reduced separately for the reinsurer's non-performance risk, which is a credit adjustment, not a risk adjustment.