International Financial Reporting Standard (IFRS) 17 introduces the concept of a risk adjustment for non-financial risk.
International Financial Reporting Standard (IFRS) 17 introduces the concept of a risk adjustment for non-financial risk.
The IFRS 17 risk adjustment is an influential factor in the pricing of insurance contracts and in how profit from insurance contracts is reported and emerges over time. While the risk adjustment must satisfy certain conditions, the method for its calculation is not prescribed and is the choice of the insurer. As such, there are many potential methods of calculation.
This paper is the third in a series designed to provide an introduction to different features of the risk adjustment that should be considered before implementation. This paper does not attempt to address all the challenges in choosing and implementing a calculation methodology, but focuses on the specific issues around calculating an equivalent confidence level for the IFRS 17 risk adjustment when a method other than Value-at-Risk (VaR) is used. The methodology is important, as in the extreme case, two identical insurers with the same policies and same risk adjustment methodology might disclose different equivalent confidence levels for the same IFRS 17 risk adjustment, solely because the translation methodology is different.
The paper opens with a simple case study to illustrate the methods described in the subsequent sections. The paper concludes with a summary including issues to consider.
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