General model of measurement of insurance contracts

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The general model is based on the following estimation parameters:

  • fulfillment cash flows, comprising of:
    • a current estimate of unbiased and probability-weighted future cash flows expected to arise during the life of the contract;
    • a discount adjustment to reflect the time value of money and financial risks, such as liquidity and currency risks (layers of discounting);
    • an explicit risk adjustment for non-financial risks; and
  • a contractual service margin representing the unearned profit from the contract.

The diagram below summarises the major estimation parameters in the general model and how the changes in the estimation parameters flow into the statement of comprehensive income. Measurement of each building block and its impact on the statement of comprehensive income are considered in more detail.

Changes in estimation parameters

>

Contractual

service

margin

>

Release of contractual service margin

>

Profit or loss


(insurance service result)

>

>

Interest accretion at inception date

11

>

FCFx

Risk adjustment financial risks

>

Experience adjustment2

>

>

FCFx

Risk adjustment non-financial risks

>

Release of risk adjustment3

>

>

FCFx

Unbiased

and

probability-weighted


future cash flows

>

Time value of money and other assumptions related to financial risk4

>

Profit or loss


and/or


Other comprehensive income

(insurance finance income or expense)

FCFx   = Fulfilment Cash Flows

After initial recognition of a group of insurance contracts, the carrying amount of the group at each reporting date is the sum of:

Carrying amount of the group of insurance contracts after initial recognition

The liability for remaining coverage

The liability for incurred claims

Contractual service margin

Risk adjustment financial risks

Risk adjustment financial risks

Risk adjustment non-financial risks

Risk adjustment non-financial risks

Unbiased and probability-weighted future cash flows

Unbiased and probability-weighted future cash flows

Liability for remaining coverage – An entity’s obligation to investigate and pay valid claims under existing insurance contracts for insured events that have not yet occurred (i.e., the obligation that relates to the unexpired portion of the coverage period).

Liability for incurred claims – An entity’s obligation to investigate and pay valid claims for insured events that have already occurred, including events that have occurred but for which claims have not been reported and other incurred insurance expenses.

 

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