ISAP topic analysis

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ISAP 4 ED paragraph / Comment from ASC or others / Appropriate practice – guidance points for the ISAP / Important educational points (to be considered in an IAN)/ TF Comments
Presentation page / Keep as in prior ISAP / Done
1.1 Purpose / Suggested wording change in the 3rd bullet. / Wording revised.
1.2Scope / The following roles were deleted but still pertinent. They are covered by ISAP 1:
-Assessment of the completeness, integrity or accuracy of data needed to support IFRS X
-Determination or review of actuarial assumptions and estimates required for IFRS X under a fully operating control environment
1.3 Compliance / Change the word ‘report’ by ‘relevant communication’
Similar changes should be made to ISAP 3.
1.4Relationship with ISAP 1 and 1A / Changed opening sentence to align with ISAP 5 revised text.
1.5Defined Terms / Look for ways to identify IFRS terms
ASC would prefer similar colour and underscoring with definitions included in the glossary / We are proposing to use a different colour (green) and a double underscoring each time an IFRS term is used. There is no intention to provide an hyperlink as it would mean copying a significant portion of IFRS X.
2.1.1.Knowledge Requirements / Recognition that IFRSs is a defined term that includes IASs.
Is the list exhaustive? / Done
Added ‘such as’
Old 2.1.2 Process and Model Governance / Delete if ISAP 1A covers sufficiently the topic / Deleted while adding 2.5.4 on Validation
2.1.2. Materiality / Suggested to delete paragraphs a and b and change a few words / What we had was identical to ISAP 3. We kept as in ISAP 3 as we saw no reason to be different.
Changed ‘distinction between’ to ‘distinctions amongst’ to be more exact.
Kept guidance from ‘the principal or reporting entity’ rather than ‘client’ to align to ISAP 3.
Took out ‘if it is known’ regarding the reporting entity’s threshold of materiality as indeed it should be known to do proper work. ISAP 3 should be changed accordingly.
2.1.3. Proportionality / Some suggested wording changes / What we had was identical to ISAP 3, except for the examples. We kept with the ISAP 3 approach, and examples regarding Pensions were changes to examples specific to Insurance. Those examples have a useful role considering the many discussions generated on IFRS on proportionality.
You suggested 2 wording changesto the ISAP3 text that we agreed with. These changes should extend to ISAP 3.
We reworked example b as suggested to improve wording.
No change since Cape Town,except taking out ‘all of which are’ in the example intro.
2.2.Identification… / Issues with having procedures, i.e.focus on actions rather than principles. / Moving from actions to principles using ‘should be satisfied that there is proper identification…
N.B. from before Cape Town: We have left the pointing to ISAP 1for guidance in case of disagreement on appropriateness of policies. Even though ISAP 1 is to be understood by all, even members of ASC had forgotten about it, so we concluded that there was a need for pointing to ISAP1 in this specific case.
We also noted that ISAP3 does use pointing out to ISAP1. / Text intended for IANs:
-Identification of insurance contracts within the scope of IFRS X - The actuary should determine an appropriate policy for identifying and evaluating significant insurance risks within the scope of IFRS X.
In doing so, the actuary should consider the potential benefits of the contract over the coverage period.
-Contracts specifically or electively excluded from the scope of IFRS X - IFRS X specifically excludes certain types of contracts from its scope. The actuary should exercise care not to inadvertently apply IFRS X to such contracts.
For some contracts, such as financial guarantees, the entity may elect to apply IFRS X. In such cases, the actuary should act in accordance with the reporting entity’s accounting policy.
-Combinations of insurance contracts - The actuary determine an appropriate process for identifying groups of contracts that are issued at or near the same time to a single policyholder or to related policyholders. The actuary should have a process to determine if a group (or subgroup) of these contracts exhibits one of the criteria that requires them to be treated in combination.
TO BE CONTINUED NEXT
2.2.Identification… (continued) / CONTINUATION
-Separating components of an insurance contract
a.Embedded Derivatives – The actuary should determine an appropriate process for identifying embedded derivatives in insurance contracts and for determining if they should be separated.
To measure the fair value of embedded derivatives that have been separated, the actuary should have a process for applying models and input controls that have been validated with available market values, if any, of similar instruments.
b.Investment Components – The actuary should determine an appropriate process for identifying investment components in insurance contracts and for determining which, if any, they should be separated. in accordance with IFRS X.
c.Service Components – The actuary should determine an appropriate process for separating the performance obligations to provide goods and services from the host insurance contract if it is distinct in accordance with IFRS X. For example, there are some agreements that combine an agreement to pay health claims on behalf of the employer combined with an insurance protection on large claims. In such agreements, the payment service is likely to be a distinct service. Other examples include investment management services and various types of other administrative services.
2.3Recognition… / Issues with having procedures, i.e. focus on actions rather than principles. / Moving from actions to principles using ‘should be satisfied that there is timely recognition…
Plus some wording cleaning
Satisfied ourselves that Contract Boundary is the proper title for that paragraph. / Text intended for IANs:
A modification may result in loss on recognition or in gain or loss on derecognition.
2.4 Measurement approach / Comments on the need to be more specific about where notion are defined and why PAA users need to know about BBA / We added references to IFRS 17 and linked the BBA guidance knowledge to the conditions to apply PAA.
2.5.0BBA / Deletion of ‘some or all.. / Done
Add reference to new ISAP 1A after deleting initial wording which is now in ISAP 1 A.
2.5.1 Definition of Portfolio / Waiting to see IASB. See 2.4 in ISAP 7 on homogeneous groups
2.5.2 General approach for selecting assumptions / Clarify role of Principal and reporting entity vs actuary
b. Consider taking the first sentence out
Clarification of some language requested. / We have worked on clarifying the Role of the actuary.
b. we have kept the first sentence in view of the current state of diverging practices.
Clarification - done. / Text intended for IANs:
On credibility:
•The actuary should assess the relevance and credibility of experience studies and use credibility procedures to combine the information from an insurers’ own experience with the information from, for example, industry studies, if the credibility procedures would result in a more appropriate basis for assumptions.
•The actuary should exercise professional judgment to decide how much weight should be placed upon evidence that is less credible such as experience relating to new products, or if the available evidence is obtained in a context different from what is expected to prevail in the future.
•The actuary should evaluate the trade-off between credibility and pertinence in selecting the period of observation upon which to base assumptions. The experience is more pertinent if observed over the recent past; however, a short period of observation may not provide enough data to be credible. Credibility blending over time can be useful in this regard, but may need adjustment for established expected changes and trends.
On anti-selection:
Assess whether evidence supports the presence of any anti-selection, within the contract boundary, in the relevant portfolios, and if so, incorporate the effect of the expected future anti-selection into the relevant assumption. The actuary should also assess how reasonably foreseeable sources of anti-selection might affect future projected experience.
2.5.3Process for updating assumptions. / ‘Generally should’ or simply ‘should’? / Kept, slightly modified,‘Generally should’ which provides an opening to improvement in the following paragraph and is consistent with ISAP 3
Text regarding changes was kept to align with ISAP3 2.6.7 with some wording modifications that could also be used for ISAP3.
ASC should look at whether the text here should be covered by ISAP 1
2.5.4 Validation of assumption and models / Paragraph added. Check with ISAP 1 A
2.5.5 Mortality and Morbidity Assumption / Replace ‘at least the following factors’ by ‘relevant factors, such as:’ / Done.
Added text around External factors. / Text intended for IANs:
Specific Considerations for Mortality and Morbidity Insurance – The actuary should consider factors relevant and appropriate for the purpose of the measurement, when deriving the mortality and morbidity assumptions. Examples of such factors include, but are not limited to:
a.Characteristics of the insured such as: age; sex; occupation; health status; and whether group or individual coverage;
b.Characteristics of the insurance purchased: such as the event insured (e.g. death, disability, critical illness, health, medical, longevity); size or volume indicators; contractual provisions; and potential for anti-selection;
c.Internal practices: such as underwriting practices; distribution systems and other marketing practices; and administrative and claims settlement practices; and
d.External factors: such as secular trends and seasonal variations; medical advances, environmental factors (e.g., changes in government offsets or health care programs; levels of unemployment); and interest rate scenarios and other economic factors (e.g., cost of living adjustments) and the impact that economic circumstances are likely to have on claims incidence and termination rates.
2.5.6 General Insurance / Replace ‘at least the following factors’ by ‘relevant factors, such as:’ / Done.
Added text around External factors. / Text intended for IANs:
Specific Considerations for General Insurance – The actuary should consider the factors relevant and appropriate for the purpose of the measurement, when assessing general insurance liabilities. Examples of such factors include, but are not limited to:
a.Characteristics of the insurance purchased: such as the perils insured (fire, storm, flood, accident, illness) and exclusions therefrom; size or volume indicators (sum insured or value, premium paid, turnover, etc.); incidence, reporting and claim run-off patterns; premiums paid; excess limits and/or deductibles; and prospective and retrospective experience rating arrangements;
b.Characteristics of the policyholder: such as industry; culture; and financial soundness, in the case of corporate policyholders;
c.Characteristics of the subject of insurance: such as car model and year; type of building or business; or age and sex for individuals;
d.Internal practices: such as underwriting practices; claims handling practices; including case estimation practices; and administrative practices;
e.External factors: such as secular trends and seasonal variation; economic influences; and socio/politico/legal developments and trends; and
f.The potential for large and/or infrequent claims.
2.5.7 Liabilities for Incurred Claims / Replace ‘at least the following factors’ by ‘relevant factors, such as:’ / Done. / Text intended for IANs:
Specific Considerations for Liabilities for Incurred Claims – The actuary should consider the following factors in addition to the factors listed above in Mortality and Morbidity Insurance and General Insurance, when assessing liabilities for incurred claims:
a.Past experience of incured claims, considering factors such as, number, size, nature and cause of claims and recoverables due under the contract;
b.The extent to which past experience is representative of expected future experience and the appropriate adjustments, including claim inflation;
c.Evolution of special contractual rights and obligations;
d.Patterns of reporting delays and indicators of unreported claims; and
e.Past patterns of under or over-estimation for case estimates.
When the value of the claim is based on actual losses, the actuary should consider the impact of the relevant and appropriate forms of inflation on the value of those losses.
2.5.8 Market Variables / Put more emphasis on approaches other than replicating portfolio in view of its limited application. / Text intended for IANs:
Specific Considerations for Market Variables – Market variables include, amongst others:
•Discount rates;
•Asset prices;
•Implied liquidity premiums;
•Published indices; and
•Currency exchange rates.
In determining the estimates of market variables, the actuary should incorporate the relevant information, such as a replicating asset or a replicating portfolio of assets, and may rely on published information from reliable sources.
A replicating portfolio is a portfolio of assets providing cash flows that exactly match the cash flows from the liability in all scenarios. Un-replicated liability risks should be taken into account outside the replicated portfolio, i.e. in the associated risk adjustment.
2.5.9 Options / Further streamlining done. / Text intended for IANs:
Specific Considerations for Options – The actuary should review all contract types to determine whether or not there are any options, explicit or otherwise, within the portfolio. The actuary should then determine whether or not any of the identified options should be separated in accordance with IFRS X.
If the actuary determines that an identified option should be considered as part of the original contract or as a separate contract, the actuary should determine how to value the option using stochastic or other techniques as appropriate.
2.5.10Policyholder Behavior / Replace ‘at least the following factors’ by ‘relevant factors, such as:’
Clarify some wording / Done. / Text intended for IANs:
Specific Considerations for Policyholder Behaviour –The actuary should identify variables, observable in the market and/or in the relevant portfolio, that are materially interrelated with policyholder behavior and reflect such interrelations in the assumptions.
In addition to the factors mentioned in the Mortality and Morbidity Insurance and General Insurance sections above, the actuary should consider the following factors, when deriving the expected assumptions for future policyholder behavior:
a.Characteristics of the insurance purchased, such as relative advantages, to the counterparty, of exercising policyholder options such as: lapsation/withdrawal and persistency; sophistication of counter-party and intermediary; cliffs created by sudden increases in benefits, generating lower policyholder option exercise rate in the years immediately preceding the cliff and higher rates upon attainment of the cliff; and short-term large spikes in cancellation rates created by large increases in premium on exercising certain options such as extension of a term insurance policy;
b.Changes in policyholder behavior over time;
c.Relevant external factors, such as the competitive situation for the product; and
d.The legal environment such as taxation upon withdrawal and any known changes in the legal environment.
TO BE CONTINUED NEXT
2.5.10 policyholder Behavior (Cont’d) / CONTINUED
Assumptions about policyholder behavior should not necessarily assume that the policyholder makes the best economic decision.
The actuary should consider whether it is appropriate to ignore cancellations and alterations, for example if their impact is appropriately captured in the refund or adjustment premium, as is often the case for general insurance.
Old 2.5.11 Projecting Surrender Values / Deleted in its entirety. / Text intended for IANs:
Specific Considerations for Projecting Surrender Value – When projecting the surrender value or transfer value payable on withdrawal, the actuary should consider relevant factors such as:
a.Market variables assumed in the projection;
b.Any guaranteed surrender or transfer value scale; and
c.Policyholder reasonable expectations implicit in the contract.
2.5.11Maintenance Expenses / Replace ‘at least the following factors’ by ‘relevant factors, such as:’ / Done. / Text intended for IANs:
Specific Considerations for Maintenance Expenses – Maintenance expenses include policy maintenance expenses, claim management expenses, and some fixed overheads and variable overheads. When advising the reporting entity regarding the the selection or reasonableness of assumptions for maintenance expenses the actuary should:
a.Consider future expenses associated with obligations arising from commitments the reporting entity has made on, or prior to, the measurement date;
b.Consider the entity’s strategy for determining the level of service provided to policyholders (and its approach to claim management, if applicable);
c.Consider the entity’s efficiency in providing that level of service (and implementing its approach to claims management, if applicable);
d.Adjust future expense cash flows with a relevant and appropriate expense inflation factor, reflecting the entity’s circumstances. The starting point will normally be market levels of price and wage inflation consistent with the market assumption with respect to future interest rates;
e.Calibrate modelled costs to ensure that the costs included in the cash flows that are used to measure insurance contracts do not exceed or fall short of the costs incurred;
TO BE CONTINUED
2.5.11Maintenance Expenses (cont’d) / CONTINUED
f.Assume such that the entity will maintain a reasonable level of new business. Therefore, the assumptions at the measurement date can normally be based on the current level. The actuary should project improvements in economies of scale beyond the valuation date only if there is clear and reliable evidence that such plans are likely to be met and that the entity has exhibited the ability to achieve such cost reductions in the past; and
g.Give appropriate consideration to the terms of agreements, if any, between the reporting entity and other parties to provide services such as policy administration, claim management, or fund management, including the possibility of termination of the agreement.
2.5.12 Variable Benefits / Look for guidance in the second paragraph / Rephrased.
2.5.13 Management Actions / Introduce’ such as:’
Clarify some wording / Done.
2.5.14 Reinsurance / Delete repeats of IFRS 17 / Done / Text intended for IANs:
While applying the building blocks approach in a manner that is generally consistent with contracts directly written, the actuary should incorporate the modifications to the guidance for insurance contracts that apply to reinsurance held (reinsurance assumed or inward reinsurance); namely,
-that the reinsurance contract is recognized when and as coverage is assumed (41a)
-that the CSM, whether negative or positive is deferred and amortized over the coverage period (41c.i)
-that the cost of the purchase of reinsurance on prior events is an expense of the period of the purchase(41c.ii)