IFRS 17 establishes principles for the recognition, measurement, presentation, and disclosure of insurance contracts.
The concept of market consistency, and the use of market variables, is noted throughout the IFRS 17 guidance. Market variables used in the determination of fulfilment cash flows (FCF) should be consistent with observable market prices. The concept of market variables is described in IFRS17.B42–B48, while IFRS17.B74–B82 discuss the use of market variables to determine the discount rate.
This draft educational note provides practical application guidance on Canadian-specific issues relating to completing a market consistent valuation for insurance contracts that contain financial guarantees.
The sections that follow in this draft educational note provide more specific application guidance for Canadian actuaries, specifically for the market consistent valuation of insurance products with financial guarantees within the Canadian market.
In addition to the guidance above, this document will discuss different stochastic modelling approaches for market variables (e.g., equity returns, interest rates, etc.). It also discusses specific items related to segregated funds with guarantees, and other interest rate guarantee products.
The guiding principles that the CLIFR subcommittee followed in writing this note were the following:
• First and foremost, consider Canadian-specific perspectives, rather than simply repeating international actuarial guidance.
• Provide application guidance that is consistent with the IFRS 17 standard and applicable Canadian actuarial standards of practice and educational notes, without unnecessarily narrowing the policy choices available in the IFRS 17 standard.
• Consider practical implications associated with implementation of potential methods; in particular, ensure that due consideration is given to options that do not require undue cost and effort to implement.
Chapters 2 and 3 of the CIA draft educational note Application of IFRS 17 Insurance Contracts provide general guidance on market variables. This draft educational note, published in February 2019, is an adoption without modification of the exposure draft of International Actuarial Note (IAN) 100. Another exposure draft of the IAN 100 is expected to be published which will address the comments made by the different bodies in addition to providing additional guidance related to the proposed amendments to the Standard.
This draft educational note is structured as follows:
Section 2: Stochastic Modelling
• Stochastic modelling is expected to be a common practice to replicate market prices and then to measure financial guarantees within insurance contracts. This section discusses the use of stochastic modelling with an emphasis on expected practices for the IFRS 17 valuation of insurance contracts with financial guarantees.
Section 3: Market Consistent Valuation
• A starting point for the valuation of financial guarantees within insurance contracts is the determination of stochastic scenarios that replicate market observable prices. This section discusses this topic, plus potential methodologies to estimate market prices when they are not observable.
Section 4: Adjustments to Market Prices
• This section discusses adjustments (e.g., liquidity adjustments, etc.) that may be made to reflect the differences between market instruments and the financial guarantees within insurance contracts.
Section 5: Segregated Fund Specific Considerations
• This section discusses additional items with a specific focus on segregated funds. Although not uniquely applicable to a market consistent valuation (i.e., the focus of this note), the subcommittee felt it was beneficial to include a discussion of these topics.
At the end of the document, there is a Glossary of terms and an Additional Resources section. These are intended to provide simple definitions of some terms used within the document, plus references to academic literature related to stochastic modelling and market consistent valuation.