Document ID: chunk:federal_register_of_legislation:F2023L00015:reg:21:p50
Version: federal_register_of_legislation:F2023L00015
Segment Type: reg
Provision Reference: reg 21 (pt 50/101)
Character Range: 169127–172042

to explain whether a public sector entity can have a zero risk adjustment and the circumstances when this may be appropriate; and

          (d) to assist entities to determine when an estimate other than the central estimate would need to be used; that is, when other than a zero risk adjustment would be needed,[20] assuming a public sector entity can have a zero risk adjustment.

Boards' redeliberations on risk adjustments

     BC147        The Boards noted the following lines of thinking on the AASB 17/PBE IFRS 17 risk adjustment requirements.

          (a) A strict application of the AASB 17/PBE IFRS 17 definition of 'risk adjustment for non-financial risk' to an entity that does not seek to be compensated for bearing risk would seem to result in a zero risk adjustment. Since almost all public sector entities do not seek to be compensated in their pricing of levies/premiums for bearing risk, it could reasonably be expected (based on the definition alone) that they would determine zero risk adjustments (a liability with a confidence level of 50%);

          (b) Based on AASB 17.B87/PBE IFRS 17.AG87, some public sector entities that do not price for bearing risk, nonetheless, would not be indifferent between;

             (i) fulfilling a liability that has a range of possible outcomes arising from non-financial risk; and

             (ii) fulfilling a liability that will generate fixed cash flows with the same expected present value as the insurance contracts; and

          would, therefore, have a risk adjustment above zero. And some stakeholders consulted by the Boards expressed the view that a zero risk adjustment does not seem realistic in respect of insurance liabilities and the uncertainty associated with them.

          (c) A public sector entity that does not price for risk could validly have no risk adjustment included in its liability for remaining coverage, but have a risk adjustment included in its liability for incurred claims on the basis that it is not indifferent to the variability associated with the expected cash flows estimated to settle claims. Accordingly, it is feasible that the confidence level for measuring a liability for remaining coverage could be different from the confidence level applied to the liability for incurred claims because the actual pricing structure does not necessarily reflect the risk appetite of the entity.

     BC148        In respect of the circumstances of a public sector entity, the Boards considered the following.

          (a) Pricing decisions can be based on a range of factors and, for example, complications can arise, when entities include a margin in levies for capital management purposes. By way of illustration, a public sector entity may need to build up its capital in preparation for enhancing future benefits or to make up for previous under-reserving because claims experience has been worse than