Document ID: chunk:federal_register_of_legislation:F2023L00015:reg:21:p52
Version: federal_register_of_legislation:F2023L00015
Segment Type: reg
Provision Reference: reg 21 (pt 52/101)
Character Range: 174470–177558

circumstances, including its objectives, management philosophy, and level of risk aversion.

          (b) In the private sector, there would generally be expected to be some, at least broad, connection between the compensation charged for bearing risk included in setting premiums and the extent to which the insurer is indifferent between the two sets of cash flows referenced in AASB 17.B87/PBE IFRS 17.AG87. This broad connection would be expected given that private sector insurers are required to remain solvent from a prudential reporting perspective and endeavour to remain profitable, particularly when they are for-profit entities. However, that same perspective does not necessarily apply to public sector entities.

          (c) There may be public sector entities that have circumstances which would lead them to recognising and measuring their liabilities for remaining coverage and/or their liabilities for incurred claims and those insurance liabilities with a zero risk adjustment.

          (d) There may be public sector entities that have circumstances which would lead them to having a zero risk adjustment in recognising and measuring their liabilities for remaining coverage, but having a risk adjustment above zero in recognising and measuring their liabilities for incurred claims. The Boards observed that this situation might arise, for example, when claims are related to infrequent large-scale events and the uncertainties around the amounts and timing of cash flows from those events are particularly difficult to estimate.

          (e) Break-even pricing may be indicative of public sector entities that do not seek to be compensated for risk and do not include risk adjustments in recognising and measuring their liabilities for remaining coverage and/or their liabilities for incurred claims.

          (f) The availability of risk mitigation factors, such as access to government guarantees and, potentially funding from general taxation, and a monopoly market position, could be significant factors in determining whether, and to what extent, some public sector entities might need to be compensated for bearing risk. Therefore, those factors may influence public sector entities' level of indifference between fulfilling a liability that has a range of possible outcomes arising from insurance risk and fulfilling a liability that would generate fixed cash flows with the same expected present value. Accordingly, those factors may impact on the amounts of risk adjustments included in recognising and measuring their liabilities for remaining coverage and/or liabilities for incurred claims.

          (g) The extent to which a public sector entity might seek to be compensated for bearing risk, and the significance of the risk mitigation measures such as government guarantees, could depend on the extent to which the entity and its management is treated as operating independently from its controlling government. A relatively independent entity might, for example, be responsible for entering into its own risk mitigation measures, such as a