Document ID: chunk:federal_register_of_legislation:F2023L00015:reg:21:p39
Version: federal_register_of_legislation:F2023L00015
Segment Type: reg
Provision Reference: reg 21 (pt 39/101)
Character Range: 138544–141542

operating a system to produce information that might be needed in applying the general measurement model to every possible scenario that might arise would probably be considerable, and is unlikely to be used by public sector entities for management purposes; and

          (d)                   few public sector insurance arrangements are likely to be ineligible for the premium allocation approach, yet the process of justifying eligibility for any contracts with coverage period of more than a year can, of itself, be resource intensive and may need to be periodically repeated.

Risk adjustments

Background

     BC107        The Boards noted that:

          (a) under AASB 17/PBE IFRS 17, a risk adjustment is: "the compensation an entity requires for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risk as the entity fulfils insurance contracts"; while

          (b) under AASB 1023/PBE IFRS 4, a risk margin relates to the inherent uncertainty in the central estimate of the present value of the expected future payments.

     BC108        The Boards noted that the notion of a risk adjustment in AASB 17/PBE IFRS 17 is the compensation the entity would require to make it indifferent between fulfilling a liability of fixed amount and a liability of uncertain amount that has a central estimate equivalent to the fixed liability [AASB 17.B87/PBE IFRS 17.AG87]. It is designed to convey information to users of financial statements about the amount charged by the entity for the uncertainty arising from non-financial risk associated with the amount and timing of cash flows.

     BC109        The Boards noted that AASB 1023/PBE IFRS 4 has no equivalent to the AASB 17/PBE IFRS 17 notion of compensation – instead, the risks are regarded as being inherent in the cash flows.

     BC110        The Boards noted that, under AASB 17/PBE IFRS 17:

          (a) there is a presumption that for-profit private sector entities would need to be compensated for bearing risk and, as risk is released, revenue would be recognised; and

          (b) public sector entities may have a different perspective and not need to be compensated for bearing risk on the basis that:

               (i) they are often monopolies and there may be the opportunity to increase premiums/levies to meet future claims; and

               (ii) they have explicit or implicit government guarantees of financial support.

Industry benchmarks and current practices

     BC111        The Boards noted that neither Standard requires a particular technique to be used to measure risk adjustments; however, currently entities typically use a confidence level (probability of adequacy) approach. The Boards also noted that:

          (a) under AASB 1023/PBE IFRS 4, many entities benchmark to a 75% confidence level (indicating the liability for incurred claims would be adequate to meet actual claims three years in four); and

          (b) under AASB 17/PBE