Document ID: chunk:federal_register_of_legislation:F2023L00015:reg:21:p51
Version: federal_register_of_legislation:F2023L00015
Segment Type: reg
Provision Reference: reg 21 (pt 51/101)
Character Range: 171789–174755

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 expected.

          (b) It may be reasonable to distinguish cases of 'capital management' and 'capital repair' from cases when an entity is pricing with a view to being compensated for risk. That is, there may be cases when entities price above break even for reasons other than seeking to be compensated for risk, which should be acknowledged. An ongoing policy of break-even pricing would be generally indicative of a public sector entity that is not seeking to be compensated for bearing risk.

Boards' conclusions on risk adjustments

     BC149        The Boards concluded that they would not make modifications to the risk adjustment requirements of AASB 17/PBE IFRS 17 for application by public sector entities, that is Approach 1 described in paragraphs BC120 and BC121.

     BC150        The Boards consider that the risk adjustment requirements of AASB 17/PBE IFRS 17 were designed to be applied to reflect the circumstances of each entity and public sector entities, by applying the unmodified requirements, would be able to reflect the impacts of their circumstances and their perspectives on insurance risk in their financial reporting. Accordingly, the Boards concluded that the amount of a risk adjustment a particular public sector entity includes in either their liabilities for remaining coverage or liabilities for incurred claims would depend on that entity's circumstances.

     BC151        In forming their conclusions, the Boards noted the following matters.

          (a) For the avoidance of doubt, the 'compensation' approach to risk adjustments in AASB 17/PBE IFRS 17 is different from the approach to risk margins under the superseded Standards (AASB 1023 and AASB 4/PBE IFRS 4), which were based on the inherent uncertainty within the estimates of expected cash flows. That is, the risk margins under the superseded Standards needed to be recognised when inherent uncertainty existed, regardless of an entity's perspective on the extent to which it needed to be compensated for that uncertainty. In contrast, the recognition and measurement of a risk adjustment under AASB 17/PBE IFRS 17 relates to the compensation the entity requires for bearing the uncertainty about the amount and timing of cash flows that arises from non-financial risk. Accordingly, the risk adjustment depends on both the inherent uncertainty within the estimates of expected cash flows and each entity's own facts and 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