Approaches to evaluate Risk Adjustment under IFRS 17

Approaches to evaluate Risk Adjustment under IFRS 17

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KACEM Hamdi (author), Actuary IA, Method and Innovation Department Group, Technical Direction at CNP Assurances, hamdi.kacem@cnp.fr - OLYMPIO Anani (co-author), Certified Actuary and ERM CERA, head of Method and Innovation Department Group Technical Direction at CNP Assurances, Anani.olympio@cnp.fr - BEHAR Thomas (co-author), Chairperson AAE, Director of Group Financial Performance at CNP Assurances, thomas.behar@cnp.fr - Subtopic: The actuarial role under IFRS 17 - The new accounting standard IFRS 17, deals mainly with the insurer’s liabilities. It’s currently being implemented by actors and some parameters are not yet stabilized. According to IFRS 17, for example the risk adjustment corresponds for non-financial risk should reflect the compensation an entity requires for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risks as the entity fulfills insurance contracts. Without precision of specific formulas, different requirements and principals are descripted by the standard. It is from this context that actors should find the most appropriate evaluation method for their own risk profile. This practical paper proposes different approaches to evaluate the risk adjustment for a savings insurance portfolio. We have considered three main methods inspired by the Cost of Capital (following the same idea as solvency 2), the deviation of technical risks and the Value at Risk approach. We explain the advantages and limitations of each of them, and we provide applications on a life insurance portfolio. Finally, the impact on the balance sheet and profit and loss account are mainly conditioned by the insurer’s risk aversion and its management decisions. Key words: Risk adjustment, risk margin, Cost of Capital, solvency 2, Value-at-Risk

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