Chapter 16 IFRS

The Core Reading doesn't go into any detail on this so you wouldn't be expected to know it for the exam. I suspect that it might be something to do with how expenses are allocated between cohorts of business, given that 'grouping' of policies can differ for IFRS compared with Solvency II, so expense allocation might also differ (including how overheads might be treated)?

 

The GMM applies to conventional without-profits business (any UL or WP insurance business would be valued under the VFA method) so there is no need for a separate investment return assumption: we are just discounting the future (fixed) cashflows.

 

The approach to contract boundaries does differ between Solvency II and IFRS 17, but this is not referred to in the Core Reading and so you would not be expected to know the details.

 

The VFA is the same as the GMM approach, except for the differences that are described in the Core Reading. So yes, there is CSM unlocking when non-economic assumptions change - just as for the GMM.

 

Fundamentally, the RM calculation is highly prescribed, whereas under the RA there is much more choice - the insurer has a lot of flexibility over the approach it takes (as you have indicated).

 

Not important for SA2 (hence we don't expand on it in the course notes) but FWIW, IFRS provides the following definition:
"Insurance finance income or expenses is defined as the change in the effect of the time value of money arising from the passage of time and the effect of changes in financial assumptions on the carrying amounts of insurance contracts recognised in the statement of profit or loss and other comprehensive income. Market variables are variables that can be observed in, or derived directly from, markets (for example, prices of publicly traded securities and interest rates)."

 

There's nothing to say that the same methods have to be used (eg stochastic model vs closed form / option pricing approach), but for practical purposes it makes a lot of sense to use the same valuation model for both.
A deterministic model would not be appropriate, as it would not capture the time value of the guarantee or option.
The valuation of options / guarantees has to be done in a way 'that is consistent with observable market prices for such options and guarantees' - ie a market-consistent approach. A risk-neutral market-consistent modelling approach is most likely to be used.

 

The course now includes very little detail on US GAAP, so this isn't something that you would need to know about for the exam.

Based on my own experiences with it (admittedly quite a long time ago!), I seem to remember that for some types of business (those that were subject to FAS 60: traditional non-linked business) the assumptions were indeed locked-in (unless needing to recognise a loss). But that wasn't the case for products that were subject to FAS 97 and FAS 120 (unit-linked, some WP).

And yes, there were also smoothing mechanisms in place such as deferred acquisition costs and deferred profit liabilities.

However, I am also aware that there have been significant changes in the accounting standards issued by FASB over the last decade or two, so wouldn't be able to say for sure that this is still the case.

Feel free to research further if you have the inclination, but not needed for the SA2 exam! https://fasb.org/standards

 

Yes but this is not covered explicitly in the SA2 Core Reading