Hoping some one can help explain the following sentence in the Core Reading regarding the IFRS 17 risk adjustment. Any comments appreciated. "It relates to non-financial risks only, for example insurance risk, lapse risk and expense risk" (pg. 20, chapter 9) Are the risk types given as examples not financial risks? What am I misunderstanding here?
Tricky one! The Core Reading is consistent with EIOPA's interpretation, see the bottom of page 30 of: https://eiopa.europa.eu/Publications/Reports/EIOPA-18-717_EIOPA_Analysis_IFRS_17_18 10 2018.pdf but I agree it looks odd.
Thanks for that - very helpful. On a little further reading (actually, the last page of the chapter), it seems Financial Risks are being defined as the combination of: Market risk Credit risk Liquidity risk Insurance risk is considered separately. I guess it makes sense to separate the two. I imagine I've glossed over elsewhere in the reading of other subjects where Financial Risk is defined in this way.
As MorningtonCrescent pointed out, this is in line with EIOPA's and the general view. Let's assume a cost of capital approach is used as a risk margin. Let's also assume it is 6% just like SII. Then the Risk margin will be 6% of all future SCRs backing that class/line/portfolio of business. However the SCR for two companies writing exactly the same business maybe different due to market risks - one company may have different investments (more risky ,more concentrated). Hence the 6% is based on the SCR of non diversifiable risks (i.e. not market ones).
