1. (9 points) ABC Insurance Group is a US-based corporation that sells only nonparticipating whole life...

  

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1. (9 points) ABC Insurance Group is a US-based corporation that sells only nonparticipating whole life and accident policies. ABC reports GAAP financials based on FAS 60. ABC is being acquired by an insurance group based in the European Union and will report financials on both an IFRS and US GAAP basis. (a) (2 points) Compare the methodology and assumptions used to calculate ABC's liabilities under IFRS 17 and ASU 2018-12. You are given: Present value of cash flows Risk Adjustment Contractual Service Margin Liability for Incurred Claims Incurred But Not Reported (IBNR) Other Assets Liability for future policyholder benefits GAAP - DAC 1,000 250 100 475 500 2,000 1,280 100 (b) (3 points) Calculate ABC's equity under both ASU 2018-12 and IFRS 17. Assume that the basis of Other Assets is the same under both regimes. Show all work. (c) (4 points) Critique the following statements regarding the Insurance Capital Standard (ICS) guided by International Association of Insurance Supervisors (IAIS). A. The main objectives of the ICS are protection of shareholders and to contribute to financial growth. B. The ICS reflects only insurance and investment risks to which an International Active Insurance Group (IAIG) is exposed. C. The capital requirement in the ICS is intended to represent a three-year 95 percentile Conditional Tail Expectation (CTE) level of risk. D. Currently, the only approach being considered to estimate margin over current estimates (MOCE) is the Cost of Capital MOCE approach, which is based on an assumed cost of holding ICS required capital. 2. (9 points) DEF, a Canadian Life Insurance Company, specializes in UL products. Recently, they decided to launch their first participating product, First Par. First Par is a whole life product with a guaranteed death benefit and annual cash dividends. (3 points) DEF is planning the following dividend determination process for First Par: • First Par dividends will be updated every three years in order to smooth experience over time. • A single interest rate will be used for all First Par policyholders. regardless of issue date or other policyholder characteristics. Claims experience gains and losses from all products will be considered. • Comment on how well the above dividend determination process reflects the contribution principle. (b) (6 points) You are given the following statements: A. Initial sales projections do not justify creating a separate participating account. Hence, there is no need for DEF to create a Par Account Management Policy. B. First Par will have several advantages over the existing UL products: • DEF may claim qualifying par status, reducing LICAT required capital. • • DEF can hold lower PfADs on First Par compared to UL products. DEF will be able to realize a profit margin at 12% regardless of experience, as the full amount of any losses can be offset by reducing dividends. C. DEF will create a Dividend Policy, but it will not be disclosed publicly to reduce the risk of a lawsuit. D. The Appointed Actuary does not need to sign any additional opinions related to the dividends and the company's dividend policy, since there is no Par Account Management Policy. Evaluate the above statements. 3. (11 points) You are given the following information about the currency risk exposure for a Canadian life insurance company: Currency (b) USD EUR GBP CNY CHF GOLD (c) Total Value of Assets Denominated in Foreign Currency 800 270 400 850 80 50 Par Liability 2,450 450 105 170 100 40 20 885 All values in the table above have been converted to Canadian dollars. Non-Par Liability 540 115 130 700 60 10 1,555 Solvency Buffer 40 10 12.5 55 5 12 (a) (7 points) Calculate the par and non-par allocations of the company's currency risk capital requirement. Show all work. 134.5 (3 points) Describe how the following actions reduce required capital for currency risks under LICAT: (i) Divest or reduce operations in foreign currency (ii) Purchase Options (iii) Purchase Forwards (1 point) Define three market risks in LICAT other than currency risk. 1. (9 points) ABC Insurance Group is a US-based corporation that sells only nonparticipating whole life and accident policies. ABC reports GAAP financials based on FAS 60. ABC is being acquired by an insurance group based in the European Union and will report financials on both an IFRS and US GAAP basis. (a) (2 points) Compare the methodology and assumptions used to calculate ABC's liabilities under IFRS 17 and ASU 2018-12. You are given: Present value of cash flows Risk Adjustment Contractual Service Margin Liability for Incurred Claims Incurred But Not Reported (IBNR) Other Assets Liability for future policyholder benefits GAAP - DAC 1,000 250 100 475 500 2,000 1,280 100 (b) (3 points) Calculate ABC's equity under both ASU 2018-12 and IFRS 17. Assume that the basis of Other Assets is the same under both regimes. Show all work. (c) (4 points) Critique the following statements regarding the Insurance Capital Standard (ICS) guided by International Association of Insurance Supervisors (IAIS). A. The main objectives of the ICS are protection of shareholders and to contribute to financial growth. B. The ICS reflects only insurance and investment risks to which an International Active Insurance Group (IAIG) is exposed. C. The capital requirement in the ICS is intended to represent a three-year 95 percentile Conditional Tail Expectation (CTE) level of risk. D. Currently, the only approach being considered to estimate margin over current estimates (MOCE) is the Cost of Capital MOCE approach, which is based on an assumed cost of holding ICS required capital. 2. (9 points) DEF, a Canadian Life Insurance Company, specializes in UL products. Recently, they decided to launch their first participating product, First Par. First Par is a whole life product with a guaranteed death benefit and annual cash dividends. (3 points) DEF is planning the following dividend determination process for First Par: • First Par dividends will be updated every three years in order to smooth experience over time. • A single interest rate will be used for all First Par policyholders. regardless of issue date or other policyholder characteristics. Claims experience gains and losses from all products will be considered. • Comment on how well the above dividend determination process reflects the contribution principle. (b) (6 points) You are given the following statements: A. Initial sales projections do not justify creating a separate participating account. Hence, there is no need for DEF to create a Par Account Management Policy. B. First Par will have several advantages over the existing UL products: • DEF may claim qualifying par status, reducing LICAT required capital. • • DEF can hold lower PfADs on First Par compared to UL products. DEF will be able to realize a profit margin at 12% regardless of experience, as the full amount of any losses can be offset by reducing dividends. C. DEF will create a Dividend Policy, but it will not be disclosed publicly to reduce the risk of a lawsuit. D. The Appointed Actuary does not need to sign any additional opinions related to the dividends and the company's dividend policy, since there is no Par Account Management Policy. Evaluate the above statements. 3. (11 points) You are given the following information about the currency risk exposure for a Canadian life insurance company: Currency (b) USD EUR GBP CNY CHF GOLD (c) Total Value of Assets Denominated in Foreign Currency 800 270 400 850 80 50 Par Liability 2,450 450 105 170 100 40 20 885 All values in the table above have been converted to Canadian dollars. Non-Par Liability 540 115 130 700 60 10 1,555 Solvency Buffer 40 10 12.5 55 5 12 (a) (7 points) Calculate the par and non-par allocations of the company's currency risk capital requirement. Show all work. 134.5 (3 points) Describe how the following actions reduce required capital for currency risks under LICAT: (i) Divest or reduce operations in foreign currency (ii) Purchase Options (iii) Purchase Forwards (1 point) Define three market risks in LICAT other than currency risk.

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1 ABC Insurance Group a Comparison of Methodology and Assumptions under IFRS 17 and ASU 201812 Under IFRS 17 and ASU 201812 both standards aim to provide guidance on the recognition measurement presen... View the full answer