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Effect of Loss Component Measurement on Onerous Insurance Contract Valuation

Abstract

Onerous insurance contracts are contracts for which the expected costs of fulfilling the contractual obligations exceed the expected economic benefits from the related insurance coverage. Under IFRS 17, losses on such contracts are identified and reflected through the measurement of the loss component. Accurate measurement of this component is important because it affects the recognition of insurance contract liabilities and the financial performance reported by insurance entities. This study will examine the effect of loss component measurement on onerous insurance contract valuation. It will assess how changes in the measurement of the loss component influence the valuation of onerous insurance contracts and determine how variations in expected future cash flows affect the amount of losses recognized in the measurement process. The study will focus on loss component measurement, onerous insurance contracts, IFRS 17, fulfilment cash flows, insurance contract liabilities, expected claims, insurance expenses, premium cash flows, risk adjustment, discount rates, and contractual service margin. Actuarial valuation techniques will be applied to estimate the fulfilment cash flows associated with onerous contracts and determine the resulting loss component. Alternative assumptions relating to claims, expenses, discount rates, and risk adjustments will be considered in the valuation. A quantitative research approach will be adopted for the study. Relevant insurance contract data, expected premiums, claims, expenses, contract durations, discount rates, risk adjustments, and loss component measurements will be analysed using IFRS 17 measurement techniques, present value calculations, actuarial modelling, sensitivity analysis, and scenario analysis. Alternative assumptions will be applied to determine their effects on the valuation of onerous insurance contracts and the associated loss component. The study is expected to reveal that changes in loss component measurement may have a significant effect on the valuation of onerous insurance contracts. Higher expected claims and expenses may increase fulfilment cash flows and consequently increase the measured loss component. The magnitude of the effect may depend on the timing of future cash flows, contract duration, discount rates, risk adjustments, and changes in expected profitability. The study will be useful to insurance companies, actuaries, accountants, auditors, financial reporting professionals, regulators, risk managers, and researchers. It may provide useful information for improving the measurement of onerous insurance contracts under IFRS 17, assessing contract losses, strengthening financial reporting practices, and supporting accurate recognition of insurance contract liabilities. The study concludes that loss component measurement is an important aspect of onerous insurance contract valuation because changes in expected fulfilment cash flows can affect the amount of loss recognized and the resulting insurance contract liability. It is therefore recommended that insurers regularly review claims, expense, discount rate, and risk adjustment assumptions and apply appropriate IFRS 17 and actuarial valuation techniques when measuring onerous insurance contracts.

Keywords: Loss component measurement, onerous insurance contracts, IFRS 17, insurance contract valuation, fulfilment cash flows, insurance liabilities, expected claims, insurance expenses, contractual service margin, risk adjustment, discount rates, premium cash flows, actuarial valuation, contract losses, insurance accounting.