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Effect of Risk Adjustment Confidence Levels on Insurance Contract Values

Abstract

The risk adjustment for non-financial risk is an important component of insurance contract measurement under IFRS 17 because it represents the compensation an insurer requires for bearing uncertainty associated with non-financial risks. Confidence levels provide a basis for expressing the degree of certainty required when determining the amount of risk adjustment. Changes in the selected confidence level may therefore influence the estimated risk adjustment and consequently affect the value of insurance contracts. This study will examine the effect of risk adjustment confidence levels on insurance contract values. It will assess how alternative confidence levels influence the measurement of risk adjustment and the resulting values of insurance contracts. The study will also examine variations in contract values arising from different confidence level assumptions and determine the extent to which these assumptions affect the measurement of insurance liabilities. The study will focus on risk adjustment, confidence levels, insurance contract values, IFRS 17, non-financial risk, insurance liabilities, fulfilment cash flows, claims uncertainty, actuarial valuation, and risk measurement. Statistical and actuarial techniques will be applied to estimate potential variations in future insurance cash flows and determine risk adjustment values corresponding to different confidence levels. A quantitative research approach will be adopted for the study. Historical claims data, expected insurance cash flows, claims variability, expense information, and relevant portfolio characteristics will be analysed using descriptive statistics, probability modelling, confidence-level analysis, comparative analysis, sensitivity analysis, and scenario-based actuarial calculations. Alternative confidence levels will be applied to selected insurance contract portfolios to determine their effects on risk adjustment amounts and overall insurance contract values. The study is expected to reveal that risk adjustment confidence levels may have a significant effect on insurance contract values. Higher confidence levels may produce larger risk adjustments and consequently higher measured insurance contract liabilities, while lower confidence levels may result in smaller risk adjustments. The magnitude of the effect may depend on the degree of claims uncertainty, risk exposure, probability distribution of future cash flows, portfolio characteristics, and the range of confidence levels considered. The study will be useful to actuaries, insurance companies, accountants, financial reporting specialists, valuation professionals, regulators, auditors, and researchers. It may provide useful information for evaluating the sensitivity of insurance contract values to risk adjustment assumptions, improving IFRS 17 measurement practices, strengthening actuarial risk assessment, and supporting consistent financial reporting. The findings may also assist insurers in understanding the financial implications of selecting different confidence levels for non-financial risk measurement. The study concludes that risk adjustment confidence levels are important considerations in determining insurance contract values because changes in the selected level of confidence can influence the amount of risk adjustment and the resulting insurance liabilities. It is therefore recommended that insurers select appropriate confidence levels based on reliable risk information and regularly conduct sensitivity analysis to evaluate the effect of confidence-level assumptions on insurance contract valuation.

Keywords: Risk adjustment, confidence levels, insurance contract values, IFRS 17, non-financial risk, insurance liabilities, fulfilment cash flows, claims uncertainty, actuarial valuation, risk measurement, confidence level analysis, insurance contract measurement, probability modelling, liability estimation, actuarial risk analysis.