Deck 39: Insurance Contracts

Question 1

Which of the following is under the scope of IFRS 4?

A) Insurance contracts that entities issue
B) Assets and liabilities of an insurance entity
C) Insurance contracts held by a policyholder
D) All of the above

Answer 1

Insurance contracts that entities issue

Question 2

Which of the following is not a type of financial risk?

A) Change in commodity prices
B) Foreign exchange rates
C) The average December temperature in Seattle
D) Occurrence of a fire in the insured person's basement
E) Two of the above

Answer 2

Occurrence of a fire in the insured person's basement

Question 3

The risk that the counterparty will cancel the contract early is known as

A) Insurance risk
B) Lapse risk
C) Economic risk
D) Payment risk

Answer 3

Lapse risk

Question 4

Consider the following details:
Contract A is signed on April 1, but significant insurance risk isn't transferred until May 1
Contract B is signed on April 1 with all significant insurance risks transferred. On May 1, the contract no longer has significant insurance risk present.
Contract C is signed on April 1 with significant insurance risks transferred. All the right of the contract expire on April 31.

-Using the above-mentioned information, which of the following contracts would be classified as insurance contracts on April 1?

A) Contracts A & B
B) Contracts B & C
C) Contracts A & C
D) All three contracts

Question 5

Consider the following details:
Contract A is signed on April 1, but significant insurance risk isn't transferred until May 1
Contract B is signed on April 1 with all significant insurance risks transferred. On May 1, the contract no longer has significant insurance risk present.
Contract C is signed on April 1 with significant insurance risks transferred. All the right of the contract expire on April 31.

-Using the above-mentioned information, which of the following contracts would be classified as insurance contracts on May 1?

A) Contracts A & B
B) Contracts B & C
C) Contracts A & C
D) All three contracts

Question 6

IFRS 4 addresses accounting for financial assets and liabilities held and issued by insurers.

Question 7

If an insurance contract has been classified as an insurance contract, but it no longer has insurance risk, the contract should be reclassified as an investment contract.

Question 8

If an insurance contract contains an embedded derivative, but that embedded derivative is also an insurance contract, an entity does not need to separate the elements of the contract.

Question 9

When a DPF is separated from the guaranteed portion of an insurance contract, the guaranteed portion is recognized as a liability.

Question 10

A contract that transfers significant insurance risk is accounted for as a financial instrument.

Question 11

What is the difference between a reinsurance contract and an insurance contract? Who is the "policy holder" in a reinsurance contract (i.e., the cedant)?

Question 12

Match the type of risk with its correct definition:

-_____ Insurance risk

A) The risk that the counterparty to the insurance contract will cancel the coverage earlier or later than expected when the contract price was determined
B) The risk that administrative costs to service the contract will unexpectedly increase
C) The risk arising from uncertainties other than financial risk that is transferred from the holder of an insurance contract to the issuer
D) The possibility that future changes in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, will impact expected cash flows

Question 13

Match the type of risk with its correct definition:

-_____ Expense risk

A) The risk that the counterparty to the insurance contract will cancel the coverage earlier or later than expected when the contract price was determined
B) The risk that administrative costs to service the contract will unexpectedly increase
C) The risk arising from uncertainties other than financial risk that is transferred from the holder of an insurance contract to the issuer
D) The possibility that future changes in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, will impact expected cash flows

Question 14

Match the type of risk with its correct definition:

-_____ Persistency risk

A) The risk that the counterparty to the insurance contract will cancel the coverage earlier or later than expected when the contract price was determined
B) The risk that administrative costs to service the contract will unexpectedly increase
C) The risk arising from uncertainties other than financial risk that is transferred from the holder of an insurance contract to the issuer
D) The possibility that future changes in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, will impact expected cash flows

Question 15

Match the type of risk with its correct definition:

-_____ Financial risk

A) The risk that the counterparty to the insurance contract will cancel the coverage earlier or later than expected when the contract price was determined
B) The risk that administrative costs to service the contract will unexpectedly increase
C) The risk arising from uncertainties other than financial risk that is transferred from the holder of an insurance contract to the issuer
D) The possibility that future changes in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, will impact expected cash flows