Ind AS 117 Transition: Onerous Motor Group and Risk Adjustment
An Indian general insurer is preparing its first Ind AS 117 financial statements. A group of motor third-party policies is expected to be onerous. The fulfilment cash flows are ₹950 crore, the risk adjustment for non-financial risk is ₹80 crore, and the contractual service margin is nil. The statutory actuarial reserve for the same portfolio is ₹910 crore, and the statutory solvency risk margin is ₹55 crore. The auditor asks why the Ind AS 117 risk adjustment is not the same as the statutory risk margin, and why the liability is higher than the statutory reserve. The valuation team also has limited data on claim inflation by accident year, and the Appointed Actuary must explain the estimate to the audit committee. The CFO wants to reduce the risk adjustment to ₹50 crore to improve the reported result, arguing that the range is wide anyway.
1. Explain the Ind AS 117 liability components and why the risk adjustment differs from the statutory solvency risk margin.
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Components. Under Ind AS 117 the liability for incurred claims is the fulfilment cash flows (best-estimate claims and expenses) plus a risk adjustment for non-financial risk, discounted; any CSM relates to future service and is zero for an onerous group. The statutory reserve is a prudential estimate, and the statutory solvency risk margin is a separate capital buffer calibrated for solvency, not the same concept as the Ind AS 117 risk adjustment. The risk adjustment is the compensation required for uncertainty in the fulfilment cash flows; it should reflect the entity's confidence level and diversification, not simply copy the statutory margin. Why higher. The Ind AS 117 liability can exceed the statutory reserve because the fulfilment cash flows use different inflation, discounting and expense assumptions and because the risk adjustment is explicit. Conclusion. Reconcile the two numbers item by item and explain the different purposes; do not force equality.
2. Evaluate the CFO's request to reduce the risk adjustment and explain how you would handle the data limitations.
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CFO request. Reducing the risk adjustment from ₹80 crore to ₹50 crore without a change in the underlying uncertainty would not be objective. A wide range is a reason to disclose sensitivity, not to choose the bottom. The actuary should apply a documented method (for example a confidence level or cost-of-capital approach) and show why ₹80 crore is appropriate. Data limitations. Limited claim-inflation data increase uncertainty; use external benchmarks, ranges and disclosure, and consider a higher risk adjustment rather than a lower one. Governance. Explain the onerous group treatment, the zero CSM and the effect on profit; record the CFO's request and the actuary's response. Communication. Give the audit committee a reconciliation, key judgements and sensitivities; state that the estimate is the actuary's professional judgement and must be signed off independently.