Modelling risk adjustment under IFRS 17
Musyoka, Nisa Wairimu
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The IFRS 17 accounting standard for measuring Insurance profits is effective for periods starting on or after 1 January 2022 and critical to its measurement is the Risk Adjustment factor. The Risk Adjustment measure is the compensation the entity requires for uncertainty about timing and amount of non-financial risks. The issue however is that there is no prescribed calculation to this measure hence entities must derive the calculation that best suits them if they adhere to the IFRS 17 requirements. This study aims to determine the best risk adjustment measure calculation given the Kenyan Insurance market. The study goes into rigorous detail as to the suggested approaches, mainly the discounted cash flow approach and the cost of capital approach and gives an analysis of how to develop the respective models and the outcome of which one worked best in the context of the Kenyan market. Data was obtained from the Insurance Regulatory Authority for the years 2015 - 2019 mainly focused on short term claim statistics. The study established that the Proportional Hazard Transform under the discounted approach would be best suited to the Kenyan market since it explains the significance of the effects of premium on risk. It also satisfies all conditions under the IFRS 17 requirements and is a coherent risk measure.