Modelling risk adjustment under IFRS 17
Date
2021
Authors
Musyoka, Nisa Wairimu
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
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.
Description
Research Project Submitted in partial fulfillment of the requirements for the Degree of
Bachelor of Business Science, Actuarial Science at Strathmore University