View source for Wix:Training/IFRS17/Free cash flows/quiz

{{Quiz/start}}
{{Quiz
| topic          = Which cash flows to include
| question       = AXA underwrites 5,000 home insurance policies in Saint-Malo, a coastal town in Brittany exposed to Atlantic storms. When measuring this portfolio under IFRS 17, which of the following would NOT be included in the estimates of future cash flows?
| option_a       = Commissions paid to the brokers who sold the policies
| option_b       = Salaries of the claims adjusters who will handle storm damage claims
| option_c       = The cost of AXA's new corporate headquarters in Paris
| option_d       = Expected salvage recoveries from damaged properties
| correct_answer = c
| explanation    = IFRS 17 requires inclusion of all cash flows that would not exist if the contracts had never been written. The Paris headquarters cost is a general corporate expense, not directly attributable to the Saint-Malo portfolio. Commissions, claims handling salaries, and salvage recoveries all arise directly from fulfilling these contracts.
}}
{{Quiz
| topic          = Which cash flows to include
| question       = A junior actuary preparing the Saint-Malo portfolio estimate includes expected claims but excludes policy administration costs, arguing they are "overhead, not insurance costs." Is this correct?
| option_a       = Yes, only claims and premiums belong in the estimate
| option_b       = No, all cash flows directly attributable to fulfilling the contracts must be included, which covers administration costs tied to the portfolio
| option_c       = Yes, administration costs are captured separately under IFRS 17 as a disclosure item
| option_d       = No, but only if the administration costs exceed 5% of expected claims
| correct_answer = b
| explanation    = IFRS 17 casts a wide net: any cash flow that would not exist if the contracts had never been written must be included. Policy administration costs tied to the portfolio are directly attributable and must form part of the estimate. There is no materiality threshold that exempts them.
}}
{{Quiz
| topic          = The contract boundary
| question       = Each Saint-Malo home policy has a one-year legal term and renews annually. At renewal, AXA can reprice each policyholder based on their updated claims history and current storm-risk models. What is the contract boundary for these policies?
| option_a       = The expected lifetime of the property
| option_b       = One year, because AXA can fully reassess and reprice at each renewal
| option_c       = Two years, to capture at least one renewal cycle
| option_d       = Six months, since storm season lasts only half the year
| correct_answer = b
| explanation    = The contract boundary ends where the insurer can reassess the individual policyholder's risk and reprice or reject. Since AXA has full repricing power at each annual renewal, the boundary is one year. The legal term and the contract boundary coincide here.
}}
{{Quiz
| topic          = The contract boundary
| question       = AXA now offers a "Loyalty Shield" variant in Saint-Malo that guarantees renewal at the same premium for three years, regardless of the policyholder's claims experience. What is the contract boundary for this variant?
| option_a       = One year, because the policy document still shows annual renewal dates
| option_b       = Three years, because AXA cannot reprice the individual policyholder during that period
| option_c       = Three years only if the policyholder actually renews each year
| option_d       = One year, because annual renewal dates always define the boundary
| correct_answer = b
| explanation    = The contract boundary is determined by the insurer's practical ability to reprice for the individual's risk, not by the dates printed on the policy. Because the guaranteed-premium clause removes AXA's repricing power for three years, the boundary extends to three years from inception.
}}
{{Quiz
| topic          = Probability-weighted estimates and keeping assumptions current
| question       = AXA's meteorologists model two scenarios for the Saint-Malo portfolio this year: a 75% probability of a mild storm season with total claims of €6 million, and a 25% probability of a severe season with claims of €22 million. What is the probability-weighted estimate of claims?
| option_a       = €6 million
| option_b       = €10 million
| option_c       = €14 million
| option_d       = €22 million
| correct_answer = b
| explanation    = The probability-weighted estimate is (0.75 × €6m) + (0.25 × €22m) = €4.5m + €5.5m = €10 million. Choosing €6 million would be the error of selecting only the most likely outcome and ignoring tail risk.
}}
{{Quiz
| topic          = Probability-weighted estimates and keeping assumptions current
| question       = A colleague argues that AXA should use the €6 million mild-season figure from the previous question because it is the most likely outcome and therefore the best predictor. Why is this reasoning flawed under IFRS 17?
| option_a       = IFRS 17 always requires the worst-case scenario to be used
| option_b       = The most likely outcome ignores the impact of less probable but high-severity events, systematically understating the liability
| option_c       = The most likely outcome is only permitted for life insurance, not property insurance
| option_d       = IFRS 17 requires the median outcome, not the mode
| correct_answer = b
| explanation    = IFRS 17 requires a probability-weighted estimate precisely because the most likely outcome can understate the liability by ignoring severe tail scenarios. The standard does not require worst-case or median figures; it requires the weighted average across all plausible outcomes.
}}
{{Quiz
| topic          = The contract boundary
| question       = Suppose AXA introduces a clause in the Saint-Malo policies allowing it to reprice at renewal but capping any premium increase at 2% per year. A risk assessor says the contract boundary is still one year because repricing is permitted. Is this correct?
| option_a       = Yes, any ability to change the premium at renewal sets the boundary at one year
| option_b       = No, because the 2% cap may prevent AXA from repricing to fully reflect the policyholder's updated risk, potentially extending the boundary
| option_c       = No, because premium caps automatically extend the boundary to ten years
| option_d       = Yes, because IFRS 17 only considers whether any repricing is possible, not whether it is sufficient
| correct_answer = b
| explanation    = The key test is whether the insurer can set a price that fully reflects the policyholder's risk. A tight cap on increases may prevent this, meaning the insurer is effectively locked into below-risk pricing. The boundary could extend beyond one year depending on whether the cap genuinely restricts full repricing. There is no automatic ten-year rule.
}}
{{Quiz
| topic          = Which cash flows to include
| question       = After a severe winter storm damages 800 homes in Saint-Malo, AXA expects to recover €1.2 million through subrogation claims against a construction company whose faulty roofing contributed to the damage. How should this expected recovery be treated in the cash flow estimates?
| option_a       = Excluded, because subrogation is a legal matter unrelated to insurance measurement
| option_b       = Included as a cash inflow, since it is a recovery the insurer reasonably expects to receive because of the contracts
| option_c       = Included, but only after the court confirms the amount
| option_d       = Netted against acquisition costs rather than included in claims estimates
| correct_answer = b
| explanation    = IFRS 17 requires all cash flows the insurer reasonably expects to receive because of the contract, including subrogation recoveries. The estimate should be probability-weighted to reflect uncertainty about the recovery amount; it does not need to wait for court confirmation.
}}
{{Quiz
| topic          = Probability-weighted estimates and keeping assumptions current
| question       = Six months into the policy year, new climate research significantly increases the estimated probability of severe Atlantic storms hitting Brittany. AXA's original assumptions assigned a 25% probability to a severe season; the new research suggests 40%. What must AXA do under IFRS 17?
| option_a       = Keep the original 25% assumption until the policies expire, then update for the next underwriting year
| option_b       = Update the probability-weighted estimate at the next reporting date to reflect the 40% figure and any other revised assumptions
| option_c       = Update only if the change exceeds a 10% materiality threshold set by the standard
| option_d       = Disclose the new research in the notes but leave the liability unchanged
| correct_answer = b
| explanation    = IFRS 17's "current estimate" philosophy requires the insurer to revise its assumptions at every reporting date to reflect the latest available information. There is no materiality threshold in the standard that permits ignoring significant new evidence. The balance sheet must show AXA's best current view of fulfilment costs.
}}
{{Quiz
| topic          = Probability-weighted estimates and keeping assumptions current
| question       = After updating the storm probability to 40%, AXA recalculates the probability-weighted claims estimate. At the same time, recent court rulings in Rennes have raised average bodily injury awards in Brittany by 15%, and construction cost inflation has increased expected repair costs. An actuary proposes updating only the storm probability and leaving other assumptions unchanged to keep the model simple. Is this approach acceptable under IFRS 17?
| option_a       = Yes, IFRS 17 only requires updating the single most material assumption at each reporting date
| option_b       = Yes, provided the other changes are disclosed in the financial statement notes
| option_c       = No, the insurer must update all assumptions that have materially changed, including legal trends and inflation, to reflect current conditions
| option_d       = No, but only because inflation adjustments are mandatory; legal trends are optional
| correct_answer = c
| explanation    = IFRS 17 requires estimates to reflect all current information at the reporting date. Cherry-picking one assumption while ignoring other significant changes — such as inflation and legal developments — would produce a stale and incomplete view of the liability. All assumptions must be brought up to date together.
}}
{{Quiz/end}}