Deck 21: Accounting for General Insurance Contracts

Question 1

In undertaking a liability adequacy test the present value of future claims must be compared with unearned premiums.

Answer 1

True

Question 2

The reason provided for discounting liabilities for future claims is that the liability represents the amount which,if set aside as at the reporting date,would accumulate to the amount of the claims as they are expected to fall due.

Answer 2

True

Question 3

In AASB 1023 General Insurance Contracts all unclosed business is estimated and the premium relating to unclosed business included in premium revenue from the attachment date.

Answer 3

True

Question 4

The present value of claim liabilities will increase as the number of years they remain unsettled increases.This difference should be treated as an expense.

Question 5

Unclosed business is defined as business written close to the reporting date for which the date of attachment of the risk is before the end of the reporting date.

Question 6

Under AASB 1023 a general insurer must adopt the fair value model to account for financial assets backing general insurance liabilities.

Question 7

At present there are three AASB standards related to insurance contracts:

A) Phase I of the IASB Insurance Project will see these replaced by one standard.
B) Three standards are required to deal with complex issues such as the HIH collapse.
C) These standards cover life insurance, general insurance and motor vehicle insurance.
D) These standards reissued in July 2004 have been significantly altered based on recommendations from the HIH Royal Commission.

Question 8

The financial statements shall disclose in relation to the outstanding claims liability the component related to the risk margin.

Question 9

Outstanding claims should be recognised as liabilities,as should any insurance premiums received in advance but not yet earned.

Question 10

In AASB 1023 General Insurance Contracts,premium that has not been recognised in the statement of comprehensive income is premium that is unearned and recognised in the statement of financial position as an unearned premium liability.

Question 11

Part of the insurance premium is a charge levied by government on the insured party.These amounts are to be treated as a liability by the insurer.

Question 12

General insurance refers to the provision of insurance for losses associated with events such as fire,flood,storms and vehicle accidents.

Question 13

Under AASB 1023 general insurers are to disclose the process used to determine which assets back general insurance liabilities.

Question 14

The direct insurer is required to use the gross method for premium recognition.

Question 15

In the situation that at year end an insurer is aware that there has been flooding in an area in which it has insured policy holders against flooding,the insurer should estimate the probable claims and treat them as an expense of the current period even though the claims have not yet been made.

Question 16

The attachment date is the date from which an insurer accepts risk for the insured under a contract or endorsement.

Question 17

An insurer is not required to disclose its objectives,policies and processes for managing risks arising from insurance contracts.

Question 18

Under the revised AASB 1023,acquisition costs with future economic benefits are no longer deferred; instead these costs should be expensed as incurred.

Question 19

General insurance contracts and life insurance contracts are not within the scope AASB 4 Insurance Contracts.

Question 20

Payments to insurance contracts that relate to claims recognised in a previous period reduce the liability for claims that was created in the previous financial period.

Question 21

What is an example of deferred acquisition costs and how does AASB 1023 require them to be treated?

A) They include commission or brokerage paid to agents to attract business. They should be deferred as an asset and systematically amortised over the period of expected benefit.
B) They include brokerage and legal fees paid in advance of the purchase of land. They should be deferred and included in the cost of the land.
C) They include the purchase of client lists and policy details from agents. They should be capitalised as an intangible asset and revalued at balance date.
D) They include brokerage and legal fees paid in advance of the purchase of land. They should be deferred and included in the cost of the land and they include the purchase of client lists and policy details from agents. They should be capitalised as an intangible asset and revalued at balance date.

Question 22

Payments made on claims should be:

A) always treated as an expense for the period in which the payment is made.
B) only treated as an expense in the period if the claim is also settled in that period.
C) used to reduce the liability for claims settled in previous periods.
D) only treated as an expense in the period if the claim is also settled in that period and used to reduce the liability for claims settled in previous periods.

Question 23

Property,plant and equipment that is within the scope of AASB 116 and backs general insurance liabilities,should be measured at:

A) depreciated historical cost.
B) net replacement cost.
C) recoverable amount.
D) None of the given answers are correct.

Question 24

An unearned premium liability is:

A) a premium that has been recognised previously in the statement of comprehensive income but not yet claimed against.
B) to meet costs, including the claims handling costs.
C) required to be recognised in the statement of financial position.
D) to meet costs, including the claims handling costs and required to be recognised in the statement of financial position.

Question 25

AASB 1023 specifies how classes of assets are to be measured.These requirements include that:

A) recoveries receivable and operating assets be recorded at historical cost.
B) financial assets within the scope of AASB 9 be measured at depreciated net market value at balance date and recoveries receivable be at their nominal amount.
C) financial assets within the scope of AASB 9 be measured at fair value through profit and loss on first application of this standard, or on initial recognition.
D) deferred acquisition costs and recoveries receivable be measured at their discounted present value.

Question 26

Where an insurer reinsures some or its entire insurance portfolio,AASB 1023 requires that,with respect to the revenue received relating to the reinsured policies and the premiums ceded to the reinsurer:

A) the revenue and premiums be set-off so that the net revenue only is recorded as this reflects the risk borne by the direct insurer.
B) the gross revenue be reflected in the accounts but a provision for reinsurance premiums be created and set-off against the policy revenue.
C) the net amount of premium (gross premium revenue less amounts transferred to the reinsurer) be recognised but a note disclosing both the gross amount of revenue and the premiums transferred to the reinsurer be provided.
D) the full amount of revenue received by the direct insurer be recognised and the portion of the premiums ceded to the reinsurer treated as an expense.

Question 27

The superseded version of AASB 1023 required that investments that are integral to the entity's general insurance activities should be:

A) measured at net market value, with any changes being treated as an adjustment to equity through reserves.
B) measured at current replacement cost and depreciated so that the expense of the period is matched against premium revenue.
C) measured at net market value, with any changes treated as a revenue or expense of the period.
D) measured at the lower of cost and recoverable amount, with any amounts written off treated as an expense of the period.

Question 28

Government charges levied on the insurer may be required to be paid while the revenue that they relate to remains unearned.In this case the appropriate accounting treatment in the books of the insurer is to treat the levies paid as:

A) a liability.
B) a prepayment.
C) a contra account to unearned revenue.
D) net the levies off the revenue recognised in the period that the levies are payable.

Question 29

General insurance is an important part of the economy as it:

A) enables entities to reduce their risk exposure.
B) benefits society by safeguarding individuals' homes.
C) encourages investment in particular activities.
D) All of the given answers are correct.

Question 30

Justice Owen in the HIH Royal Commission suggested that:

A) Accounting standards which were unclear were primarily responsible for the collapse of HIH.
B) The inclusion of more non-accounting experience on the AASB could assist in the standard setting process.
C) That the true and fair view was no longer applicable to accounting reports.
D) Accounting standards which were unclear were primarily responsible for the collapse of HIH and that the true and fair view was no longer applicable to accounting reports.

Question 31

Warning Ltd writes insurance policies to cover the risk of storms in northern Australia.The policy premiums are expected to be received evenly over the year as they have evenly distributed due dates.Warning Ltd is aware that the risk of storms is 25 times greater in the months between December and March than in the other months of the year.The appropriate discount rate for Warning Ltd is 11%.If the total amount of insurance premiums to be received is $400 000,what is the pattern of revenue recognition in accordance with AASB 1023 (round amounts to the nearest dollar)?

A) $33 333 per month
B) $82 407 in December to March; $3296 each other month
C) $3667 per month.
D) $92 593 in December to March; $3703 each other month

Question 32

Hazard Ltd writes insurance policies to cover the risk of fire in northern New South Wales.The policy premiums are expected to be received evenly over the year as they have evenly distributed due dates.Hazard Ltd is aware that the fire risk is eight times greater in January,February and March than it is the rest of the year.The appropriate discount rate for Hazard Ltd is 12%.If the total amount of insurance premiums to be received is $50 000,what is the pattern of revenue recognition in accordance with AASB 1023 (round amounts to the nearest dollar)?

A) $12 500 in January, February and March; $1389 each other month
B) $3720 per month
C) $12 121 in January, February and March; $1515 each other month
D) $4167 per month

Question 33

Unclosed business can be described as:

A) a business that has been rendered inoperable but is covered by a general insurance contract and will be restored.
B) a situation where an insurer has agreed to accept the risk before the appropriate policy contract has been completed.
C) business written close to balance date where the attachment date is post balance date.
D) a situation where the unearned portion of the premium needs to be estimated to be included in premium revenue.

Question 34

In undertaking a liquidity adequacy test,if the present value of future claims exceeds the unearned premium liability:

A) The difference must be recorded as an asset under AASB 1023.
B) A further liability should be recorded to 'make up' the deficiency.
C) An expense should be recorded by initially writing down any related intangible assets.
D) A further liability should be recorded to 'make up' the deficiency and an expense should be recorded by initially writing down any related intangible assets and related deferred acquisition costs.

Question 35

The treatment of deferred acquisition costs is inconsistent with AASB 138 because:

A) These costs are deemed to be an intangible asset under AASB 138.
B) These costs do not meet definition criteria for assets under the AASB Framework.
C) These costs are not separable, which is required for intangible assets under AASB 138.
D) These costs do not meet definition criteria for assets under the AASB Framework and these costs are not separable, which is required for intangible assets under AASB 138.

Question 36

The pattern of revenue recognition required by AASB 1023 is:

A) As premiums become due and payable, the revenue should be recognised according to accrual principles.
B) In accordance with the pattern of past receipts from policies of a similar type.
C) Based on the discounted cash flows expected to be associated with the policy, using past experience of policies that are in the same category.
D) Based on the pattern of the incidence of risk to which the insurer is exposed.

Question 37

Danger Ltd writes insurance policies to cover the risk of theft in central Brisbane.The policy premiums are expected to be received evenly over the year as they have evenly distributed due dates.Danger Ltd is aware that the risk of theft is 20 times higher in March and 15 times higher in July than in the other months of the year.The appropriate discount rate for Danger Ltd is 15%.If the total amount of insurance premiums to be received is $1 000 000,what is the pattern of revenue recognition in accordance with AASB 1023 (round amounts to the nearest dollar)?

A) $72 467 per month
B) $200 000 in March, $150 000 in July, $54 167 in each other month
C) $83 333 per month.
D) $444 444 in March, $333 333 in July and $22 222 in each other month

Question 38

Government charges should be included as part of the premium revenue if:

A) they are levied on the insurer and incorporated into the insurance premium.
B) they are imposed on the insured party by the government.
C) the insurer is acting simply as a collector of levies and charges imposed by the government.
D) they are levied on the insurer and incorporated into the insurance premium and the insurer is acting simply as a collector of levies and charges imposed by the government.

Question 39

AASB 1023 requires which discount rate to be applied to an outstanding claims liability?

A) weighted average cost of financing for the particular insurer.
B) market-determined risk-adjusted rate of return for the particular insurer.
C) risk-free discount rates based on current observable and objective rates.
D) high quality corporate bond rates.

Question 40

Items to be disclosed under AASB 1023 include:

A) inwards freight.
B) revenue from operating assets.
C) investment expenses.
D) inwards reinsurance revenue.

Question 41

Which of the following are considered income arising from insurance contracts?

A) direct premium revenue
B) inward reinsurance premium revenue
C) unearned premium revenue
D) direct premium revenue and inward reinsurance premium revenue

Question 42

Which of the following are considered expenses arising from insurance contracts?

A) direct claims expense
B) reinsurance claims expense
C) deferred acquisition costs
D) direct claims expense and reinsurance claims expense

Question 43

Which of AASB 1023's requirements has received the main criticism?

A) the prohibition against netting reinsurance receivables against claims liabilities.
B) the requirement to mark investments to market and reflect the changes in the statement of comprehensive income.
C) the requirement to report premium revenues gross.
D) the requirement to discount future claim liabilities at the market-determined, risk-adjusted discount rate for the entity.

Question 44

There have been numerous criticisms of AASB 1023 since it became operative in 1992.The criticisms have mainly come from:

A) policy holders.
B) government policy advisers.
C) general insurers.
D) professional accounting bodies.

Question 45

AASB 1023's disclosure requirements relating to the statement of comprehensive income include:

A) deferred acquisition costs.
B) inwards reinsurance revenue.
C) unearned premiums.
D) undiscounted gross claims incurred.

Question 46

Which of the following is not a part of Justice Owen's recommendations to the Australian Accounting Standards Board with respect to AASB 1023 General Insurance Contracts?

A) requirement that premium revenue and insurance liabilities be recognised on the commencement of a contract of insurance
B) requirement that, in estimating the present value of liabilities, future cash flows be discounted using high quality corporate bond rate
C) requirement that companies subject to the standard disclose a 10-year claims-development table that includes past estimates of claims on an undiscounted basis as well as the actual costs of settling claims
D) requirement that insurance liabilities be valued at a level of sufficiency of at least 75 per cent, as required by APRA's prudential standards

Question 47

Some stakeholders have been critical of aspects of AASB 1023 that introduce volatility into earnings.Why would increased volatility be considered undesirable?

A) Increased volatility is associated with unreliable service and may lead potential policy holders to choose another company.
B) It makes it more difficult for management to plan how to manage its profit levels.
C) Volatile earnings make it more difficult for employees to argue for pay increases.
D) Insurers may be put into technical default on contractual clauses relating to things such as debt covenants.

Question 48

It was argued that the old version of AASB 1023 would inappropriately increase the volatility in earnings through:

A) its requirement to recognise short-term changes in the net market value of investments in the statement of comprehensive income regardless of whether or not management intends to hold the investments long term.
B) the failure to net reinsurance reimbursements from claims so that a higher level of claims is reflected in the statement of comprehensive income despite the fact that management has mitigated against this.
C) the failure to recognise the value of intangible assets such as client lists that contribute to a steady flow of income for an insurer.
D) the failure to net reinsurance reimbursements from claims so that a higher level of claims is reflected in the statement of comprehensive income despite the fact that management has mitigated against this and the failure to recognise the value of intangible assets such as client lists that contribute to a steady flow of income for an insurer.

Question 49

Which of the following is within the scope of AASB 1023 General Insurance Contracts?

A) fixed fee service contracts
B) life insurance contracts
C) weather derivatives
D) product warranties

Question 50

Which of the following statements is not in accordance with AASB 1023 General Insurance Contracts when determining the outstanding claims liability?

A) Premium that has not been recognised in the statement of comprehensive income is premium that is unearned and shall be recognised in the statement of financial position as an unearned premium liability.
B) The outstanding claims liability may be discounted for the time value of money using government bond rates that match the structure and term of the future obligations.
C) The expected future payments include: (a) unpaid reported claims; (b) claims incurred but not reported; (c) claims incurred but not enough reported; and (d) acquisition costs.
D) An outstanding claims liability shall be recognised in respect of direct business and reinsurance business and shall be measured as the central estimate of the present value of the expected future payments for claims incurred with an additional risk margin to allow for the inherent uncertainty in the central estimate.

Question 51

Which of the following statements is true?

A) In accordance with AASB 1023 premium revenue shall be recognised from attachment date as soon as there is a basis on which it can be reliably estimated.
B) Premium revenue shall be recognised in the statement of comprehensive income from attachment date over the period of the contract in accordance with the pattern of the incidence of risk.
C) Premium revenue shall be recognised in the statement of comprehensive income from attachment date over the period of the general insurance contract.
D) In accordance with AASB 1023 premium revenue shall be recognised from attachment date as soon as there is a basis on which it can be reliably estimated and premium revenue shall be recognised in the statement of comprehensive income from attachment date over the period of the contract in accordance with the pattern of the incidence of risk.

Question 52

Which of the following statements is correct in regards to assets backing general insurance liabilities?

A) Financial assets are required to be recognised at fair value through profit and loss.
B) Property, plant and equipment shall be measured using either the cost model or the valuation model.
C) Investment properties shall be measured using the fair value model.
D) Financial assets are required to be recognised at fair value through profit and loss, and investment properties shall be measured using the fair value model.

Question 53

Risk margins are determined on the basis of:

A) the robustness of valuation models used.
B) past experience of the insurer and the industry.
C) the reliability and volume of data.
D) all of the given answers.

Question 54

The disclosures required in AASB 1023 in relation to liabilities for outstanding claims include:

A) the percentage margin adopted in determining the outstanding claims liability.
B) the component related to the risk margin.
C) the central estimate of the expected present value of future payments for claims incurred.
D) all of the given answers.

Question 55

Which of the following is not within the scope of AASB 1023 General Insurance Contracts?

A) motor vehicle insurance
B) home and contents insurance
C) third party liability insurance
D) life insurance

Question 56

AASB 1023 General Insurance Contracts requires premium revenue to be recognised in the statement of comprehensive income from attachment date using which basis?

A) straight-line basis over the duration of the insurance contract
B) consistent with the use of economic benefits
C) systematic basis consistent with the pattern of the incidence of risk
D) on expiry date of the insurance contract

Question 57

The consistency of AASB 1023 with other accounting standards has been raised as an issue.Which two other standards specifically do not apply to the general insurance part of a business but may apply to the remaining elements of the business?

A) AASB 132 Financial Instruments: Disclosure and Presentation and AASB 102 Inventories
B) AASB 112 Income Taxes and AASB 124 Related Party Transactions
C) AASB 107 Statement of Cash Flows and AASB 132 Financial Instruments: Disclosure and Presentation.
D) AASB 9 Financial Instruments: Recognition and Measurement and AASB 116 Property, Plant and Equipment.

Question 58

The new version of AASB 1023 has gone some way to reducing the volatility in earnings but:

A) Some volatility will remain with the required application of AASB 140.
B) This volatility will be completely removed when the IASB complete their Insurance Project.
C) The introduction of the requirement to apply AASB 9 will introduce further volatility to the accounts.
D) Some volatility will remain with the required application of AASB 140 and the introduction of the requirement to apply AASB 9 will introduce further volatility to the accounts.

Question 59

A general insurer that also conducts other business may be required to apply different valuation methods even within 1 class of assets.For example,land and buildings may be valued in one of a number of ways,including:

A) at cost or fair value where they do not back general insurance business liabilities but only at fair value under AASB 1023.
B) at lower of cost and net realisable value where they are an integral part of the insurance business and net present value where they are not an integral part of the insurance business.
C) at management's discretion, at either net market value or depreciated (in the case of buildings) cost.
D) at net market value or fair value, depending upon the whether the land and buildings are an investment for the purposes of generating revenue or used as an operating asset to provide office space for the insurance business

Question 60

You are an accountant for Chance Insurance Ltd and are asked to assess the adequacy of unearned premium liability.You are able to access the following information:
I)present value of expected future cash flows relating to future claims based on current insurance contracts
II)unearned premium liability (before liability adequacy test)
III)risk margin
IV)related deferred acquisition cost
V)related intangible assets
Which of the following combinations best fits the liability adequacy test as prescribed in AASB 1023?

A) (I+III) - II
B) (I+III) - (II - IV - V)
C) (I-III) - II
D) (I+III) - (II+IV+V)

Question 61

Explain the rationale in AASB 1023 of selecting the pattern of the incidence of risk to recognise premium revenue.

Question 62

AASB 1023 General Insurance Contracts states that the pattern of the incidence of risk for many direct insurance contracts will be:

A) straight-line basis over the duration of the insurance contract.
B) consistent with the business cycle.
C) driven by economic forces.
D) reduced over the life of the contract.

Question 63

Explain the accounting treatment for revenues associated with unclosed business.How are they measured?

Question 64

Discuss the steps required to apply the liability adequacy tests to general insurers.How does this initiative that resulted from the HIH Royal Commission assist in avoiding another HIH collapse?

Question 65

What aspects of the current version of AASB 1023 will still give rise to earnings/price volatility that was dreaded by the industry when AASB 1023 was first introduced?

Question 66

How is outstanding claims liability measured as prescribed in AASB 1023 General Insurance Contracts?

Question 67

Which of the following was not identified by the general insurers as introducing volatility to the financial statements?

A) debentures
B) equity investments
C) government bonds
D) property

Question 68

Discuss the disclosure requirements for the statement of comprehensive income.

Question 69

Discuss 'expected future payments' as referred to in AASB 1023 General Insurance Contracts.

Question 70

Discuss the measurement requirements for assets held to 'back general insurance liabilities'.

Question 71

In accordance with AASB 1023,what types of expected future payments in relation to insurance claims are required to be disclosed in the statement of financial position?
Explain how each type is measured.

Question 72

A central requirement for financial statements in Australia is that they are:

A) true and understandable.
B) true and fair.
C) true and reasonable.
D) true and correct.

Question 73

The cedant is:

A) the insurer.
B) the policy holder.
C) the reinsurer.
D) none of the given answers.