ESTIMATION OF IFRS 17 RISK ADJUSTMENT FOR SURRENDER RISK IN LIFE INSURANCE

• Main Author: Murti Dewi, Elisa
• Format: Theses
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/85823
• Institution: Institut Teknologi Bandung

Surrender risk is a risk associated with policyholder’s decision to terminate their insurance policy before its maturity or before the insured event occurs. Surrender risk is one of the risks that can affect the financial stability of life insurance companies because policyholder can decide to surrender at any time and the company must pay a certain amount of cash value. This causes uncertainty regarding the timing and amount of future cash flows. This study proposes two models for calculating the risk adjustment (RA) under IFRS 17. The RA is one of the components of the liability measurement under IFRS 17 that reflects the compensation required by insurers to bear uncertainties arising from non-financial risks. IFRS 17 does not specify a particular method for risk adjustment calculation, so this is one of the main challenges for insurance companies in implementing IFRS 17. The proposed models, namely the lognormal model and the sticky model, are used to model the company’s future cash flows under surrender risk. Furthermore, the methods used to calculate the RA are Value at Risk (VaR) and Tail Value at Risk (TVaR). Based on the simulation results, it is found that the lognormal model provides more stable RA values than the sticky model. The calculation using TVaR method produces a greater RA value than the calculation of RA using VaR method. The RA calculation model in this study fulfilled the three criteria set in IFRS 17. This study also offers a practical model formula for life insurance companies to calculate the RA of cash flows with surrender risk without running time-consuming simulation process.