Notes to the Financial Statements
As at 30 June 2024, discount rates used to discount insurance and reinsurance cash flows are based on a yield curve derived from Commonwealth Government bond market yields as at the valuation date, plus an adjustment for illiquidity premium which is based on a formula driven by the difference between these yields and an A-rated non-financial corporate bond for the first ten years, and 20 basis points thereafter. FY24 FY23 Discount rates 4.30% p.a. to 5.35% p.a. 4.10% p.a. to 4.99% p.a.
5.2.3 Risk adjustment
The risk adjustment for non-financial risk is the compensation that is required for bearing the uncertainty about the amount and timing of cash flows that arises from non-financial risk as the insurance contract is fulfilled. Because the risk adjustment represents compensation for uncertainty, estimates are made on the degree of diversification benefits and expected favourable and unfavourable outcomes in a way that reflects the Group’s degree of risk aversion. The Group estimates an adjustment for non-financial risk separately from all other estimates. The cost of capital method was used to derive the overall risk adjustment for non-financial risk. In the cost of capital method, the risk adjustment is determined by applying a cost rate to the present value of projected capital relating to non-financial risk. The cost rate is set at 7.0% (30 June 2023: 7.0%) per annum representing the return required to compensate for the exposure to non-financial risk. The capital is determined at a 99.5% (30 June 2023: 99.5%) confidence level and is projected in line with the run-off of the business. The resulting amount of the calculated risk adjustment corresponds to the average confidence level of 89% (30 June 2023: 89%). The confidence level varies across the different products, and LRC and LIC. Determination of risk adjustment for groups of reinsurance contracts held is based on the risk adjustment of groups of underlying contracts and the reinsurance percentage applied for each group.
5.2.4 Coverage units
The CSM of a group of contracts is recognised as insurance revenue in each period based on the number of coverage units provided in the period, which is determined by considering for each contract the quantity of the services provided, its expected coverage period and time value of money. For lump sum business, coverage units are the discounted value of the sum insured in-force on the contract, allowing for expected decrements (lapse and mortality/morbidity) and indexation. For disability income business, coverage units are the discounted benefit amount including expected decrements such as lapses, mortality and indexation but excluding terminations. Expected coverage period is derived based on the likelihood of an insured event occurring to the extent they affect the expected duration of contracts in the group. Determining the expected coverage period is judgemental since it involves making an expectation of when claims and lapse will occur. Determination of coverage units for groups of reinsurance contracts held follow the same principles as for groups of underlying contracts.
5.2.5 Transition to AASB 17
The Group applied AASB 17 for annual reporting period beginning on 1 July 2023. The Group has determined that it was impracticable to apply the full retrospective approach for some groups of contracts because certain historical information was not available or was not available without undue cost or effort that would enable it to be used under this approach. Therefore, the Group applied the modified retrospective or fair value approaches for these groups of contracts. The Group exercises judgements in determining the transition approaches, applying the transition methods and measuring the transition impacts on the transition date, which will affect the amounts recognised in the consolidated financial statements on the transition date. Refer to section 5.1.6 Transition approaches for detail.
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ClearView Annual Report 2024
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