ECIC IR 2023

ANNUAL Financial Statements for the year ended 31 March 2023

E

D

H

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I

L I

N

B

2

0

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0

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S

1

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E X P O R T C R E

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O C

A S

C

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D I

F

T

A

I

N

H

S

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U

U

R

O

A

S

N

F

C

O

E

N

C

O

O

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R

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P

A

O

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Accounting Policies

Fulfilment cash flows The fulfilment cash flows comprise unbiased and probability-weighted estimates of future cash flows within the contract boundary. Fulfilment cash flows are determined separately for insurance contracts (including reinsurance contracts) issued and reinsurance contracts held. Fulfilment cash flows are allocated to groups of insurance contracts for measurement purposes. Fulfilment cash flows exclude expense cash flows not directly attributable to the fulfilment of the insurance contracts. No cash flows vary based on the returns on any financial underlying items, hence no financial risk related to cash flows. Interest paid on claims are deemed to be part of fulfilling the insurance obligation and hence will be reflected as insurance service expenses and not accounted for under insurance finance expenses. The fulfilment cash flows do not reflect ECIC’s non-performance risk (i.e. ECIC credit risk). For reinsurance contracts the probability weighted estimates of the future cash flows include the potential credit losses and other disputes of reinsurer recoveries to reflect the non-performance risk of the reinsurer. Future cash flows are estimated at a project/investment/transaction level per line of business and if a contract that is actually part of the project/investment/transaction and for some reason does not form part of the aggregation group the cash flows are allocated down to that contract. An explicit risk adjustment for non-financial risk is estimated separately from the other estimates. This risk adjustment represents the compensation required for bearing uncertainty about the amount and timing of the cash flows that arises from non-financial risk. For reinsurance contracts held, the risk adjustment reflects that some of this uncertainty will be ceded to the reinsurer. The risk adjustment forms part of the fulfilment cash flows for a group of insurance contracts. Risk adjustment Risk adjustment recognises the possible outcomes, particularly where unfavourable outcomes are possible. The risk adjustment is the difference between the risk-adjusted value and the expected value of a liability (i.e. the uncertainty that surround the net cashflow). The risk adjustment has a floor of zero and hence cannot be negative. ECIC use a confidence quantile technique to determine the risk adjustment. The risk adjustment is calculated as the amount that must be added to the expected value of the insurance liabilities, such that the probability that the actual outcome will be less than the liability is equal to a targeted probability or confidence level. The risk adjustment is the difference between this result and the expected mean value. Contractual service margin (CSM) The CSM is the unearned estimated profit embedded in the insurance contracts. It represents the portion of the total expected future cash flows that is not yet recognised as revenue. The CSM is initially determined at the inception of the insurance contract and is released to the income statement over the coverage period as the insurance coverage is provided. The CSM ensures that the revenue recognition is spread appropriately over time, aligning with the provision of insurance coverage. If a group of insurance contracts is not onerous at initial recognition, the CSM will be measured as the equal and opposite amount of the net inflow resulting from the total of the fulfilment cash flows. This results in no income or expenses arising on initial recognition. If a group of insurance contracts is onerous at initial recognition, the group will immediately recognise this net outflow in profit or loss. Following this, a loss component will be created to represent these losses recognised in profit or loss. Subsequently an increase or reversal of losses on onerous groups of insurance contracts will be presented in profit or loss. For reinsurance arrangements a loss recovery component is established when underlying onerous groups of insurance contracts are recognised, which will offset the insurance losses for the portion of the contracts being reinsured. Discount rates Under IFRS 17 the discount rate should reflect the time value of money and the characteristics of the insurance contract’s cash flows. A zero-coupon yield curve, adjusted to reflect the illiquidity of the group of insurance contracts where applicable, will be applied to cash flows. In certain circumstances, an illiquidity premium may be considered as part of the discount rate. In general, illiquidity premium is an adjustment to the discount rate that reflects the increased risk associated with less liquid investments (i.e.

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