IFRS 17 component reflecting the compensation the insurer requires for uncertainty in the amount and timing of non-financial cash flows.
The risk adjustment is the component of the liability under IFRS 17 that reflects the compensation an insurer requires for bearing the uncertainty in the amount and timing of cash flows linked to non-financial risk, that is, insurance risk proper, distinct from financial risk. It expresses the insurer's risk aversion: the greater the uncertainty over future claims, the higher this adjustment. Unlike Solvency II which prescribes a risk margin method, IFRS 17 leaves the insurer the choice of estimation technique, provided it discloses the equivalent confidence level, which introduces an element of judgement and limits direct comparability across players. The adjustment is released to profit as uncertainty resolves with the run-off of risk. For the analyst, its level indicates the prudence of assumptions and complements the reading of the contractual service margin in assessing profitability.
An insurer calibrating a risk adjustment corresponding to a high confidence level signals prudent assumptions, holding more liability than the best estimate alone.
risk adjustment, ajustement pour risque, RA IFRS 17