GROUP ACCOUNTING POLICIES (continued) 5. Insurance, investment and reinsurance contracts (continued) 5.1 Classification of contracts (continued) 5.1.3 Measurement (continued) Best estimate of expected future cash flows include: • Premiums • Expenses including: o Allocation of insurance acquisition cash flows attributable to the portfolio to which the contract belongs o Claims handling costs o Policy administration and maintenance costs o Allocation of fixed and variable overheads directly attributable to fulfilling insurance contracts • Payments to policyholders including: o Death benefits o Accidental death benefits o Sickness benefits o Permanent incapacity benefits o Disability benefits o Dread disease benefits Risk adjustment: An explicit risk adjustment for non-financial risk is estimated separately from the other estimates. Discount rates: The estimates of future cash flows are adjusted using the current discount rates to reflect the time value of money and the financial risks related to those cash flows, to the extent not included in the estimates of cash flows. The discount rates reflect the characteristics of the cash flows arising from the groups of insurance contracts, including timing, currency and liquidity of cash flows. The determination of the discount rate that reflects the characteristics of the cash flows and liquidity characteristics of the insurance contracts requires significant judgement and estimation. Risk of the Group’s non-performance is not included in the measurement of groups of insurance contracts issued. In the measurement of reinsurance contracts held, the probability-weighted estimates of the present value of future cash flows include the potential credit losses and other disputes of the reinsurer to reflect the non-performance risk of the reinsurer. The Group estimates certain FCF at the portfolio level or higher and then allocates such estimates to groups of contracts. The Group uses consistent assumptions to measure the estimates of the present value of future cash flows for the group of reinsurance contracts held and such estimates for the groups of underlying insurance contracts. Contract boundary The Group uses the concept of contract boundary to determine what cash flows should be considered in the measurement of groups of insurance contracts. Cash flows are within the boundary of an insurance contract if these arise from substantive rights and obligations that exist during the reporting period in which the Group can compel the policyholder to pay the premiums, or in which the Group has a substantive obligation to provide the policyholder with insurance contract services. 117 Group Accounting Policies
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