IFRS17 Measurement of Property & Casualty Insurance Contracts

IFRS 17 introduces the concept of a risk adjustment that compensates insurers for the uncertainty about the amount and timing of the cash flows that arise from non-financial risks. The method for its calculation is not prescribed and several options are emerging, including value at risk and cost of capital. This paper recalls (Myers & Cohn, 1981) to provide a cost of capital approach that has desirable characteristics including relative ease of implementation, risk adjustment margins that are fully diversified and additive from granular levels, alignment with pricing bases and recognition of a uniform return on allocated capital