LAT test, Run-off test
In 2012 all the insurance market started using International Financial Reporting Standards (IFRS). Due to the fourth standard of IFRS, the insurance company is obliged to take the Liability Adequacy Test (LAT). The idea of this test is to evaluate the adequacy of liabilities at the end of each reporting period. In order to proceed this current estimates of future cash flows in its insurance contracts are being used.
Run-off test — the adequacy of the allowance for losses generated in the previous reporting date check up.
‘LUTS Consulting’ can offer you following LAT related services:
- Carrying out the LAT and Run-off test according to the IFRS and Regulatory rules;
- Making an Actuary report with all the test related methods and assumptions’ description; as well as with the analysis, forecasts, and recommendations provided by Certified Actuary;
- Regulatory and auditor’s check support, carrying out LAT related presentation for any audience.
Since 2012, the financial market of Ukraine is based on the International Financial Reporting Standards (IFRS).
IFRS 4 “Insurance Contracts” is fully related to the Insurance Companies. One of the standards, which had been described in this document, is the requirement of the conducting of the Liability Adequacy Test of reserves (LAT).
Liability Adequacy Test of reserves is the estimation of the need to increase book value of insurance obligations/reserves (or decrease of book value of relevant deffered acquisition cost or relevant intangible assetes) based on the analysis of future cash flow. The result of the Liability Adequacy Test is shown by Unexpired Risk Reserve. In case, if LAT gives the deficit of the actually formed reserves, this reserve is nonzero.
The International Financial Reporting Standards also stress on the need to conduct Run-off test, which allows to estimate the sufficiency of the formed loss reserves for the previous reporting periods.