IFRS 17 General Measurement Model 26 th April 2019 2 Disclaimer - PowerPoint PPT Presentation

IFRS 17 – General Measurement Model 26 th April 2019

2 Disclaimer The views expressed in this presentation are those of the presenter(s) and not necessarily of the Society of Actuaries in Ireland

3 Agenda • Introduction – Previously covered – TRG updates – IASB updates • Overview – Policy Liabilities under IFRS 17 • Present Value of Future Cashflows • Risk Adjustment • Contractual Service Margin • Profit Emergence • Conclusion

4 Abbreviations AoC Analysis of change IASB International Accounting Standards Board Modified retrospective application (on BBA Building Block Approach MRA transition) BEL Best estimate liability OCI Other comprehensive income BoP Beginning of period PAA Premium Allocation Approach CoA Chart of accounts RA Risk Adjustment CoC Cost of capital RM Risk margin under Solvency II CSM Contractual Service Margin SII Solvency II European Financial Reporting Advisory EFRAG TRG Transition Resource Group Group EoP End of period UoA Unit of account GMM General Measurement Model (GMM) VFA Variable Fee Approach FCF Fulfilment cash flows YE Year-end Full retrospective application (on FRA transition) FVA Fair value approach (on transition)

5 Background to the Standard IASB’s project on insurance contracts Exposure Insurance Revised Revised Original Discussion Draft of project Standard Effective Effective paper revised started due date date Mar Jan proposals Jul May 2004 2005 2010 2017 May Jun Jan Jan 1997 June 2007 2013 2021 2022 IFRS 2019 Exposure IFRS 17 IFRS 4 standards Draft of issued issued adopted in proposals Europe • IFRS 9 – some insurers will use deferral option until 1 January 2022 based on IFRS 4 amendments • IFRS 15 is effective 1 January 2018, IFRS 16 is effective 1 January 2019 • Investment contracts without discretionary participation features (e.g. unit linked investments) are in scope of IFRS 9 / IAS 39 • IFRS 17 delayed by a year to 1 January 2022, revised standard due late Q2 2019. • FASB decided to only make targeted amendments to US GAAP

6 Previously Covered • Scope • Contract classification – IFRS 17 defines insurance contracts as contracts under which significant insurance risk is transferred. • Unbundling – distinct components? • Aggregation – profitable vs onerous contracts, Companies will need to set a definition of ‘similar risks’ and ‘managed together’ and complete a profitability analysis. • Measurement models – GMM, PAA, VFA. • Reinsurance – inward (“issued”) vs outward (“held”) reinsurance. • Transition – Full retrospective, modified retrospective or fair value approach. • Presentation and disclosures – amounts, judgements and risks.

7 TRG Discussion Topics • • February 2018: September 2018: – – Separation of insurance components of a single Insurance risk consequent to an incurred claim insurance contract; – Determining discount rates using a top-down – Boundary of contracts with annual repricing approach mechanisms – Commissions and reinstatement premiums in – Boundary of reinsurance contracts held reinsurance contracts issued – – Insurance acquisition cash flows paid and future Premium experience adjustments related to current or renewals past service – – Determining the quantity of benefits for identifying Cash flows that are outside the contract boundary at coverage units initial recognition – – Insurance acquisition cash flows when using fair value Recovery of insurance acquisition cash flows transition – Premium waivers – Group insurance policies – Industry pools managed by an association – Annual cohorts for contracts that share in the return of a specified pool of underlying items. • May 2018 • April 2019 – Combination of insurance contracts – Investment components within an insurance contract – Determining the risk adjustment for non-financial risk – Policyholder dividends in a group of entities – Changes in the risk adjustment for non-financial risk – Cash flows within the contract boundary due to time value of money and financial risk – Boundary of reinsurance contracts held with repricing – Definition of insurance contracts with direct mechanisms participation features — mortality cover – Determining the quantity of benefits for identifying – Consideration of reinsurance in the risk adjustment for coverage units non-financial risk – Changes in fulfilment cash flows as a result of inflation.

8 IASB – Areas considered for revision No change proposed Change proposed 1. Scope: Loans and other forms of credit that 10. Measurement: Business combinations - 18. Defined terms: Insurance contract with transfer insurance risk classification of contracts direct participation features 2. Level of aggregation 11. Measurement: Business combinations - contracts 19. Interim financial statements: Treatment of acquired during the settlement period accounting estimates 3. Measurement: Acquisition cash flows for 12. Measurement: Reinsurance contracts held - initial 20. Effective date: Date of initial application of renewals outside the contract boundary recognition when underlying insurance contracts are IFRS 17 onerous 4. Measurement: Use of locked-in discount 13. Measurement: Reinsurance contracts held - 21. Effective date: Comparative information rates to adjust the contractual service margin ineligibility for the variable fee approach 5. Measurement: Subjectivity - Discount rates 14. Measurement: Reinsurance contracts held - 22. Effective date: Temporary exemption from and risk adjustment expected cash flows arising from underlying insurance applying IFRS 9 contracts not yet issued 6. Measurement: Risk adjustment in a group 15. Presentation in the statement of financial position: 23. Transition: Optionality of entities Separate presentation of groups of assets and groups of liabilities 7. Measurement: Contractual service margin - 16. Presentation in the statement of financial position: 24. Transition: Modified retrospective coverage units in the general model Premiums receivable approach: further modifications 8. Measurement: Contractual service margin - 17. Presentation in the statement(s) of financial 25. Transition: Fair value approach: OCI on limited applicability of risk mitigation performance: OCI option for insurance finance income related financial assets exception or expenses 9. Measurement: Premium allocation approach - premiums received

9 Agenda • Introduction • Overview – Policy Liabilities under IFRS 17 – Measurement Models - which model when? – IFRS 17 General Measurement Model • Present Value of Future Cashflows • Risk Adjustment • Contractual Service Margin • Profit Emergence • Conclusion

10 Which Model When IFRS 17 Measurement Models Modifications to the General Measurement Model General Measurement Model Variable Fee Approach Premium Allocation Approach (mandatory) (optional) (Liability for remaining coverage) (Ins. Contracts with Direct Participation Features) MUST be used, if at inception* of • Default approach MAY be used, if at inception of contract **: group: • Used at transition (i) Policyholder contractually (i) not differ materially to GMM participates in clearly identified & live/production pool of underlying items; or • Both life & & (ii) coverage period of group is (ii) Policyholder receives general insurance max one year. (Many GI substantial share of the returns contracts; possibly annual • (aka “BBA”, on the underlying items; renewable life contracts.) & Building Blocks (ii) Changes in policyholder (Note other preferences may also Approach) benefits substantially vary with impact on decision here.) the change in underlying items. * For transition business this varies ** Approach not necessarily seriatim

11 Which Model When – Likely Product Types IFRS 17 Measurement Models Modifications to the General Measurement Model General Measurement Model Variable Fee Approach Premium Allocation Approach (mandatory) (optional) (Liability for remaining coverage) (Ins. Contracts with Direct Participation Features) Long term business • Unit linked (UL) • Short term general insurance “Life” examples business • Variable annuity (VA) & equity • Whole of life • Short term life and certain index-linked contracts • Term assurance group contracts • Continental European 90/10 • Protection contracts • Annuities • UK with profits contracts • Reinsurance written • Unitised with profits “Non - Life” examples Judgements re possible breaches of VFA Judgements re possible breaches of PAA • Multi-year motor requirements: requirements: • Warranty cover • • For VA, guarantee aspects. For annual renewable business, • Certain types of Loss whether guarantee at renewal date • For UL, if death benefit sufficient to Portfolio Transfers / justify insurance contract treatment. Adverse Development • European “formulaic with profits” Cover