©2005 deloitte & touche llp new zealand society of actuaries financial services forum 27...

©2005 Deloitte & Touche LLP

New Zealand Society of Actuaries Financial Services Forum

27 November 2009

IFRS: Insurance Accounting.

Charles Hett

November 2009

Audit. Tax. Consulting. Actuarial. Financial Advisory

3 ©2009 Deloitte Touche Tohmatsu

Recap the Insurance Project to date

Key Features of the Phase II Framework

Issues and recent developments

What this means for NZ reporting

Implications and other

IFRS/Reporting factors

Agenda

Recap the Insurance Project.

5 ©2009 Deloitte Touche Tohmatsu

Insurance Accounting timeline

Thinking/Concern

IFRS IFRS Phase IIDevelopment

Issues Paper1999

IASBIFRS

1990sJuly 2001

January 2005

2007

Discussion Paper

May’07

Extended ConsultationDSOP

Issued

IFRS 4Phase 1

NZ 1 Jan 07

Back to the Drawing Board

2008+

??

IFRS Insurance Accounting - November 20096 ©2009 Deloitte, Touche Tohmatsu,.

•Intangible assets

IFRS 4 Phase I

Life insurance companies

Non-lifecompanies

Insurance Disclosures

Contract classification

Claims development

Assumptions and risk objectives

Analyses & Reconciliations

Sensitivities

Risk concentration

Temporary measure to continue until Phase II standard emerges

NZ FRS 35 NZ FRS 34

Insurance & Participating Contracts – Local GAAPInvestment Contracts – IAS 39

Best Estimate

Planned Margins

(recover AC)

Central Estimate

OCR / IBNR

UPR, DAC

Risk Margin

Liability Adequacy

NZ ~ Little methodology change, mostly level of disclosure

Development of Phase II.

IFRS Insurance Accounting - November 2009 8 ©2009 Deloitte, Touche Tohmatsu

The Proposed Model

3 building blocks to measure insurance liabilities :

Explicit, unbiased, probability weighted and current estimates of the contractual cash flows;

Current market discount rates that adjust the estimated cash flows for the time value of money;

Margin: Explicit - Bearing risk (a risk margin) and providing other services (a service margin)Composite - Single margin (calibrate to premium)


Phase II – Measurement: Three Building Blocks

Estimates of future cash flows Explicit and Current view (Balance Sheet date)

Unbiased and Probability weighted

ConsiderationsNot necessarily most recent informationAvailability of “market” data for insurance liabilities As consistent as possible with observed market prices“Market consistent” vs. “Entity specific”

Complexity of possible stochastic scenarios – Looks unlikely


Phase II – Measurement: Three Building Blocks (cont’d)

ConsiderationsConsistency with observable market ratesAvailability of market rates for long term insurance liabilitiesDoes not reflect risk inherent in cash flowsOwn insurer’s credit position in measuring liabilities – unlikelyUse of asset-based rates – only if directly linked to liabilitiesLiquidity Premium (avoid annuity mismatching)Further guidance – unlikely (Fair Value measurement: IAS39)

Discounting Observable market rates:

1) Timing 2) Currency 3) Liquidity


Phase II – Measurement: Three Building Blocks (cont’d)

Margins – Composite or ExplicitComposite: single margin calibrated to premium (essentially current MoS)

Risk Margin: Allow for variance and skew in underlying distribution(s)(Uncertainty in projected cash flows)

Service Margin: The amount for servicing the contract

Considerations:• Risk Margin methods can have very different outcomes

– Percentile Basis (~ NZ non-life margin: 75% confidence level) – Cost of Capital (~ Solvency II)– Economic Capital (~ Adverse Scenarios/MCEVs)– Not a shock absorber

• Availability of “market participant” data on servicing– “Sub-contractor” profit margin or use “entity-specific” basis

• Residual Margin: To ensure no Day 1 profits


Phase IIKey Issues.


Other Key Issues

DAC and Revenue Recognition

Exit Price or Fulfilment Value : IAS 37

Margins

Future Premiums: Contract Boundary

Profit/Loss at Inception

Other Issues

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14 ©2009 Deloitte Touche Tohmatsu.

Position at Mid-October 2009

• IASB

• Initial Measurement– Selling should not affect measurement

– Day 1 revenue to cover acquisition costs

– AcqCosts – direct and incremental

• IAS 37 approach (draft)– IAS 37 influenced by Insurance Project

– Consistency with other liabilities

– No market info. => Entity based estimates

• Explicit Margins– (Risk, Service, Residual)

– Risk/Service Margin remeasured

• Expense Initial Costs as incurred

• No Profit/Loss at Inception

• FASB

• Initial Measurement– Contract liability based on consideration

– Prohibit DAC (No Service at PoS)

• Current Fulfilment (CFV)– Not inconsistent with IAS 37 (draft)

• Composite Margin– Consistency with approach to Revenue

• Expense Initial Costs as incurred

• No Profit/Loss at Inception


Proposed Models – Mid October 2009


Recent Developments.


Late October 2009Unwelcome Convergence!

• Revenue recognition is paramount

• Acquisition Costs expensed as incurred

• IASB agreed margins calibrate to full contract premium (after PoS)

• FASB agreed explicit margin for Risk (Uncertainty)

• Revisiting Policyholder Accounting– Insurance Policies held by Customers (as assets) – reconsider, no decision


Proposed Models – Before 28 October 2009


Proposed Models – After 28 October 2009


Other IssuesYet to be Discussed/Resolved

Policyholder Accounting

Policyholder Participation Rights

Credit Characteristics of insurance liabilities

Unbundling

UPR, Recognition, IAS 39

Disclosure


What This Means.


• Exposure Draft to be issued January April 2010

• A joint IASB/FASB Exposure Draft

• Comment period to May August 2010

• Standard to be in place by June 2011

• Substantial IASB membership changes July 2011

Timetable (Updated 18 Nov)Next two years

IASB/FASB appear to be allocating resource to ensure this timetable can be met


• Many similarities to NZ MoS (composite margin)

• Some differences:

• Explicit assessment of Risk & Service margins

• Residual Margin may not be remeasured

• No income to cover acquisition costs (No DAC, -’ve PL)

• No mention of Tax (anywhere) => Gross of Tax liabilities and

margins

• Reinsurance treated explicitly (as current)

• Financial Advice at Point of Sale a service?

Implications for New Zealand


Business Implications for the Insurance Industry

IFRS Phase II

IFRS Phase II

Need to review impacts on:

External reporting, disclosures and financial communication

External reporting, disclosures and financial communication

Management reporting and budgetting

Management reporting and budgetting

Capital ManagementCapital Management

Regulatory ReportingRegulatory Reporting

Systems, data, models & processes

Systems, data, models & processes

Experience Monitoring Assumption setting

Experience Monitoring Assumption setting

Asset and Liability matchingAsset and Liability matching

Product pricing and designProduct pricing and design

Value CreationValue CreationTax and Tax PlanningTax and Tax Planning


Three key areas to consider

Valuation

Increased reliance on actuarial models

Analysis to derive explicit margins ~ risk margin

Assumption changes => not Re-spread ~ volatility

Yet more disclosure?

Product Development

Reporting incentives to structure products

(contract boundaries)

Higher profit volatilityUse of Reinsurance

Impact of acquisition cost reporting loss on

distribution costs

Risk Management

Risks and Controls for valuation models

Managing market risk to mitigate profit volatility(closer link between risk

management and reporting)

Risk Margins Risk Management

Overall a more explicit risk based reporting requirement should lead to stronger links between reported profits, risk management,

reinsurance and investment strategy and capital requirements

IFRS 4 Phase II will likely be the chance to move more fully to a gross of tax profit reporting requirement (separate IAS 12 tax treatment)


ContactsCharles HettHead of Actuarial Services

+64 4 470 3866+64 21 616 [email protected]

Klaas StijnenManager - Actuarial Services

+64 4 470 3660+64 (0)21 273 [email protected]

Margaret CantwellManager - Actuarial Services

+64 4 470 3537+64 21 267 [email protected]


This presentation and the accompanying handouts cover topics only in general terms and are intended to give a wide audience an outline understanding of certain issues relating to Phase II of the IASB insurance project, and therefore cannot be relied on to cover specific situations; applications of the principles set out will depend on the particular circumstances involved. Furthermore, responses given in the presentation to questions are based on only an outline understanding of the facts and circumstances of the cases and therefore do not form an appropriate substitute for considered specific advice tailored to your circumstances. We recommend that you obtain professional advice before acting or refraining from acting on any of its contents. We would be pleased to advise you on the application of the principles demonstrated at the seminar and other matters to your specific circumstances but in the absence of such specific advice cannot be responsible or liable.

Deloitte & Touche LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at Stonecutter Court, 1 Stonecutter Street, London EC4A 4TR, United Kingdom. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu ('DTT'), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other's acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT.


New Zealand Society of Actuaries Financial Services Forum

27 November 2009

©2005 deloitte & touche llp new zealand society of actuaries financial services forum 27...

Documents

insurance project

deloitte touche tohmatsu

unlikely slide

premium slide

liquidity slide

development of phase

iasb ifrs

financial advisory slide