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IFRS 17 – why actuaries need to care
Life2017
21/22 June 2017
QE11 Conference Centre, London
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They’ve only gone and done it …
1997 Kick-off
IASC starts Insurance Contracts project.
May 2017 Publication of IFRS 17 Insurance contracts
July 2013
Re-Exposure Draft Insurance Contracts
May 2002
IASB agreed to split insurance project into Phase 1 and Phase 2
Comparatives mean opening balance sheet
required as of 1 January 2020 (companies
reporting on calendar year basis)
Early adoption possible, provided that the
entity also applies IFRS 9 and IFRS 15 at
the same time
Adoption mandatory for annual periods beginning
on or after 1 January 2021
July 2010
Exposure Draft Insurance Contracts
May 2007
Discussion Paper: Preliminary views
March 2004
IFRS 4 Insurance contracts ‘Phase I’ completed and interim
Standard on insurance contracts issued
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Agenda
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IFRS
What is it?
Why care now?
Worked examples
Summary
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21/22 June 2017
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What is it?
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Current Balance Sheet Overview and where IFRS 17 fits in?
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Financial
Instruments
Shareholder
Equity
Property
Intangible
Assets
IFRS 4 Insurance Contracts
--------------
IAS 39 Financial instruments:
Recognition and Measurement
IAS 18 Revenue
IAS 38 Intangible Assets
IAS 40 Investment Property
IAS 39 Financial instruments: Recognition
and Measurement
IAS 32: Financial Instruments: Presentation
IFRS 7 Financial Instruments: Disclosures
Assets Liabilities
Other IAS 12 Income Taxes
IAS 19 Employee Benefits
Debt
OtherIAS 37 Provision, Contingent
Liabilities and Contingent Assets
DACIAS 18 Revenue
IFRS 4 Insurance Contracts
IAS 37 Provision, Contingent Liabilities
and Contingent Assets
In 2014 standards finalised for:
IFRS 9 to replace IAS 39
IFRS 15 to replace IAS 18
In 2017 standards finalised for:
IFRS 17 to replace IFRS 4
4
“Insurance”
liabilities
“Investment”
liabilities
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Why is it being introduced?
6
IFRS 4 was always intended to be replaced
It allowed a wide variety of approaches some of which were deemed to
not adequately reflect the underlying financial performance of
insurance contracts
Objectives for IFRS 17
Globally consistent approach Explicit risk measurement and
allowance for the time value of
guarantees and options
More useful and understandable
information for the users of financial
statements
Use of current estimates for all cash
flows and maximum use of observable
market data
Exclude distinct investment
components from insurance revenue
Insurance revenue recognised as
performance obligations fulfilled
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SummaryWorked examplesWhy care now?IFRS: What is it?
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IFRS 17 building block approach vs SII
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Market-consistent value
of cash flows
Risk adjustment
Contractual service
margin
Total
Insurance
Contract
LiabilityFulfilment cash flows: Component
representing the risk-adjusted present
value of cash flows needed to fulfil the
contract
Value of expected future profit resulting
on zero Day profit
SII BEL
Risk Margin
IFRS 17 Solvency II
VIF forming part of Own
Funds
Map to
SII
Illustrative
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Building block – measurement of fulfilment cash flows
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Explicit
Unbiased
Entity perspective
Within contract boundary
Cash Flows
Reflect liquidity
characteristics of cash
flows
Consistent with observable
market prices
Exclude factors not
relevant to the cash flows
Time Value of Money
Compensation the insurer
requires for bearing
uncertainty
May reflect diversification
within and between
portfolios
Disclosure of confidence
level
Risk Adjustment
Market-
consistent
value of cash
flows
Risk
adjustment
CSM
Total
Insurance
Contract
Liability
Fulfilment cash flows are updated each reported period:
Actual vs expected cash flow variances for current period flow through to P&L
Changes in estimates of future cash flows related to future coverage adjusts CSM
ALM mismatches flow through to either the P&L or Other Comprehensive Income
Fulfilment cash flows
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Building block discount rates – top down vs bottom up
9
Liquid risk-free
curve
Illiquidity premium
Gross yield on
reference portfolio
Allowance for
uncertainty
Elimination of credit risk and any other, not
relevant factors
Consistency with observable market prices of
financial instruments with consistent
characteristics as liabilities such as timing,
currency and liquidity
Bottom-up
Top-down
Expected defaultIFRS 17 discount
rate
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Illustrative
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Building block approach – contractual service margin
10
Effectively a balancing item that eliminates
day one gain
Cannot be negative except for reinsurance
Released as services are provided
Adjusted to reflect impact of changes in
best estimate assumptions in respect of
future service thereby reducing profit
variability
CSM discount rate “locked” at inception
except for directly participating business
Contractual Service Margin
Market-
consistent
value of
cash flows
Risk
adjustment
CSM
Total
Insurance
Contract
Liability
A modified “variable fee” approach applies for direct participation business
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Grouping of contracts
Each portfolio is then divided into
three groups:
Contracts in a group must be no
more than a year apart
Contracts initially to be split into “portfolios”,
meaning contracts that are subject to similar
risks and managed together.
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Contracts that are onerous at initial recognition
Contracts that at initial recognition have no significant
possibility of becoming onerous subsequently
The remaining contracts in the portfolio
11
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IFRS 17 P&L
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IFRS 4 IFRS 17
Premiums Insurance contract revenue
Investment income Incurred claims and expenses
Incurred claims and expenses Insurance service result
Change in insurance contract liabilities Investment income
Profit or loss Insurance finance expense
Net financial result
Profit or loss
Discount rate changes on insurance liability
(optional)
Total comprehensive income
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Burdensome transitional requirements
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Can a full
retrospective
approach be
applied?
Full retrospective approach
If possible
Modified retrospective approach
Fair value approach
If impractical
Choice of transition approach
decided at group of contract level
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IFRS 17 will require new, slicker financial reporting processes and models
14
2021
Final IFRS 17
standard
2017 2018
IAS 39
And
IFRS 4
IFRS 9 or/and IAS 39
and
IFRS 4
IFRS 9
and
IFRS17
IFRS 17
go-live
Dry
Run
Test
Results
2019 2020
Understand and agree
IFRS 17 methodology
Specify, develop and test models
Derive retrospective
figures including CSMs
Automation & process improvement
YE 19
figures
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IFRS 17 – a lot to do and to think about
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Implementation issues
Separation of investment components
Discount rates
Risk Adjustment approach
CSMs and increased granularity
New actuarial models and much
slicker processes
Retrospective application
Commercial issues
Greater earnings volatility
Communication to investors and
analysts
Differences between SII, IFRS 17, EEV
and other KPIs
Possible impact on distributable
earnings and dividends
Revisions to product strategy and
design?
SummaryWorked examplesWhy care now?IFRS: What is it?
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Why care now?
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Implementing IFRS 17 requires a holistic approach …
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PEOPLE
TECHNICAL
DECISIONS
TOOLS
PROCESSES
IFRS
+
+
+
Target operating model
Training
Board sponsorship
Software solutions
Process automation & governance
Actuarial models/ reserving
Data requirements
Impact analysis
Technical decisions
17
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… with actuaries needing to take a major interest in implementation
18
Technical judgements and decisions will impact equity, profit emergence and implementation complexity
Requires new actuarial models – dealing with CSM retrospective assumptions, calculations and analysis
Further pressure on reporting processes, requiring new systems and people TOM
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More than just accounting: Significant commercial impacts
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The different equity and profit emergence and revised presentation requirements will
lead insurance companies to review or revise:
1
2
4
3
KPIs for internal and external use
Capital and risk management
Product strategy and pricing
Asset liability management
5 Investor engagement
19
SummaryWorked examplesWhy care now?IFRS: What is it?
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Impact of IFRS 17 on KPIsThe cash/solvency/profit linkage has broken down
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Metric Impact of IFRS 17
Profit Steadier emergence of IFRS profits for UK insurers
Transition impact and explanation
Distributable
cash
Key investor metric over short and medium term
IFRS17 distributable earnings constraints?
Value Mix of IFRS, EV & Solvency II Own Funds used
Use of IFRS equity as Value starting point?
CSM and EV VIF / NB margin reconciliation?
Capital Current focus on Solvency II
IFRS17 / SII alignment of assumptions and
methodology?
20
SummaryWorked examplesWhy care now?IFRS: What is it?
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ALM – update framework
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Solvency II ratio Solvency II balance sheet
IFRS Profits
Ratio
Time
100% SCR
Profit
Time
? IFRS Equity / Value
A L
A L
Update ALM framework and
governance to reflect:
KPI approach/Investor messaging
Projected and stress tested ALM-
related constraints and volatilities
Clear delegations
Critical factors may include:
IFRS distributable reserve or
earning constraints, dividend
payout ratio
P&L or OCI for market assumption
changes
SII/IFRS17 alignment – RA/RM,
discount rate, TMTP
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Engaging with investors
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Plan the investor communication – the earlier the better!
One of the
biggest
investor
communication
challenges
we have ever
seen
Book
Value
Market
based
approachIFRS 17
Revenue
excluding
deposits
22
Statement of Comprehensiv e Income
2021
Insurance contract revenue X
Insurance service expenses (X)
Insurance service result X
Investment income X
Insurance finance expense X
Net financial result X
Profit/Loss X
Discount rate changes on insurance
liability (optional)X
Total comprehensive income X
SummaryWorked examplesWhy care now?IFRS: What is it?
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21/22 June 2017
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Unit-linked, with-profit, and annuities
Example contracts
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Unit-linked or With-profits – questions and issues
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Direct participation feature – treat as variable fee business
Separate ‘deposit’ element of premium. Treatment under IFRS 9
Unit-linked contract (if qualifies as insurance):
changes in future ‘variable fee’ (AMC) from economic assumption changes will impact CSM, smoothing the profit
With-profits contract:
include discretionary payments on best estimate basis
economic assumption changes impact CSM
treatment of guarantees
treatment for 100:0 and 90:10 funds – disclosure of estate and shareholder transfers
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Annuity contract – questions and issues
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Modelling of IFRS 17 Discount rate
Top down or bottom up approach
Business group definition
Illiquidity of liabilities, underlying reference assets and
asset transition
Modelling of IFRS 17 Risk Adjustment
Choice of approach, disclose percentile
Offset by Day 1 CSM, but different behavior in later
years
In this example assumed SII approach with 2% COC
Behaviour and interpretation of CSM
Transition for in-force business
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Non-profit annuity projectionsExample: Emerging profit/surplus Under IFRS4, IFRS17, SII (net of SCR)
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SummaryWorked examplesWhy care now?IFRS: What is it?
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Non-profit annuity projectionsExample: Emerging profit/surplus Under IFRS4, IFRS17, SII (net of SCR)
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SummaryWorked examplesWhy care now?IFRS: What is it?
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Non-profit annuity projectionsExample: Emerging profit/surplus Under IFRS4, IFRS17, SII (net of SCR)
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SummaryWorked examplesWhy care now?IFRS: What is it?
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Modelling with different IFRS17 discount rates – Illustrative
Spread (bps) over EIOPA RFR
ILP FS
0 50 100 150 200 250
IFRS 4 Solvency II
MA
Earned rateRFR
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IFRS 4: 50% of spread
Solvency II with Matching Adjustment: Earned rate – fundamental spread
SummaryWorked examplesWhy care now?IFRS: What is it?
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Modelling with different IFRS17 discount rates – Illustrative
ILP FS
0 50 100 150 200 250
IFRS 4 Solvency II
MA
Earned rateRFRPoint at which CSM = 0 at
time 0
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Spread (bps) over EIOPA RFR
IFRS 4: 50% of spread
Solvency II with Matching Adjustment: Earned rate – fundamental spread
SummaryWorked examplesWhy care now?IFRS: What is it?
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Sensitivity in assumptionsExample of the impact of the choice of discount rate
IFRS 17
discount rates:
All with respect
to the swaps
less credit risk
rate.
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SummaryWorked examplesWhy care now?IFRS: What is it?
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Annuity modelExample: Positive mortality experience variance (+10%) in year 4
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Summary: Takeaways
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Timescales are short
Implementation will be complex
Principles based
Communication and commercial impacts
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