ifrs 4 phase ii · 2015. 9. 15. · ifrs 4 phase ii on general insurance reserving march 2015 *...

IFRS 4 Phase II

On General Insurance Reserving

www.pwc.cn

September 2015

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Agenda

Introduction Challenges for general insurers: Same as SII? How about TW?

The Updated information Measurement models

Business combinations and portfolio transfers

Components of calculation

1 2

3 4

5 6 Case Study How to prepare for changes?

7 8 Slide 2

Sep 2015 IFRS 4 Phase II On General Insurance Reserving

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Introduction

1 Slide 3


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Introduction Background and timeline

Slide 4


IASB

May 2007 July 2010 June 2013 2016? 2019?

2007

2010

2013 2014 2015 2016 2017 2018

~ ~

Discussion paper (DP) published

Phase II Exposure Draft (ED)

IASB revised ED Final standard IASB

Effective date of standard

2019

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Existing IFRS

Other IASB standards also impact insurers, for example: IFRS 13 – Fair value measurement

IAS 18: Revenue

IFRS 4: Insurance Contracts

IAS 39: Financial Instruments Recognition and measurement

IAS 32: Financial Instruments Presentation

IFRS 7: Financial Instruments Disclosures

IAS 12: Income Taxes IAS 19: Employee Benefits


IFRS 4: Insurance Contracts


Insurance Contracts

Investment Contracts

standard undergoing major review with implications for insurers

Intangibles / DAC

Property

Financial Instruments

Other Liabilities

Debt

Contract Liabilities

Equity

Assets Liabilities

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Proposed IFRS

Insurance contracts standard (to replace IFRS 4) • Ongoing IASB deliberations with 2nd Exposure Draft in June 2013 (see later sections)

IFRS 9: Financial instruments (to replace IAS 39) • Classification and measurement of financial assets - Fair value (P&L or OCI) or Amortised cost • Liability deposit floor retained; affects business classified as “investment contracts” (e.g. Certain

unit linked pension contracts)

Revenue recognition standard (to replace IAS 18) • Affects business classified as “investment contracts” • Retains DAC incremental at contract level (change in second ED)

IFRS 13: Fair value measurement (new standard defining how to fair value) • “ ... the price that would be received to sell an asset or transfer a liability in an orderly

transaction between market participants at the measurement date” • The fair value of a liability should reflect the effect of non-performance risk

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IFRS Timeline

FASB decides to only make targeted amendments to US GAAP

2014

Mandatory effective date of 2018 **

IASB re-deliberation and final standard?

2016

Insurance contracts

Fin

an

cia

l

in

stru

men

ts

Classification & measurement

Impairment

Hedge accounting

Mandatory effective date 2019 or later?*

IFRS Standard

Solvency II Go-Live in Europe

Macro hedge accounting

Discussion paper – comments due October 2014

Comprehensive IFRS 9 standard issued July 2014

IFRS 15 issued in May 2014

Revenue Mandatory effective date 2017 ***

2015 2017 2018 onwards

ED, final standard and mandatory effective date are still to be confirmed

7

March 2015 IFRS 4 Phase II On General Insurance Reserving

* IASB will decide at future meeting on effective date. One alternative is to provide 3 years between adoption of IFRS 9 and IFRS 4 Phase II. ** IASB has decided to provide additional transition relief for IFRS 9 upon adoption of IFRS 4 Phase II. EFRAG endorsement advice expected in April 2015. *** Positive EFRAG endorsement advise for 2017 issued in March 2015.

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Mind the Gap? The timelines for Solvency II and IFRS 4 Phase II are not aligned

What will happen to IFRS financial reporting in the ‘gap’ period.....

• Maintain existing IFRS reporting and parallel run with Solvency II systems

• Adopt Solvency II or a modified version if permitted under existing IFRS 4

• Early adopt the requirements of IFRS 4 Phase II

2012 2013 2014 2015 2016 2017 2018 2019

Solvency II live?

IFRS 4 Phase II

live?

Maintain current approach

Adopt (modified) Solvency II?

Early adopt IFRS 4 Phase II?

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Challenges for general insurers: 1) Same as SII? 2) How about Taiwan? 2

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Same as Solvency II?

The key valuation principles in the proposals for measuring liabilities for insurance contracts in IFRS 4 Phase II and Solvency II are the same:

• A mean best estimate of all possible outcomes.

• Discounted at a market rate of interest.

• Plus an additional margin for risk.

…although these principles have not been strictly applied in the IFRS options for short term business.

The key differences are:

• No gain on policy inception for IFRS.

• Insurance contract definition (more of a problem for life insurers than GI).

• IFRS less prescriptive on risk margin and discount rates.

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Solvency II versus IFRS for insurance contracts Contract liabilities

Solvency II IFRS – Investment Contracts

IFRS – Insurance Contracts

Technical Provisions

Solvency capital requirement

Risk margin

Discounted probability weighted estimate of future cash flows

Replicating portfolio value

Fair Value or Amortised cost

Contractual service margin

Replicating portfolio value

Risk adjustment

Discounted probability weighted estimate of fulfilment cash flows

Contract liabilities

• Risk margin = Sets the technical provisions as the expected amount required to take over and meet the obligations.

• As a regulatory regime, there is a capital requirement– the Solvency Capital Requirement (SCR).

• Risk adjustment = Compensation the entity requires for bearing the uncertainty about the amount and timing of the cash flows that arise as the entity fulfils the contract.

• Contractual service margin represents unearned profit in contract.

• Certain acquisition costs are included in the fulfilment cash flows resulting in implicit deferral of these costs.

• All financial liabilities are classified as fair value through profit and loss or amortised cost.

• Initial measurement is at fair value. Subsequent measurement is at fair value (subject to a ‘deposit floor’) or at amortised cost depending on classification.

• Model contains deferral of acquisition costs and upfront fees.

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Topic IFRS Solvency II Significance Observations

Definition and scope

Insurance and participating investment

All contracts

• The measurement of investment contracts in IFRS may be significantly different to Solvency II.

Recognition Date coverage begins (plus onerous contact test for earlier)

Date party to contract

• Significance of any difference will depend on the onerous contract test in IFRS. For many long term contracts the recognition will be the same.

Separating components from an insurance contract

Distinct investment components, embedded derivatives and certain goods and services (e.g. asset management services)

No

• Potential requirement to separate asset management service components in IFRS could be a difference to Solvency II.

• Revenue items are not presented on the IFRS income statement for non-distinct investment components.

Contract boundary

No longer required to provide coverage or contract does not confer any substantive rights to policyholder

Amend terms to ‘fully reflect risk’

No projection of premiums for savings contracts

• In Solvency II (unlike IFRS), there is a

requirement to separate contracts into components, where the contract boundary differs between components.

• Devil will be in the detail as the distinct definitions for Solvency II and IFRS are considered in view of contract terms.

Solvency II versus IFRS for insurance contracts Comparison (1)

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Cash flows (excluding acquisition)

Incurred directly to fulfil portfolio of contracts

Prescribed

• Potential risk of differences in certain cash flows, for example, certain overheads expenses and tax.

Acquisition costs

Directly attributable at portfolio level

Expensed as incurred

• In IFRS, there is “implicit” deferral of acquisition costs. There is no equivalent concept in Solvency II.

Discount

rate

Top down or bottom up (current and locked-in for OCI purposes)

Likely to be prescribed based on swaps + (matching adjustment or counter-cyclical premium **)

• The discount rate remains one of the most

significant areas of uncertainty in Solvency II. It is unclear how the prescribed Solvency II discount rate will compare to the principle-based approach in IFRS.

• No concept of locking-in/OCI in Solvency II.

Risk adjustment

No prescribed method

(fulfilment value)

Prescribed 6% cost of capital (transfer value)

• The Solvency II risk margin is prescribed, while

the IFRS risk adjustment is principle-based. It is likely that there will be differences in the two approaches.


** Long Term Guarantees Assessment report by the European insurance regulatory (EIOPA) in June 2013 proposed replacing the counter-cyclical premium with a separate measure outside of the discount rate (known as the “Volatility Balancer”).

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Eliminate day-one gain

(update for certain subsequent changes)

No

• No equivalent concept of deferral-and-matching (through the contractual service margin) in Solvency II.

Participating contracts

Decomposition of cash flows into those that vary directly, indirectly or do not vary by the underlying assets for contracts that specify linkage and where entity is required to hold assets

Cash flows from participating feature included

(except for ‘approved surplus funds’)

• No required decomposition of cash flows in

Solvency II. However, both IFRS and Solvency II will contain a stochastic assessment of options and guarantees.

• For directly linked cash flows, the linkage of the cash flows in IFRS to the measurement and presentation of support assets (‘mirroring’) is a significant difference to Solvency II if assets are not FVTPL

• The treatment of residual participating fund assets and the allocation between liability and equity will depend on the specific nature of the contracts and national law.

Short duration contracts

Unearned premium model for pre-claims liability while cash flow projection for claims liability

As for other contracts

• In IFRS, the unearned premium model is optional. A cash flow approach can be adopted as in Solvency II.


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Changes from existing standard in Taiwan

Comparison between current method(UPR) and PAA method

No. Item Current method(UPR)

PAA method

1. Recognition date Underwriting date

An entity shall recognise an insurance contract that it issues from the earliest of the following: (a) the beginning of the coverage period; (b) the date on which the first payment from the policyholder becomes due; and (c) if applicable, the date on which the portfolio of insurance contracts to which the contract will belong is onerous.

2. Directly attributable acquisition costs

Not deducted less any payments that relate to the directly attributable acquisition costs for the coverage less than one year.

3. Pre-coverage cash flows

N/A

Cash flows paid or received before the insurance contract is recognised that relate directly to the acquisition or the fulfilment of the portfolio of insurance contracts that will contain the insurance contract.(advance premium and commission)

4. Onerous contract liability

Considered in premium deficiency reserve

plus any onerous contract liability measures in accordance with the difference between the carrying amount of the liability for the remaining coverage and the fulfilment cash flows.

5. Time value N/A When at contract inception, the time between the entity providing the coverage and the due date for the premium is over one year.

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Changes from existing standard in Taiwan Original Assets Items New Assets Items Original Liabilities

Items New Liabilities Items

Liability for the remaining coverage(PAA)

Premium receivable (and assumed premium receivable)

Insurance contract assets (premium receivable and assumed premium), Suspense debits

Advance received(advance premium), commission payable, unearned premium reserve, premium deficiency reserve

Insurance contract liabilities(unexpired risk reserve, commission payable), advance received

Liability for the remaining coverage(BBA)

Same as above Same as above Same as above Insurance contract liabilities(unexpired risk reserve, including fulfilment cash flow, time value, risk adjustment and contract service margin)

Liability for incurred claims

N/A N/A liability for incurred claims

Insurance contract liabilities(liability for incurred claims, including fulfilment cash flow, time value and risk adjustment)

Ceded Liability for the remaining coverage

Suspense debits (ceded premium), receivable ceded commission, ceded unearned premium reserve, ceded PDR

Insurance Contract assets(ceded unexpired risk reserve, including fulfilment cash flow, time value, risk adjustment and contract service margin)

ceded premium payable Insurance contract liability(ceded premium payable)

Ceded liability for incurred claims

Ceded liability for incurred claims

Insurance contract asset (Ceded liability for incurred claims, including fulfilment cash flow, time value and risk adjustment)

N/A N/A

The difference adjustment is recorded in Retained earnings Slide 16


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The updated information: Changes from IASB’s 2013 exposure draft 3

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Changes from IASB’s 2013 exposure draft Premium Allocation Approach

Changes from 2013 exposure draft Potential implications and open questions

• Revenue is recorded on the basis of the passage of time and the expected number of contracts in force. However, if the expected pattern of release of risk differs significantly from the passage of time, then revenue would be earned on the basis of expected timing of incurred claims and benefits.

• The pattern of services reflects either the passage of time or the expected timing of incurred claims. This could imply, for example, for hurricane insurance that the entire revenue should be recognised in the hurricane season, rather than spread out over the year.

• Entities will need to consider what the most appropriate reflection for each type of product is.

• When an entity presents the effect of changes in discount rates in OCI, the discount rate that is used to determine the interest expense for the liability for incurred claims in the PAA should be the rate locked-in at the date the claim was incurred.

• This modification is expected to be welcomed by non-life insurers intending to use the PAA approach for the pre-claims liability as it means systems do not need to track the discount rate at inception of the contract.

• Clarifies that contracts acquired through a portfolio transfer or a business combination should be accounted for as if they had been issued by the entity at the date of the portfolio transfer or business combination.

• This clarifies that the insurance event for contracts acquired in the settlement period is the discovery of the ultimate cost of claims. Therefore, the coverage period will normally be the period over which the claims are settled.

• Some insurance contracts acquired in the settlement period through a portfolio transfer or a business combination are unlikely to qualify for the PAA, as the settlement period is now the coverage period, which may be longer than 12 months.

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Changes from IASB’s 2013 exposure draft Building Block Approach


Discount rates

• Accounting policy choice to present changes in the discount rate in either profit or loss or other comprehensive income (‘OCI’) which should be applied to similar contracts, considering the portfolio in which the contract is included and the related assets that the entity holds.

• Eliminates some mismatches in profit or loss arising from the 2013 exposure draft as only limited assets are permitted an OCI presentation under IFRS 9.

• For non-participating contracts, entities have to assess the level at which this accounting policy should be applied in their specific circumstances or where this election should be used to avoid accounting mismatches.

• Additional guidance for setting discount rates where there is limited market data.

• The scope of permitted discount rate extrapolation methods will be an area of judgement and interpretation.

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• Unlocking the CSM for changes in the risk adjustment related to future coverage, and reversing previously recognised losses in profit or loss before reinstating the CSM.

• Greater consistency in the unlocking treatment of changes in the best estimate liability and risk adjustment.

• Entities will have to track any negative CSM over the life of the contract (including amortisation) to assess which amount should be reinstated if the contract returns to being profitable.

• Confirmed that accretion of interest on the CSM and calculating the subsequent adjustments that unlock the CSM are both at the day one locked-in discount rates.

• Day one locked-in discount rates will be required to be maintained (despite the above mentioned policy choice for changes in discount rates). This could be burdensome for long-term business.

• Because the initial profit is deferred and the CSM is based on day one economic assumptions, volatility may arise in equity or profit or loss (depending on the accounting policy choice for changes in discount rates) as market conditions change over the life of the contract.

• Amortisation of CSM for non-participating contracts reflects the transfer of service as the basis of passage of time (stand ready obligation) and the expected number of contracts in force.

• Provides greater clarity than the 2013 exposure draft on how to interpret the requirement to amortise in line with the transfer of service.

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Unit of account

• Amend the definition of a portfolio of insurance contracts to be: ‘Insurance contracts that provide coverage for similar risks and are managed together as a single pool’.

• The removal of the reference in the 2013 exposure draft to contracts that are not ‘priced similarly relative to the risk taken on’ will reduce the number of distinct portfolios.

• The definition of portfolio may impact whether contracts with unisex rates or universal rates for different age groups are viewed as onerous at inception.

• At initial recognition, onerous contracts are not permitted to be aggregated with profit-making ones in determining the CSM.

• Onerous contracts at the outset will need to be tracked separately.

• Clarified that the objective of the standard is to measure an individual insurance contract liability, but that in applying this companies could aggregate insurance contracts provided that it meets this overall objective. Examples to be provided in the final standard to show how this can be achieved when releasing the CSM after inception.

• The examples may set the precedent for the level of granularity required in the actuarial models and may determine the level of cross-subsidies/pooling between contracts. This will impact the operational challenges and financial results on implementing IFRS 4 Phase II.

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Changes from IASB’s 2013 exposure draft Other topics


Insurance contract revenue

• Income statement definition of revenue in the 2013 exposure draft has been retained.

• Revenue is determined each period from expected claims and the release of the risk adjustment and CSM. Investment components are excluded from revenue.

• Presentation of premium information, such as premiums due or written, in the income statement that is not consistent with this definition of revenue is prohibited.

• The definition of revenue continues to represent a significant change to current measures, such as premiums written or due, adopted in the life insurance sector.

• The prohibition of using premiums due or written will prevent entities from using such measures as a starting point on the face of the income statement.

Reinsurance

• After inception, where changes in estimates of cash flows on a direct insurance contract impact profit or loss are offset by corresponding changes on a reinsurance contract, these should be recognised in profit or loss.

• Removes a potential asymmetry between direct and reinsurance contracts in the 2013 exposure draft for subsequent measurement.

• For profitable reinsurance contracts at inception that offset losses on direct insurance contracts, a CSM is setup in line with the 2013 exposure draft.

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Changes from IASB’s 2013 exposure draft Other topics


Fixed-fee service contracts

• Entities are permitted (but not required) to apply the revenue recognition standard to fixed-fee service contracts meeting the definition of insurance contracts, that also meet the scope exclusion criteria in the 2013 exposure draft.

• This allows insurers that issue fixed-fee service contracts to choose to apply the insurance contracts guidance to all their contracts.

Additional guidance for significant insurance risk

• The guidance will be clarified that significant insurance risk occurs only when there is a possibility that an issuer incurs a loss on a present value basis.

• This means that contracts that provide a payment on death being the value of the underlying fund or the value of the premiums paid if the fund value is lower than premiums paid could still qualify as insurance contracts, consistent with current practice.

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Measurement models

4 Slide 24


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Measurement models for general insurers

Undiscounted reserves for past claims (including

IBNR)

Current IFRS/GAAP

BBA throughout PAA

PAA and undiscounted

incurred claims

Discounting

Risk adjustment

Best estimate of fulfilment cash flows

Discounting

Risk adjustment


Discounting

Risk adjustment


Contractual Service Margin

UPR less DAC

Premium (less acquisition costs)

unearned

Premium (less acquisition costs)

unearned

Ex

pir

ed

ris

k

Un

ex

pir

ed

ris

k


Risk adjustment

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Default measurement model in IFRS 4 Phase II Overview of building block approach ‘BBA’

• Default model for all insurance contracts.

• Based on discounted best estimate of future cash flows.

• Explicit margins:

- Contractual service margin to prevent gain on policy inception.

- Risk adjustment.

• Day 1 loss recognised in income statement.

• Cash flow approach for all liabilities: past claims (including IBNR) and future cover.

Unearned profits recognised over coverage period.

Reflect compensation for uncertainty. Quantifies the value difference between certain and uncertain liability.

Discounting future cash flows using ‘top-down’ or ‘bottom-up’ approach for discount rates to reflect characteristics of the liabilities.

Best estimate cash flows – explicit, unbiased and probability weighted estimate of fulfilment cash flows.

Discounting

Risk adjustment



Expired and unexpired risk

Similar to SII but with the additional contractual service margin

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Optional model for short term contracts Premium Allocation Approach ‘PAA’

• Optional simplified model for future cover based on the unearned premium.

• Permitted for short duration contracts (period of cover <= 1 year) or where a ‘reasonable approximation’ of BBA.

• ‘Reasonable approximation’ does not apply when entity expects significant variability in cash flows – No further guidance on what this means.

• Incurred claims liability (including IBNR) calculated in the same way as for the BBA approach.

A half-way house between old GAAP and SII?

Unexpired premiums less acquisition costs

Discounting

Risk adjustment

Best estimate of fulfilment cash flows*

Expired risk Unexpired risk

* Probability weighted, essentially a mean.

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Optional model for very short tail contracts PAA and undiscounted liabilities

Unexpired premiums less acquisition costs

Expired risk Unexpired risk

Risk adjustment

Undiscounted estimate of fulfilment cash flows

Avoids discounting entirely for very short-tail contracts

• PAA for unexpired risk. Incurred claim liabilities (inc. IBNR) are undiscounted.

• Permitted for short duration contracts (period of cover <= 1 year) or where a ‘reasonable approximation’ of BBA, and claim liability cash flows are expected to be paid or received in one year or less.

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Default measurement model BBA – Link to presentation in the accounts

Profit or loss

Other Comprehensive Income (equity)

Up

da

te f

or

cha

ng

e in

es

tim

ate

s re

late

d t

o f

utu

re

serv

ices

Release of contractual service margin

Release of risk adjustment relating to current period

Experience adjustments

Unwind at locked in rate

Discounting

Risk adjustment


Best estimate of fulfilment

cash flows

Update current market rates

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Optional model for short term contracts PAA approach – Link to presentation in the accounts

Discounting for incurred claims only*

Risk adjustment for incurred claims only

Premium plus pre-coverage cashflows

less acquisition costs


for expired risk **

Profit or loss

Other Comprehensive Income (equity)

Update for current estimates (without the CSM, all

assumption changes feed directly into the P&L)

Experience adjustments

Unwind at locked in rate

Adjustments for premium and revenue for coverage

* Unless using undiscounted liabilities ** Probability weighted

Update current market rates

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Optional premium allocation approach Further details

Initial recognition of liability for remaining coverage:

• Premium received.

• Pre-coverage cash flows and acquisition costs.

• Onerous contract test (sum of future cash flows > 0).

Subsequent measurement of liability for remaining coverage:

• Accrete interest at interest rate at initial recognition.

• Increase with premiums received.

• Reduced with premiums allocated to period in systematic way reflecting transfer of services (exclude investment component from revenue).

• Onerous contract test.

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Optional premium allocation approach Further details (continued)

Pattern of revenue recognition

• Revenue reflects passage of time and expected number of contracts in force

• If this does not reflect pattern of release of risk, revenue is earned on basis of expected timing of incurred claims and benefits

• If straight line presumption is rebutted, revenue recognition is based entirely on expected claims.

• Assess pattern of claims for each type of product.

• For example, for hurricane insurance the entire revenue should be recognised in the hurricane season, rather than spread out over the year.

• Entities will need to consider what the most appropriate reflection of services is for each type of product.

Change in IASB decisions

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Presentation Statement of comprehensive income

• Presentation of premium information not consistent with commonly understood notions of revenue, such as premiums due or premiums written, is prohibited.

• Revenue as obligations are satisfied for PAA as well as BBA

• No prescribed income statement and IAS 1 requirements apply


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Presentation Statement of comprehensive income (continued)

20XX 20XX

Insurance contracts revenue X X

Incurred claims and expenses (X) (X)

Underwriting result X X

Investment income X X

Interest insurance liability (X) (X)

Net interest and investment income X X

Profit or loss X X

Effect of discount rate changes on insurance liability

(X) (X)

Total comprehensive income X X

Insurance components

~

~

Changes in balance sheet measurement model should be bifurcated into insurance and non-distinct investment components

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Form design(balance sheet) 財務狀況表(資產負債表)

保險合約資產保險合約(含分進再保合約)負債

未到期負債

來自採PAA法之合約 [A]

來自採BBA法之合約 [B]

已發生賠款負債 [C]

分出再保險合約資產

[A-1]採PAA法之保險合約未到期負債(初始認列)(1)

(2)

(3)

(4)

(5)=(1)-(2)+(3)+(4)

[A-2]採PAA法之保險合約未到期負債(後續衡量)

[A-2-1]採PAA法之本期認列保險合約收入

= 依合理方式分配至該期間之保費

已收保費

已付直接可歸屬取得成本

保障前現金流量(+已收/-已付)

虧損性合約負債

原始認列之末到期負債

(註：若為負值則列為保險合約資產)

期初未到期負債

本期已收保費

本期認列保險合約收入

(但需扣除直接可歸屬取得成本之攤銷) [A-2-1]

本期與直接可歸屬取得成本有關之支付

虧損性合約負債

貨幣時間價值調整數

期末未到期負債

(6)

(7)

(8)=(1)+(2)-(3)-(4) +(5)+(6)+(7)

虧損性合約負債變動數

(1)

(2)

(3)

(4)

(5)

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Form design(balance sheet)

B-1 未到期負債原始認列保費收取時

預期現金流出

(不含直接可歸屬取得成本)(L1)由(1)而得 600 600

預期現金流入 (L2)由原始資料 900 0

風險調整 (L3)由原始資料 0 0

直接可歸屬取得成本 (L4)由原始資料 0 0

履約現值(L5)=(L1)-(L2)

+(L3)+(L4)(300) 600

保障前現金流量(+已收/-已付) (L6)由原始資料 0

保險合約服務利潤(CSM)(L7)=-(L5),if(L5)<0

(L7)=0,if(L5)>0300 300

虧損性合約負債(L8)=(L5),if(l5)>0

(L8)=0,if(L5)<00

期初未到期負債 L9=(L5)+(L7) 0 900

B-2採BBA法之保險合約未到期負債(後續衡量) Y1 Y2 Y3

期初未到期負債1(不含立即認列損益)(B1)：Y1由((L9)

Y2、Y3由(B3)900 600 300

本期認列保險合約收入[B-2-1] (B2) 300 300 300

期末未到期負債1(不含立即認列損益) (B3)=(B1)-(B2) 600 300 0

期初未到期負債2(立即認列於損益) (B4)：Y2、Y3由(B7) 0 150

立即認列於損益之本期損失金額 (B5)= -(12) 150

立即認列於損益之本期損失金額解除 (B6)= 上一年(B5) 0 150

期末未到期負債2(立即認列於損益) (B7)=(B4)+(B5)-(B6) 0 150 0

合計期初未到期負債 (B8)=(B1)+(B4) 900 600 450

合計期末未到期負債 (B9)=(B3)+(B7) 600 450 0

[B-2-1]採BBA法之本期認列保險合約收入 Y1 Y2 Y3

預期當期理賠及費用現金流出

(扣除攤回及代位流入)

(不含直接可歸屬取得成本)

(B11)=(1) 200 200 450

本期末到期負債風險調整變動數 (B12)=(R11) 0 0 0

本期保險合約服務利潤釋出數 (B13)=(3) 100 100 0

本期分配之直接可歸屬取得成本 (B14)=(D1) 0 0 0

UNWIND (B15)=(B6) 150

本期認列保險合約收入 (B16)=(B11~14)-(B15) 300 300 300

[B-2-1-1]本期末到期負債風險調整變動數及其調節表

本期末到期負債風險調整變動數[B-2-1-1] =(R8)-(R9) 0 0 0

期初末到期負債風險調整 =(R8) 0 0 0

期末末到期負債風險調整 =R(9) 0 0 0

[B-2-1-2] 保險合約服務利潤調節表 Y1 Y2 Y3

期初保險合約服務利潤 (C1)=(L7) 300 200 0

本期保險合約服務利潤釋出數 (C2)=(C1)分期釋出 100 100 0

未來現金流量估計變動之調整

(未能調整之部份，另以60(D)處理)(C3)=(11) (100) 0

應計利息 (C4) 0 0 0

期末保險合約服務利潤 (C5) 200 0 0

Slide 36


PwC

Form design(P/L form) 損益表及其他綜合損益表

Y1 Y2 Y3

保險合約收入

PAA保險合約收入 XX

BBA保險合約收入60(B)60(C ) =(B16) 300 300 300

分出再保險合約支出

PAA分出再保險合約收入 YY

BBA分出再保險合約收入 ZZ

已發生賠款 =(7) 200 450 450

已發生理賠費用

已發生費用

立即認列之虧損性合約損失60(A) =(L8) 0

未來現金流量估計未調整於

保險合約服務利潤者60(D)=(B5) 150

當期實際現金流量與先前估計數

之經驗調整60(E)=(8)

UNWIND =(B15) 150

虧損性合約負債變動數60(F)

:

承保損益小計(Operation /Underwriting income) (1)　 100 (300) 0

投資損益

保險負債利息費用

:

投資損益小計(2) (investment result) 0 0 0

損益表損益　(Profit and Loss) (3)=(1)+(2) 100 (300) 0

貨幣時間價值調整數

:

其他綜合損益小計(Other comprehensive income) (4) 0 0 0

總綜合損益 (Total comprehensive income)　(5)=(3)+(4) 100 (300) 0

註：承保利益亦可以下列方式表達

CSM釋出 =(3) 100 100 0

未來現金流量估計未調整於

保險合約服務利潤者60(D)=(B5) 0 150 0

當期實際現金流量與先前估計數

之經驗調整60(E)=(8) 0 250 0

已發生理賠費用

已發生費用

虧損性合約負債變動數60(F)

承保損益小計(Operation /Underwriting income) (1) 100 (300) 0

Slide 37


PwC

Business combinations and portfolio transfers

5 Slide 38


PwC

Other specific requirements Portfolio transfers and business combinations

Requirements

• Excludes consideration for other assets and liabilities acquired in same transaction

• In business combination, consideration is fair value of contracts

• Fair value reflects consideration relating to liability assumed

• Difference between initial measurement and consideration is goodwill or bargain purchase

Clarification after 2013 exposure draft:

• Contracts acquired through portfolio transfer / business combination accounted for as if they had been issued by acquirer at the date of the portfolio transfer / business combination.

• Insurance event for contracts acquired in the settlement period is the discovery of the ultimate cost of claims.

• Coverage period will be the period in which the ultimate claims amount is discovered (normally the period over which the claims are settled).

• Some insurance contracts acquired in the settlement period are unlikely to qualify for the PAA, as the period in which the ultimate claims amount is discovered may be longer than 12 months.

• CSM has to be set-up for contracts acquired in the settlement period (see next slide)

Slide 39


PwC

Other specific requirements Long-tail PAA contracts acquired in the settlement period

BBA throughout PAA

PAA and undiscounted

incurred claims

Discounting

Risk adjustment


Discounting

Risk adjustment


Ex

pir

ed

ris

k


Risk adjustment

Issuer of insurance policies Entity acquiring

insurance contracts

BBA

Contractual Service Margin

Discounting

Risk adjustment


One of three options for liability for incurred claims (expired risk)

Contract has new coverage period (discovery of

ultimate claims amount) and CSM has to be set-up

Examples could be liability insurance/bodily injury, asbestos, workers compensation

Slide 40


PwC

Components of calculation

6 Slide 41


PwC

Best estimate of fulfilment cash flows Basic cash flows

Explicit, unbiased, probability-weighted estimate (expected value) of future cash outflows less future cash inflows that will arise as insurer fulfils the insurance contract:

• Market variables consistent with observable prices.

• Based on the (re)insurers perspective for other cash flow estimates.

• Relate directly to the fulfilment of contracts.

All cash flows that arise as contract fulfilled are included:

• Premiums and claims.

• Options and guarantees.

• Direct acquisition costs (but excludes indirect costs).

• Policy administration and maintenance costs (but exclude certain overhead expenses).

• Reinsurance cash flows.

• Profit commission.


Slide 42


PwC

Best estimate of fulfilment cash flows Recognition – Direct contracts

Contracts are recognised and included in the financial statements at the earliest of:

• The beginning of the coverage period;

• When the first scheduled payment from the policyholder is due; and

• If applicable, the date on which the portfolio of insurance contracts to which the contract will

belong is onerous (sum of net expected cash outflows > 0).

Contract boundary (end) Cover commences

Enter into contract Year end


Slide 43


PwC

Best estimate of fulfilment cash flows Boundary (end) of a contract


Contract boundary is where the entity:

• has right or practical ability to reassess risk of particular policyholder and can re-price; or where

both of the following are satisfied:

- Entity has right or practical ability to reassess risk of portfolio of insurance contracts and

can re-price.

- Pricing of premiums up to reassessment of risks does not take into account future risks.

So contract will end when:

• Not required to provide coverage.

• Can re-price to reflect risks of policyholder.

• In some cases, when insurer can re-price to reflect risk of portfolio.

• On substantial modification (and take modification as a new contract).

Whether the insurance contracts are written directly or through a delegated authority (also known as

binder) is irrelevant. The contract boundary definition is based on the underlying insurance contract.

May be different to Solvency II !

Slide 44


PwC

Example: Contract Boundaries Where is the contract boundary?

1. For an individual private medical insurance policy with a guarantee not to individually re-underwrite the contract, but where the insurer has the right to review the premiums annually based on the experience across the portfolio?

2. For an annually renewable motor insurance contract issued under a five year delegated authority with a three month cancellation clause, where is the contract boundary?

1 year

1 year


Slide 45


PwC

Best estimate of fulfilment cash flows Reinsurance contracts (1 of 4)

Recognition: Held reinsurance

Outwards (held) reinsurance contracts are recognised and included in the financial statements at :

• The beginning of the coverage period, if the reinsurance covers aggregate losses on a portfolio; or otherwise,

• When the underlying contracts are recognised.


Slide 46


PwC


Recognition: Inwards (written) reinsurance

Aggregate cover?

Treat as direct Is net inflow +

ve?

Recognise as underlying

contracts are written

Recognise immediately all

future cash flows under the treaty

Yes

Yes

No

No

For inwards (written) treaty reinsurance, whether the treaty is onerous will be key

Whether the treaty is onerous may change, increasing the volatility of the TPs


Slide 47


PwC


Cash flows

• Assumptions consistent with underlying contracts.

• Recoveries and ceding commissions dependent on claims as part of claims.

• Ceding commissions not contingent on claims as a reduction in reinsurance premium.

Interaction between profitable reinsurance and onerous direct insurance contracts

• Changes in cash flows on reinsurance contracts after inception that offset losses on direct insurance contracts are recognised in profit or loss.

• For profitable reinsurance contracts at inception that offset losses on direct insurance contracts, a CSM is still recognised

Best estimate of fulfilment cash flows Change in IASB decisions

Slide 48


PwC


Impact of outwards reinsurance

• If expected cash flows are positive (net inflows) deferred gain.

- If the deferred gain relates to:

◦ Future events recognise over coverage period

◦ Past events recognise over settlement period

• If expected cash flows are negative (net outflows):

- If the loss relates to:

◦ Future events defer and expense over coverage period

◦ Past events recognise immediately

• Risk adjustment represents risk being transferred to issuer of reinsurance contract

• Non performance risk of reinsurer is included in expected cash flows

• Use of OCI for changes in discount rates is optional


Slide 49


PwC

Discount rate

• Needs to reflect the characteristics of the cash flows in terms of timing, currency, liquidity and linkage to returns on specific assets*

• Full yield curve required

• For OCI calculations, two sets of discount rates required: locked in initial rates and current rates

IFRS

(‘Top down’)

IFRS

(‘Bottom up’)

Illiquidity Premium

Risk Free Rate

or

Expected Default

Unexpected Default

Mismatch Adjustment

Discount rate

Solvency II - Developing proposals

‘Volatility adjustment’

Risk Free Rate

EIOPA advice 14 June 2013 proposed ‘Volatility Balancer’ to own funds

Usually unavailable

Top down = bottom up? Unlikely given components of asset yields?

Discounting

Relative size is for illustrative purposes only * Additional application guidance in case of lack of market data. Use judgement to: • Make appropriate adjustments to observed transactions • Develop unobservable inputs using best available information. • Unobservable inputs should not contradict relevant market data.

Slide 50


PwC

Discount rate Use of other comprehensive income is optional

Other Comprehensive Income (OCI) sits on the balance sheet in equity. It exists to prevent volatility in the liabilities due to changes in discount rates affecting the P&L.

Apply building block model with various

assumptions

Record in OCI the difference between

the liability discounted at the

current discount rates and the rates at initial

recognition

Run the model using current discount rates

(balance sheet measurement)

Run the model using discount rates at

initial recognition

Record in profit or loss unwind of

discount of liability

Discounting Change in IASB decisions

Slide 51


PwC

Discount rate Use of other comprehensive income under the PAA

• Discount rate used is rate locked-in at the date the liability for incurred claims is recognised, rather than at contracts inception under the BBA

• For incurred but not reported (‘IBNR’) claims, the rate is determined when IBNR is first recognised

• Changes to IBNR do not lead to a change in the locked-in rate

• No need to track discount rate at contract inception

Discounting Change in IASB decisions

Slide 52


PwC

Discount rate Other comprehensive income: Issues for GI

Potential mismatch between assets and liabilities:

• Changes in asset values feed directly into the P&L whereas changes in discount rates feed into OCI. If the assets and liabilities are not matched, this will also have an effect on the P&L depending on the extent of the mismatch and the changes in investment conditions.

• There is no recognition (through increased stability in the P&L) of moves towards a matched position after inception, because the presentation is tied into the initial discount rate. This is likely to cause mismatches and (misleading) results for claims such as periodical payment orders (‘PPOs’).

OCI is optional, so general insurers can opt to recognize changes in discount rates immediately in profit or loss.

Discounting

Slide 53


PwC

Risk adjustment IFRS vs. Solvency II

Risk adjustment

• Risk adjustment objective is ‘the compensation the insurer requires for bearing the uncertainty inherent in the cash flows that arise as the insurer fulfils the insurance contracts.’

• No limitation on techniques or prescribed level of diversification.

• Solvency II risk margin adopts a prescribed cost of capital method. If a cost of capital method is adopted for IFRS then there is the potential for a different calibration to Solvency II.

• Volatility of each method will be a consideration when determining the approach as all changes in the risk adjustment go through profit or loss.

• Disclosure of confidence level required.

Cost of capital

Cost of setting up the economic

capital required for the lifetime of

the portfolio. No prescribed capital

or percentage cost but market

practice likely to drive

ultimate requirement?

Confidence level

Value at risk; used to measure the

expected loss on the portfolio at the

specified confidence level over

specified time horizon. Disclosure

may lead insurers to ‘target’ a

certain level?

Conditional tail expectation

Tail value at risk; used to measure

the expected loss on the portfolio as

an average of outcomes occurring

above the specified confidence level

over the specified time horizon.

Slide 54


PwC

Risk adjustment Practical treatment in Taiwan

Risk adjustment

1

2

3

4 Q: How to split total risk adjustment to detailed portfolios when the amount is evaluated on combined basis? A: Actuary should select a reasonable basis to allocate the amount, e.g. % of liability for incurred claims and liability for the remaining coverage.

Q: How to calculate the risk adjustment when there is not sufficient experience?

A: RBC risk coefficient from industry average experience

Risk Adjustment can be selected based on the following models:

1. Mack’s method 2. Bootstrapping 3. Stochastic chain ladder/B-

F/Cape Cod 4. Generalized Linear

Modelling(GLM) techniques 5. Bayesian method

Q: How to select the cost of capital rate when there is not sufficient information? A: Refer to solvency II, selected as 6%.

Slide 55 Sep 2015 IFRS 4 Phase II On General Insurance Reserving

PwC

Contractual service margin No day 1 profit and no Solvency II equivalent ...

Contractual service margin is recognised to defer gain at contract inception while losses at inception are recognised immediately (cannot be negative).

Re-measurement:

• Unlocked for differences between current and previous estimates of future cash flows relating to future coverage and other future services (e.g. assumption changes no longer taken to P&L unless margin goes negative).

• Do not unlock for changes in estimates of ultimate cost of settlement for claims already incurred.

• Margin can be reinstated once exhausted, but previous losses should first be reversed. Reinstatement can be above original value.

Interest accretion:

• Interest accreted on margin using locked in discount rate.


Slide 56


PwC

Contractual service margin No day 1 profit and no Solvency II equivalent ...

Contractual service margin is recognised to defer gain at contract inception while losses at inception are recognised immediately (cannot be negative).

Amortisation:

• Released over coverage period in line with the transfer of services provided (reduction in exposure).

Unit of account:

• Margin determined at outset at portfolio level (but could be at a lower level).

• Portfolio definition no longer refers to contracts that are priced similarly relative to the risk taken on.

• On initial recognition onerous contracts should not be aggregated with profit making contracts.

• Objective of standard is to measure at individual contract but can aggregate if meets objective.

• Examples to be provided in the final standard.


Slide 57


PwC

Other specific requirements Unit of account for the BBA and PAA – Driver of complexity

Consolidated group

Reporting unit

Reporting unit

Portfolio

Reporting unit

Line of business

Line of business

Portfolio

Cohort

Cohort

Cohort by term

Contract

Significant impact on modelling and data

requirements

Component Unit of account

Fulfilment cash flows Portfolio/Contract

Discount Liability characteristics

Contractual service margin – Recognition

Individual contract, but can aggregate if it meets objective. Also not combine profit making and loss-making contracts

Contractual service margin – Amortisation

None stated

Risk adjustment None stated

Onerous contract test (prior to recognition)

Portfolio

Cohort

Cohort

Definition of portfolio: ‘Insurance contracts that are subject to similar risks and managed together as a single pool.’

The intention of the IASB is to have a similar unit of account for the onerous contract test under the PAA and BBA


Slide 58


PwC

Profit signatures and distribution Summary of profit drivers

Difference between

investment return

and liability

discount unwind

Release from

risk


Amortisation* (release

of day 1 profit)

prospectively modified

by changes in

cash flow estimate**

Day 1 loss

recognition

Experience

Variances Indirect expenses

** Until contractual service margin goes negative

* Service is provided on basis of passage of time (stand ready obligation) and reflecting the expected number of contracts in force

Slide 59


PwC

Case Study

7 Slide 60


PwC

1. Recognition of an insurance contract

An entity issues a portfolio of insurance contract with three year of coverage (e.g. Engineering business).

The coverage is from 7/1/2014 to 6/30/2017;

The issue date is 3/20/2014, the date on which the first payment from the policyholder becomes due is 6/20/2014; Total premium is $360,000, paid in instalment over three years, the 1st instalment of $120,000 has been received on issuance; The commission is $72,000, paid in 3rd quarter of 2014; The discount rate at 6/20/2014 is 2%; Cost of capital method is used in the calculation for risk adjustment; The assumption of cash flow and cost of capital is as below:

2014 2015 2016 2017

Cash Flow (in $) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Premium Received 120,000

Cash outflows_Claim 3,231

6,462

9,692 12,923 16,154 19,385 22,615 25,846 29,077

32,308

35,538 38,769

Cash outflows_Commission 72,000

Cash inflows_Premium 120,000 120,000

Cost of Capital

1,428

81 - 1,922 1,694 1,410 1,071 2,765 2,317 1,817 1,263

658

Slide 61


PwC


2014 2015 2016 2017

Cash Flow (in $) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Premium Received 120,000

Cash outflows_Claim 3,231

6,462

9,692 12,923 16,154 19,385 22,615 25,846 29,077 32,308 35,538 38,769

Cash outflows_Commission 72,000


Cost of Capital 1,428

81 - 1,922 1,694 1,410 1,071 2,765 2,317 1,817 1,263

658

This entity shall recognize this contract at earliest of the following: (a) the beginning of the coverage period; (i.e. 6/30/2014) (b) the date on which the first payment from the policyholder becomes due; (i.e. 6/20/2014) The entity measure this insurance contract at initial recognition as follows:

(in $) Initial Recognition Note

Future cash outflows 324,000 (1)sum of cash outflows

Future cash inflows (240,000) (2)sum of cash inflows

Future Cash flows 84,000 (3)=(1)-(2)

Time Value (4,351) (4)=PV of (1)- PV of (2) -(3)

Risk adjustment 15,851 (5)PV of cost of capital

Fulfilment Cash Flows 95,500 (6)=(3)+(4)+(5)

Pre-coverage cash flows* (120,000) (7) premium received

Contract Service Margin 24,500 (8)=max{-[(6)+(7)],0}

Insurance contract liability at initial recognition 120,000 (9)=(6)+(8)

* the 1st instalment of $120,000 has been received on issuance, which is earlier than the initial recognition.

Slide 62


PwC


As at 12/31/2014, the discount rate is still 2%. The estimated cash flow for future coverage do not change. The entity measure this insurance contract at subsequent recognition as follows:

(in $) 2014/12/31 Note







Contract Service Margin 23,775 (7)


(7)=the carrying amount at the start of the reporting period+ the interest accreted-the amount recognised in accordance with the service provided in the period+ a favourable difference between the current and previous estimates of the present value of future cash flows At this case, only the interest accreted and recognised in profit or loss with service provided impact the closing balance of contract service margin.

2014Q2 2014Q3 2014Q4

Opening balance 24,500 24,513 24,308

The interest accreted 13 123 122

The amount recognised with the service provided 0 (327) (655)

Decrease in the estimate of future cash outflows added to margin 0 0 0

Closing balance 24,513 24,308 23,775

Slide 63


PwC

1. Recognition of an insurance contract As at 6/30/2015, the discount rate is still 2%. The estimated cash flows for future coverage have changed. The entity measure this insurance contract at subsequent recognition as follows:

(in $) 2015/6/30 Note



Future Cashf lows 68,308 (3)=(1)-(2)






Discounted to 2015/6/30

2015 2016 2017

Evaluation Date Discount Rate Cash Flow Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

31/12/2014 2.0% Cash outflows_Claims 214,196 16,154 19,385 22,615 25,846 29,077 32,308 35,538 38,769


Future Cash Flow 95,972

30/06/2015 2.0% Cash outflows_Claims 183,597 13,846 16,615 19,385 22,154 24,923 27,692 30,462 33,231


Future Cash Flow 65,373

favourable difference between the current and previous estimates of the present value of future cash flows

30,599

2015Q1 2015Q2

Opening balance 23,775 22,909

The interest accreted 116 113

The amount recognised with the service provided (982) (1,514)

Decrease in the estimate of future cash outflows added to margin 0 30,599

Closing balance 22,909 52,108

Slide 64


PwC


As at 12/31/2015, the discount rate changes to 3%. The estimated cash flows for future coverage have also changed. The entity measure this insurance contract at subsequent recognition as follows:

(in $) 2015/12/31 Note




Time Value (3,847) (4)=PV of (1)- PV of (2) -(3), the discount rate is 3% instead of 2%

Risk adjustment 8,974 (5)PV of cost of capital, the discount rate is 3% instead of 2%




2015Q3 2015Q4

Opening balance 52,108 48,439

The interest accreted at 2% interest rate 261 242

The amount recognised with the service provided (3,930) (4,386)

Decrease in the estimate of future cash outflows added to margin 0 (12,909)

Closing balance 48,439 31,386

Slide 65


PwC


As at 12/31/2015, the discount rate changes to 3%. The estimated cash flows for future coverage also change. The entity measure this insurance contract at subsequent recognition as follows:


2016 2017

Evaluation Date Discount Rate Cash Flow Q1 Q2 Q3 Q4 Q1 Q2

30/06/2015 2.0% Cash outflows_Claims 154,907 19,385 22,154 24,923 27,692 30,462 33,231


(9)Future Cash Flow 35,497



(10)Future Cash Flow 48,406

Diff of PV of future cash flows=(9)-(10) (12,909)


2016 2017

Evaluation Date Discount Rate Cash Flow Q1 Q2 Q3 Q4 Q1 Q2



Risk adjustment 9,044

(11)Fulfilment cash flow 57,450



Risk adjustment 8,974

(12)Fulfilment cash flow 56,128

Impact from discount rate change=(11)-(12) 1,322

The movement of impact from discount rate change is recognized in OCI. (Optional)

Slide 66


PwC

2. Recognition of an reinsurance contract An entity estimates that the expected present value (EPV) of premiums from the policyholders equals CU900, and the risk adjustment equals CU30. This entity enters into a 30 per cent proportional reinsurance contract and, at the same time, issues corresponding underlying insurance contracts. In relation to the reinsurance contracts held, the entity estimates the following: (a) the EPV of cash inflows is CU270 (recovery of 30 per cent of the EPV of cash outflows of CU900 for the underlying insurance contracts); (b) the risk adjustment is CU18 (as 30 per cent of the risk adjustment of CU60 for the direct insurance contracts); (c) the EPV of cash outflows (the single reinsurance premium paid to the reinsurer, less ceding commissions received from the reinsurer) is: (i) in Example A: CU300; and (ii) in Example B: CU280. Because the reinsurance coverage does not relate to events that occurred before the purchase of the reinsurance contract, the measurement of the asset that arises from the reinsurance contract held would be as follows:

Example A Example B

CU CU

EPV of cash inflows (recoveries) 270 270

EPV of cash outflows (premium ceded, net of ceding commission)

-300 -280

Risk adjustment 18 18

Fulfilment cash flows -12 8

Contractual service margin 12 -8

Reinsurance contract at initial recognition 0 0

The effect on profit or loss will be the following:

Gain/(Loss) at initial recognition 0 0

The Contract Service Margin

could be negative for reinsurance

contract!

Slide 67


PwC

How to prepare for changes?

8 Slide 68


PwC

Summary: Main issues for general insurers

Use of PAA

• Most GI insurers are likely to use the PAA for contracts of one year or less, but uncertainties remain over applicability for longer term contracts.

• Unit of account is challenging and costly to apply in practice

• Leveraging Solvency 2 / regulatory changes for BEL and risk adjustment in most cost effective way

• P&L presentation and explaining the business

Optional use of other comprehensive income

• Rules are complex and require storage of discount rates at time policy is recognised (big issue for latent-exposed policies).

• Mismatch of treatment of assets and liabilities may increase overall P&L volatility due to presentation of discount rate changes in the OCI …. but OCI is optional.

Risk margin

• For firms without a Solvency II internal model, this calculation could be challenging.

Inwards (written) reinsurance

• Potential for whether treaties are onerous are not to change during the treaty will increase the volatility of the technical provisions.

Companies should start planning for IFRS 4 Phase II now as no significant changes for general insurers are expected in re-deliberations

Slide 69


PwC

What are the next steps? ‘Plan for a plan’

It’s the right time to start thinking about impact of re-exposure draft in terms of:

• Impact on emergence of profit for new business • How the proposals compare with current IFRS • Transitional impact on balance sheet and shareholders equity

Financial impact

• Development required for building blocks: Best estimate, contractual service margin, risk adjustment

• Analysis capability using models • Data requirements to support analysis and disclosures • Reporting processes

Systems and processes

• Plans for lobbying/influencing activity during ED period • Big issues for group arising from financial impact and

systems/data/processes analysis • Size of project (type of resources, costs), workstreams

required, scheduling and project governance

Preparation and planning

for the ED

Slide 70


PwC

What we do to prepare for changes?

Topic What the departments did What the management received

Interpreting the Exposure Draft

• Analysis of staff papers • Development of working positions for the project

• One view of the current status of the ED, based on IASB staff papers, with interpretation for our client

Engaging the business units through training

• Developed and ran training sessions in each of the main insurance business units (US, Asia, UK)

• Objective to raise knowledge and engagement to enable successful workshops

• Detailed 1 day training course for 30 people in each BU

• Tailored to each BU, with worked numerical examples based on local products

Analysis at business unit level

• Ran business-unit workshops, building on the training sessions to enable assessment of main systems and process impacts

• Materials setting out key issues to support workshop facilitation

• Report of key findings and recommended activities for next 6 months

Financial impact analysis for 12 key products

• Built Excel-based cash flow models for 12 of the clients best selling products (spanning the main product types – unit linked, variable annuity, protection, annuity, with-profits/participating)

• Built IFRS overlay models for these products, to illustrate best estimate profit signature and a number of sensitivity/scenario tests

• Key product cash flow models • IFRS (current local implementations in each

territory (including US GAAP) and phase 2) overlays

• Profit signatures, including alternative scenario illustrations

• Commentary and analysis of key messages

Preparation and planning

• Draft of report, and key findings • Outline project structure and activity plan • Programme governance proposals • Supporting key message development and areas of

focus for influencing/lobbying

• Draft report • Draft outline project plan including detailed

activity plan for next 6 months • Governance approach including terms of

reference for technical working group

Slide 71


PwC

Example of actions to do Key messages Forward planning is a good investment to make now

• Timeline to go-live (potentially as few as 3 years to transition date for SEC reporters) drives a need and opportunity for forward-planning

• Release of re-exposure draft is a strong catalyst for analysis of key impacts

Working positions on key aspects of the standard can be set out in some detail now, and the unanswered questions are becoming fewer

• We have well-developed working positions, and we understand the biggest questions that will require more analysis over the coming months

• We have a good roadmap for a typical implementation project

There’s no substitute for understanding the numbers

• Make use of worked examples in training to build the client’s understanding

• Profit signature work also helps – these were the key to developing key messages and for the ‘penny to drop’

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PwC

What are our clients doing and how we can help?

• ED could represent last chance to influence debate

• Fundamental issues exist in current model for insurers (e.g. mandatory OCI, participating contract model)

Lobbying efforts

• Assessment of financial, operating and system implications

Impact study

• Sizing scale (including resource requirements) and determining when activities should occur

• Interaction with Solvency II and other finance change initiatives

Interactions with wider

change initiatives

• Workshops to understand the issues and support in drafting comment letter

• Assessing product specific impacts (e.g. profit profiles) and overall impact on company profit and equity

• Planning effectively for the change so as to start at the right time and focus spend

Actions Next steps

Slide 73


This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the

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