Baseline Delta ApproachMaking a complex world simple

22 September 2017

Four key financial reporting challenges of todayK

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CostSpeed Frequency Lack of insight

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Swiss Re’s solutions to these challenges

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Concurrent Fast Close

• Baseline closed first across all valuations

• Deltas aligned across all valuations and closed according to a pre-defined

schedule

Speed

Continuous Close

• Event driven booking model, updating all financial statements (current and

future)

• No early cut-offs and limited period end close activities

Frequency

Insightful analytics, covering:

• Valuation walks e.g. comparing US GAAP with Solvency 2

• Results analysis i.e. understanding Actual vs Expected

• Rolling projection and planning capabilities for the entire balance sheet

• Simulations of the financial in various “what if” scenarios

Lack of insight

Single sub-ledger solution covering assets and liabilities together with an

automated closing processCost

Today’s focus

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• Our solution philosophy

• Demonstrating key elements of the solution with a high level proof of concept:

- Concurrent Fast Close

- Automated walks between valuation

- Analytics within a valuation

The solution philosophy – Smart. Proactive. Upfront.

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• Smart: Use of a meaningful unbiased common denominator which removes data redundancies and the need for reconciliations along with centralised accounting rules and booking logic

• Proactive: One integrated data model for factual and projection enabling booking of full run-off in advance

• Upfront: Generate required accounting data at source once for multiple use

We have used this philosophy to design a sub-ledger for all assets and liabilities, enabled by technology development

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At its core the BDA is about splitting accounting entries into two components - a common denominator (the Baseline) and the valuations specific components (Delta bookings).

Baseline Delta Approach (BDA): an innovative approach to Multi-GAAP accounting

Baseline Delta explained

• The most suitable Baseline for (re-)insurance businesses is a set of valuation neutral contractual cash flows.

• These cashflows comprise all undiscounted current and future contractual cash flows and reflect best estimates, both of which are considered unbiased.

• The Baseline definition can be applied to all asset and liabilities

• The Deltas are established based on the rules of the specific valuation in question (e.g. US GAAP) and the differences to the Baseline

As the approach is based on a granular and integrated data model, it can also support a seamless production of current and future financial statements – including a cash flow statement – as well

as a variance analysis, which is needed for IFRS 17

The frozen yoghurt analogy

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Automated walks between valuations

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Illustrative example of applying the Baseline Delta Approach - Introduction

Year 1 Year 2 … Year 10 Total

Claims -10.0 -10.0 -10.0 -10.0 -100.0

Cashflows representing the Baseline, defined to be Undiscounted Nominal Best Estimate Ultimate Contractual Cashflows

Assumptions US GAAP Solvency 2

Discount Rate 6.0% 2.0%

Prudent Adjustment to Cashflows

25.0% of Baseline

n/a

Stylised example of claims under a 10 year life insurance contract with expected claims as follows:

These assumptions are the key differences between Solvency 2 and US GAAP in this example and are captured as Delta bookings for:• Time Value of Money (Nominal Risk Free Discounting)• Uncertainty (Risk Adjustment to Discounting and

Prudent adjustment to cashflows)

We illustrate this example for both US GAAP and Solvency 2 using the following assumptions:

Concurrent Fast Close

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P&L Valuation Delta Baseline US GAAP Solvency 2

Change in Claims Reserve

Baseline +100.0 +100.0 +100.0

Nominal Risk Free Discounting

-10.2 -10.2

Risk Adjustment to Discounting

-16.2

Prudent Adjustment to cashflows

+18.4

Total +100.0 +92.0 +89.8

Balance Sheet Valuation Delta Baseline US GAAP Solvency 2

Claims Reserve

Baseline -100.0 -100.0 -100.0

Nominal Risk Free Discounting

+10.2 +10.2

Risk Adjustment to Discounting

+16.2

Prudent Adjustment to cashflows

-18.4

Total -100.0 -92.0 -89.8

Concurrent Fast Close

A A A

B B

C

D

A A A

B B

C

D

ConcurrentBookings are made at the same time across valuations for both the Baseline (booking A) and any common Deltas (booking B)

Fast• Actuaries are only required to

compute the Baseline once, thus reducing their workload

• Deltas are automatically computed according to pre-defined accounting rules

• Use of state of the art technology speeding up the run time

Our accounting rules solution

+

+

+

+

+

+

+ +

+

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UC2 – Prudent

adjustment to cashflows

TD1 – Nominal risk free

discounting

UD1 – Risk adjustment

to discounting

PX2 – Residual

cashflow deferral

UD2 – Prudent adjust to

discounting

PX2 – Residual

cashflow deferral

UM1 – Margin for

capital costs

UM1 – Margin for

capital costs

TD1 – Nominal risk free

discounting

TD1 – Nominal risk free

discounting

Valuation – IFRS 17VValuation – Solvency IIVValuation – US GAAPV

Baseline

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Analytics within a valuation

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We think of analytics in three dimensions: Analytical Type, Driver and Management Action. Each and every booking is tagged with this information.

Our solution for analytics

Initial recognition

Time recognition

Experience recognition

Update recognition

De-recognition

Drivere.g. Mortality, Fire, Expense

Management Actione.g. Change in SAA, Expense saving initiative, strategic project, new product

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Illustrative example of applying analytics

Inception

Baseline: +100

Delta: -8

US GAAP: +92

Projected Year 1

Baseline: +100

Delta: -15

US GAAP: +85

Actual Year 1

Baseline: +95

Delta: -14

US GAAP: +81

Actual Year 1 + a

day

Baseline: +110

Delta: -17

US GAAP: +93

Initial recognition

Time recognition

Experience recognition

Experience recognition Update recognition

Summary

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• Our solution addresses the four key challenges of today’s CFO to make a complex world simple:

Speed FrequencyLack of insight Cost

• We have demonstrated how to apply the BDA to insurance liabilities. The approach is extendable to the full balance sheet including all (re)insurance products, risk margins, investments, debt, expenses, tax, etc.

• The BDA is a powerful Multi-GAAP response to the ever increasing reporting requirements in our industry (incl. IFRS 17) with potential to significantly increase steering capabilities at the same time.

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Legal notice

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©2017 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re.

The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation.