Preview Of IFRS 17 Insurance Contracts

IFRS FoundationPreview of IFRS 17Insurance ContractsNational Standard-Setters webinarMay 2017The views expressed in this presentation are those of the presenter,not necessarily those of the International Accounting Standards Board (the Board) or IFRS Foundation.Copyright IFRS Foundation. All rights reserved

Contents Why has IFRS 17 been developed How IFRS 17 works What this means for investors Appendix—some additional features– Reinsurance– Simplified approach for short-term contracts– Adjustments applicable to contracts with a ‘variable fee’2

3Why has IFRS 17 beendeveloped?Copyright IFRS Foundation. All rights reserved3

Economics of business poorly depicted4 Lacking relevant and transparent information from someaccounting todayIssues todayLack of useful information Use of old or outdated assumptions Options and guarantees not fully reflectedin measurement of insurance contracts Use of ‘expected return on assets held’ asdiscount rateHow this undermines analysis Fundamental economics are notnecessarily reflected in the reportedIFRS numbers Comparing companies by source ofprofitability is a needlessly difficult taskLack of transparency about profitability Profits recognised at different points Use of many non-GAAP measures

Little comparability5 Lack of comparability today is a multi-level problemIssues todayLack of comparability among insurersSolution / Benefits IFRS companies report insurancecontracts using different practicesNon-uniform reporting within groups New framework will replace hugevariety of accounting treatments Revenue will reflect the servicesprovided, and exclude deposits, likeany other industry Insurance contracts of subsidiaries areconsolidated using different practicesInconsistency with other industries Revenue include deposits Revenue reported on a cash basis5

Typical existing Income StatementP&L20X1Gross premiumsPremiums ceded to reinsurersInvestment incomeTotal incomeGross claims, benefits and expensesClaims and expenses ceded toreinsurersAcquisition costs amortisationChange in insurance contract liabilitiesTotal expensesProfit before tax620X016,321 13,567(816)(678)9,9029,03025,407 21,919(13,827) (12,012)368351(1,259) (1,150)(9,308) (8,377)(24,026) (21,188)1,381731Cash based and includescollection of deposits.Inconsistent with otherindustriesIncludes repayment of depositsConfusing adjustment thatincorporates multiple factorsInconsistent measurementreduces comparability‘Source of earnings’ difficult to identify6

Typical existing Balance SheetBalance sheetFinancial assetsDeferred acquisition costsPremiums receivableReinsurance contract assetsOther assetsTotal assetsInsurance contract liabilitiesUnearned premiumsOther liabilitiesEquityTotal liabilities and 0105,59551,43125,716293,752Multiple line items, inconsistent terminologyand inconsistent measurement, difficult tounderstand 5,5454,79644,70522,352257,3987

8Understanding IFRS 17Copyright IFRS Foundation. All rights reserved8

IFRS 17 Income StatementP&L920X1Insurance revenueInsurance service expenses20X09,856(9,069)8,567(8,489)Incurred claims and insurance contract expenses(7,362)(7,012)Insurance contract acquisition 81789,030(8,377)653731Gain or (loss) from reinsuranceInsurance service resultInvestment incomeInsurance finance expensesNet financial resultProfit before taxRicher information contentWith amounts that will be more relevant andmore comparable9

IFRS 17 Balance SheetBalance sheetFinancial assetsReinsurance contract assets*Other assetsTotal assetsInsurance contract liabilities**Other liabilitiesEquityTotal liabilities and 844,70522,352245,875* Groups of insurance and reinsurance contracts in an asset position presented separatelyfrom those in a liability position** Acquisition cost cash flows, premiums receivable and unearned premiums are included inthe measurement of insurance contracts10

Measuring insurance liabilities321PV of futurecash flows11RiskadjustmentcurrentBalance sheetFinancial assetsReinsurance contract assetsOther assetsTotal assetsInsurance contract liabilitiesOther liabilitiesEquityTotal liabilities and equitycurrentUnearnedprofitIFRS 3245,875178,81844,70522,352245,87511

1Future cash flows12 Current estimates of future cash flows Probability weighted and unbiased Stochastic modelling where necessary for financial optionsand Claims and benefitsConsidering financial options andguarantees embedded in the contracts12

1Discount rates13 Current market-consistent discount rates relevant to theliability Return premium on assets included only to the extentthat the liability cash flows are themselves linked tothose assets Disclosures about the rates used and the judgementsmade by the company13

2Risk adjustment14 Explicit adjustment for the compensation a companyrequires for bearing insurance risk– No more implicit risk adjustments to expected cashflows and lack of transparency regarding ‘reservereleases’ Part of total unearned profit– Recognised in P&L as the company is released fromrisk14

3Contractual Service Margin Unearned risk-adjusted expected profit– New CSM in the period risk-adjusted value of newbusiness– Unearned CSM adjusted where assumptions change CSM released to P&L as insurance services areprovided over the coverage period– No day 1 profit If the CSM would be negative onerous contracts– Onerous contract loss recognised immediately andsubsequently adjusted1515

Liability roll forward 116Estimates of thepresent value offuture cash flowsBEGINNING OF l163,9625,9988,858 178,818(784)1,117(116) - Current service provided in the period35(604)(923) (1,492) - Past service adjustment to past claims47(7)Insurance service result (702)506 Insurance finance expenses19,087-2219,308TOTAL CHANGES IN P&L18,385506(818)8,07318,833-- 18,833191,1806,5048,040 205,724Changes related to: - Future service yet to be provided CASH FLOWSEND OF PERIOD Excl. the effects of reinsurance1Some insurance finance expenses may be presented in Other Comprehensive Income—see later-21740(1,039) (1,235)

Future service—incl. new businessEstimates of thepresent value offuture cash flowsBEGINNING OF tal163,9625,9988,858 178,818- Future service yet to be provided*(784)1,117(116)217New profitable contracts recognised(2,344)9691,375-1,45239(1,491)-New onerous contracts recognised15108-123Estimate changes - onerous contracts9319435(604)(923) (1,492)47(7)Changes related to:Estimate changes - profitable contracts- Current service provided in the period- Past service – adjustment to past claimsInsurance service result (702)506Etc * Note: Positive number in total column increase in liability loss in P&L Excl. the effects of reinsurance-40(1,039) (1,235)

Current service—profit recognisedEstimates of thepresent value offuture cash flowsBEGINNING OF tal163,9625,9988,858 178,818(784)1,117(116)35(604)(923) (1,492)(923)(923)(604)(604)Changes related to:- Future service yet to be provided- Current service provided in the periodContractual service margin earnedRelease from riskExperience loss- Past service – adjustment to past claimsInsurance service result Etc Excl. the effects of reinsurance352173547(7)(702)506-40(1,039) (1,235)

Past service—adjusting past claimsEstimates of thepresent value offuture cash flowsBEGINNING OF tal163,9625,9988,858 178,818(784)1,117(116)- Current service provided in the period35(604)(923) (1,492)- Past service – adjustment to past claims47(7)(702)506Changes related to:- Future service yet to be providedInsurance service result Etc Excl. the effects of reinsurance-21740(1,039) (1,235)

Insurance finance expenses20 Discount unwind plus effect of changes in discount rates andother financial assumptions Recognise as gain or loss in period; option to present part in OCIEtc Insurance finance expensesEstimates of thepresent value offuture cash flowsRiskadjustmentContractualservice cretion at historical rate* – P&L7,170-2217,391Assumption changes (P&L or OCI)1,917-- **1,917Etc * Systematic allocation of finance cost using ‘locked-rate’ accretion applies to non-par, for parcontracts the allocation allows for participation effects** CSM adjusted for ‘variable fee’ effect for certain par contracts

Cash flows21 Gross premiums received still reported as part of theliability roll-forward– But not in profit and loss as ‘revenue’Etc Estimates of thepresent value offuture cash cecontractliabilitiesCash flows18,83318,833Premiums received33,57033,570Claims, benefits and other expensespaidInsurance acquisition cash flowsEND OF 05,724

Presentation of the service result22 The insurance service reflects changes in the insurance liability(CSM release etc.) BUT presented in P&L as – Insurance revenue, less– Insurance service expenses Requires the total insurance liability to be split into – Liability for remaining coverage– With separate identification of that related to onerous contracts– Liability for incurred claimsA familiar approach for non-par at present –now applicable to all insurance contracts

Insurance revenue23 Revenue recognised reduces liability for remaining coverage Equals premiums received (adjusted for time value of money)attributable to services provided in the period Payments to policyholders unrelated to insured event (return of‘deposits’) are not revenueTime value of moneyInsurancerevenueDepositsLiability for remaining coverageYear 1PremiumsYear 2Year 3Year 4Year 5

Liability roll forward 224Liabilities for remaining coverageExcluding onerouscontracts componentInsurance contract liabilities 20X0Insurance revenue*Insurance service expensesClaims incurred in the periodOnerous contracts losses and (reversals)Insurance acquisition costs expensed*Investment componentsInsurance service result Insurance finance expensesTotal changes in the statement of comprehensive incomeCash flowsPremiums receivedClaims, benefits and other expenses paidInsurance acquisition cash flowsTotal cash flowsInsurance contract liabilities 20X1 Excl. the effects of reinsurance* Insurance revenue includes recovery of insurance acquisition costs161,938(9,856)Onerous contractscomponent15,859Liabilities 01)(14,336)1,19018,833205,724

Summary: the benefits of IFRS 17 Global comparability for the first timeRelevant and updated measurement of liabilitiesFinancial risks and economic mismatches revealedSource of earnings approach to performanceValue of new business integrated with the accountingEnhanced disclosure and greater transparencyIntuitive accounting that will be more understandableIFRS 17: a game changer for theglobal insurance industry?2525

26AppendixSome of the detailCopyright IFRS Foundation. All rights reserved26

ReinsuranceP&LInsurance revenueInsurance service expensesIncurred claims and insurance contractexpensesInsurance contract acquisition costsGain or (loss) from reinsuranceInsurance service resultBalance sheetFinancial assetsReinsurance contract assetsOther assetsTotal 36,002282,871Similaraccountingbut lforwardprovided27

Simplification for short-term contracts28 Simplified ‘premium allocation approach’ option for manyshort term non-par contracts Key difference compared with above – Liability for remaining coverage not analysed into cashflows, risk and unearned profit– Short term nature means analysis of unearned profit andnew business less important For many non-life businesses IFRS 17 will not producefundamental change– Except that the application of the PAA will be moreconsistent28

Additional CSM adj. for some contracts29 ‘Variable fee’ approach applicable to contracts with ‘directparticipation features’ CSM balance adjusted for the shareholders’ share of thechange in underlying items– In effect a remeasurement of CSM for changes in financialvariables (in addition to the non-financial variablesapplicable to all contracts)– Change in value of options and guarantees adjusts CSMand hence future release of CSM Does not affect the structure of P&L or roll forwards, justthe numbers29