CIAA Annual Accounting Update

Transcription

1 CIAA Annual Accounting Update October 2017

2 Agenda for the session Topic Time Breakfast 8:00 8:30 Introductions 8:30 8:45 IFRS 17: Insurance Contracts 8:45 10:00 Break 10:00 10:15 IFRS 9: Financial Instruments 10:15 10:45 IFRS 16: Leases 10:45 11:05 IFRS 15: Revenue from contracts with customers 11:05 11:15 Closing remarks and questions 11:15 11:30 PwC 2

3 Alodie Brew Alodie Brew, CPA, CA Partner, PwC LLP Alodie has over 25 years experience in the financial services industry, specializing in insurance. She works collaboratively with clients and leverages her broad relationships to bring them the expertise of the entire firm. Alodie is a recognized leader in the industry. She is a member of the OSFI Insurance Advisory Committee, an advisor to the IBC (Financial Affairs), the co-chair of the IBC IFRS 17 Working Group and a regular speaker at industry events. PwC 3

4 Kyle Snyder Kyle Snyder, CPA, CA Assurance Senior Manager, PwC LLP Kyle has over 10 years of audit and advisory experience in the insurance industry. Kyle spent two years in PwC s UK office working on the audit of a global insurer. His experience includes technical accounting, IFRS conversions, audits of complex internal control and IT environments, advisory services and regulatory compliance and reporting. He has a strong understanding of insurance products an related risks for P&C insurers. PwC 4

5 Cassandra Rouse Cassandra Rouse, CPA, CA Manager, PwC LLP Cassandra has significant experience auditing P&C insurance companies, including Canadian operations of multi-national insurers. She works closely with management to understand processes, flow of transactions and related control activities, as well as its oversight function and control environment. Cassandra also provides guidance on accounting and regulatory developments and contributes to thought leadership. PwC 5

6 Timeline for Standards Today IFRS PwC IFRS IFRS IFRS

7 IFRS 17: Insurance Contracts

8 Timeline 1 Jan Dec Dec 2021 Start of comparative reporting period End of comparative reporting period End of IFRS 17 adoption reporting period 2020: Comparative reporting period 2021: First year of IFRS 17 adoption

9 Building Block Approach Default approach The measurement model Premium Allocation Approach To simplify for short term contracts (optional)

10 IFRS 17 - Building Block Approach (BBA) No equivalent today Unearned profit in the contract Amortized over coverage period Contractual service margin No provision for interest rate risk Recognized as released from risk Risk adjustment Discount at a liability rate Best estimate liability Some expenses excluded Probability weighted discounted expected present value of cash flows Liability for remaining coverage Risk adjustment + Probability weighted discounted expected present value of cash flows Liability for incurred claims

11 IFRS 17 - Premium Allocation Approach (PAA) UPR Premiums received less acquisition costs Risk adjustment + Probability weighted discounted expected present value of cash flows Liability for remaining coverage Insurance EyeOpener - May 17, 2017 Liability for incurred claims 6

12 IFRS 17 - Premium Allocation Approach (PAA)

13 Top questions for P&C

14 1 Can I opt for PAA? Materiality 12 months of less Not materially different when over 1 year. Multi-year contracts? Coverage for past events? Acquired portfolio? Option 23

15 Systems 2 At what level should I aggregate? Timing of loss Portfolio Determined at inception Similar risk Managed together Group Profitability Time cohorts Onerous contracts 23

16 Systems 3 Do I have to recognize day one losses? Onerous contract Earlier of contract date, first premium or coverage start date Timing of loss Onerous contracts 23

17 Systems 4 How to calculate the CSM? Data storage Initial and subsequent measurement Coverage units What will be the optimal CSM solution?. Methodology 23

18 IFRS 9 5 Will my discount rate change? It depends... Based on characteristics of. liabilities Duration Liquidity Currency OCI Option 23

19 Systems 6 How will the Risk Adjustment be calculated? What method will I use? Confidence interval Conditional tail expectation (CTE). Cost of capital Other method Disclose confidence interval How to calculate the diversification benefit? Methodology 23

20 Systems 7 Which acquisition costs are included? Allocation judgement Directly attributable expenses at portfolio level. Policy choice for 1 year or less (PAA) Recognize pre-coverage expenses P&L Timing 23

21 Loss ratio 8 Potential mismatches Different approach Can t offset day one loss. Non-performance risk Difference in recognition of aggregate coverage vs individual coverage Will my reinsurance contracts be impacted? Impact on capital 23

22 CSM 9 Transition Availability of data Retrospective application If not practicable - policy. choice: modified retrospective or fair value Systems 23

23 GL Mapping 10 Do I need to expand my disclosures? Where did premiums go? Data Expanded disclosures. Granularity of disclosures Confidence level for risk adjustment 23

24 Operational impacts 11 Timelines Data/systems Processes & controls Markets & distribution Performance / HR ALM / Investments Product Development & Pricing Distribution & Markets IT Systems & Infrastructure What is the impact on your business?. Business impacts Profitability / KPIs Investor relations New product design Business plans Financial Reporting & Disclosures Performance Management Education & Training 23

25 5 Questions you should be asking yourself PwC 1. What is management s transition strategy and timeline? 2. What are the key issues specific to our company? 3. How will the new measurement model impact our business strategy? 4. How will the change impact our operational processes, systems, reporting and management information, compensation plans, key performance indicators (KPIs), tax, controls, debt covenants etc.? 5. How and when are we communicating changes to stakeholders? 25

26 Next steps?

27 What are the next steps? Identify accountin g policies & key operation al issues Gather and validate data and business decisions Impleme nt systems, processes and business decisions Impact assessment Financial impact Operational impact Business impact Dry run and comparativ es 2021 Adoption Initial project setup & awareness training Assess impact and project planning

28 Financial Impact Assessment Gap Accelerator Workshop and Training Diagnostics IFRS 17 Tools and Accelerators Our IFRS 17 toolset Profit Signatures PMO Toolkit Systems Architecture Model Options 23

29 Illustrative example short duration Assumptions Portfolio of short duration liability contracts (long tail) Coverage period of 1 year Premiums of $240k recognized on straight line basis over 1 year Loss ratio of 65% ($156k) - claims all incurred in year 1 but settle over a period of 5 years (payment pattern skewed to later years) with no favorable/adverse claims development Acquisition costs of $38k and underwriting expenses of $36k Assume explicit risk margin is consistent with CGAAP provision for adverse deviation (PFAD) of 10% of undiscounted claims liability Assume investment yield on portfolio is 5% Assume discount rate for the insurance liability is 4% PwC 29

30 Illustrative example short duration Assumptions Undiscounted income statement (in total) All incurred in year 1 but settled over 5 years = $138,846 = $135,004 PwC 30

31 Illustrative example short duration Balance sheet (extract) PwC 31

32 Illustrative example short duration Statement of comprehensive income *shown on separate line for IFRS 17 for illustrative purposes only IFRS 17 Loss ratio Year 1: 64%, Total: 58% CGAAP Loss ratio Year 1: 62%, Total 65% PwC 32

33 Illustrative example short duration PwC 33

34 Illustrative example short duration Change in discount rates in year 3 Illustration of change in interest rates at beginning of year 3 Investment yield on portfolio decreases to 3% (from 5%) Discount rate on insurance liability decreases to 2% (from 4%) initial 4% rate current 2% rate PwC 34

35 Illustrative example short duration Change in discount rates in year 3 Statement of comprehensive income *shown on separate line for IFRS 17 for illustrative purposes only IFRS 17 Loss ratio Year 1: 64%, Total: 58% CGAAP Loss ratio Year 1: 62%, Total 65% PwC 35

36 Illustrative example short duration Change in discount rate in year 3 PwC 36

37 Illustrative example short duration Change in discount rate in year 3 PwC 37

38 Illustrative example short duration What if the risk margin is not the same as current practice? Assume risk margin for IFRS 17 of 15% Assume current practice is PFAD of 10% PwC 38

39 Illustrative example short duration What if the risk margin is not the same as current practice? Statement of comprehensive income *shown on separate line for IFRS 17 for illustrative purposes only IFRS 17 Loss ratio Year 1: 67%, Total: 58% CGAAP Loss ratio Year 1: 62%, Total 65% PwC 39

40 Illustrative example short duration What if the risk margin is not the same as current practice? PwC 40

41 Illustrative example short duration Recap Conceptually similar to today Potential differences illustrated in this example PwC Discount rates and presentation of the unwind of discounting The effects of changes in discount rates Risk margin Key impacts are on Timing of earnings Optional OCI presentation Impact on KPI s 41

42 Break

43 IFRS 9: Financial Instruments

44 Timeline 1 Jan 2018 Effective 31 Dec 2018 Deferral disclosures (Q1 if public) 2018: First year of IFRS 9 adoption (unless deferred) 1 Jan 2021 Insurance effective date : Deferral Period

45 Two Step Test Activities > 90% Deferral eligibility IFRS 4 liabilities significant? Liabilities connected with insurance? Whole Group 23

46 Deferral eligibility Other Liabilities arising include: derivatives tax liabilities debt instruments salaries and other benefits 23

47 SPPI Test Public? Deferral Disclosure Fact you applied the exemption How you concluded you are eligible What assets meet the SPPI test vs other assets Fair value at end of period Change in fair value during Credit risk for SPPI 23

48 What s changing IFRS 9 includes changes in 3 key areas: Impairment Expected credit loss model Classification & measurement Impairment model IFRS 9 Hedge accounting Classification and measurement

49 Classification & measurement Debt instruments Is objective of the entity s business model to hold the financial assets to collect contractual cash flows? No Yes Derivatives Is the financial asset held to achieve an objective by both collecting contractual cash flows and selling financial assets? Amortised cost1 No No Yes No FV-OCI (with recycling)1 Has the company taken the election to present changes in fair value in OCI for equity instruments that are not held for trading? Yes Fair value through P&L 1 Impairment considerations apply. 2 Expect there to be limited attraction for insurers of using the FV-OCI option for equities given inability to recycle to P&L. PwC Is the equity instrument held for trading? No Yes Does the company apply the fair value option to eliminate an accounting mismatch? No Yes Yes Do contractual cash flows represent solely payments of principal and interest? Yes No Equity instruments FV-OCI (no recycling)2 49

50 Business Model Factors to consider Level? Business Model How assets are managed Other factors

51 Business Model - FV OCI Example Factors to consider Manage assets to collect and sell Collection and selling integral part of performance FVOCI Particular activities aimed at achieving the model No threshold for amount of sales

52 SPPI - Modification Test Cash flows may be modified Instrument Compare cash flows If modification result in cash flows significantly different from benchmark cash flows it fails SPPI test Benchmark instrument

53 Portfolio Complexity Process and Controls SPPI Test Considerations Benchmark instruments Reasonably possible scenarios Cash flows different? = FVTPL Individual asset basis Practical examples: Options Prepayments Rate resets Conversion features Other embedded derivatives 23

54 Impairment - Expected Credit Losses Scope Scope Scope Financial assets at amortised cost Financial assets (debt instruments) at FVOCI Loan commitments Financial guarantee contracts Lease receivables and trade receivables or contract assets Modified financial assets

55 Impairment - What s Changing Incurred loss (IAS 39) DCF* Portfolio Allowances What is the probability that a counterparty has defaulted? Probability of Default (PD) What is the probability that a counterparty will default? Future loss Balance sheet exposure What is our exposure today? Exposure at Default (EAD) What will be our exposure at this point in time? Future performance Collateral How much of this are we likely to lose? Loss given default (LGD) How much of this are we likely to lose? DCF* Collateral Expected loss (IFRS 9)

56 Expected Credit Losses - Deterioration model The three stages Decision tree Absolute credit quality no Does the financial asset meet the definition of low credit risk at the reporting date? Relative credit quality Has the credit risk increased significantly since initial recognition? Assessment based on payment status: no If more than 30 days overdue yes (rebuttable presumption) yes yes Credit-impaired Does the financial asset meet the credit-impaired definition (same definition as in IAS 39)? yes no Performing Significant increase of credit risk Credit-impaired 12-Months-EL (interest revenue on gross basis) EL over Lifetime (interest revenue on gross basis) EL over Lifetime (interest revenue on net basis)

57 Expected Credit Losses Change in credit quality since initial recognition Recognition of expected credit losses 12 month expected credit losses Lifetime expected credit losses Lifetime expected credit losses Effective interest on gross carrying amount Effective interest on amortised cost carrying amount (i.e. net of credit allowance) Interest revenue Effective interest on gross carrying amount Stage 1 Performing (Initial recognition*) Stage 2 Underperforming (Assets with significant increase in credit risk since initial recognition*) Stage 3 Non-performing (Credit impaired assets)

58 Calculating expected losses PD aka Probability of a customer defaulting on its contract Key drivers: Customer characteristics Economic variables Determined at product level for retail portfolios and at borrower level for wholesale portfolios EAD aka Expected amount owed to the insurer at the time of default What is our exposure today vs What will be the exposure at point of default LGD aka Expected loss (may be a % of EAD) How much of this are we likely to lose (IAS 39 and IFRS 9)

59 Impairment overview Multiple economic scenarios How likely are large loss events? Future Observed 20 % Purchase or originate a loan Scenario 1, probability? 30 % Scenario 2, probability? What is the credit risk? 50 % Scenario 3, probability? Staging Has credit risk increased since origination or acquisition? Loan specific characteristics How has the loan behaved? Stage 1 Performing Loans 12 month expected losses Qualitative and Quantitative considerations Measurement What is the expected credit loss? Collateral value Discounting loss experience Loan limits Limit utilization Life Does the result make sense? 12M PD PD LGD Are post model adjustments required? EAD Stage 2 Significant increase Lifetime expected losses Stage 3 Credit impaired LT PD LGD1 LGD2 LGD3 EAD1 EAD2 EAD3 PD LGD EAD ECL Systems, data, processes, controls, data and governance Record and disclose

60 IFRS 17 Interaction IFRS 9 = Interest sensitive in OCI IFRS 17 FVOCI debt Insurance Liabilities Not interest sensitive Amortized cost Not interest sensitive FVOCI equity OCI FVPL Equity = Interest sensitive in P&L = Interest sensitive in OCI or PL

61 Key judgments Assets subject to ECL Model Deferral vs. overlay Summary of Key Considerations Remember disclosure requirements regardless Interaction with IFRS 17 liabilities Systems, controls, processes, governance Think of the potential impact tomorrow 23

62 IFRS 16: Leases

63 Timeline 1 Jan Jan 2019 No restatement of comparatives Date of initial application 2018: Comparative reporting period 31 Dec 2019 End of IFRS 16 adoption reporting period 2019: First year of IFRS 16 adoption

64 IFRS 16: Leasing Overview Lessee Lessor Subleases Effective date Implementation Definition of a lease Components Discount rate Lease term Lease payments

65 Overview of Lessee Model IFRS 16 Balance sheet Right-of-use asset X Lease liability X Income statement Interest expense X Amortization expense X Lease expense (short-term/small X ticket items) Statement of cash flows Interest portion of Accounting policy liability operating/financing Principal portion of Financing liability Lease expense Operating

66 Recognition and measurement exemptions Short-term leases Lease term of 12-months or less (may include periods covered by options) Accounting policy choice (by class of underlying assets) Reassessment in case of modification or change in lease term Only applicable for lessee Low value assets Assets with a value, when new, of USD 5,000 or less Accounting policy choice (lease-by-lease basis) Only applicable for lessee

67 Changes for Lessors under IFRS 16? - PwC Definition of lease Lease and non-lease components Discount rate Right-of-use asset accounting and impairment Lease Payments What s in and out? - Classification Change to lessee needs and behaviors could impact future leasing arrangements Subleases 67

68 Specific change to subleases for lessors Intermediate lessor accounts for and presents a head lease and a sublease separately. Sublease is classified by reference to the attributes of the right-of-use asset, not the underlying asset. Term of sub-lease is compared to the term of head lease when assessing whether the lease is for the major part of the economic life. Present value of lease payments compared to FV of the right-of-use asset, not the underlying asset. Head lease term and FV of ROU asset is likely smaller than life and fair value of underlying asset resulting in more subleases classified as finance leases.

69 IFRS 16 - Effective date Adoption Simplified approach Effective annual reporting periods beginning on or after 1 January 2019 No restatement of comparative information Apply IFRS 16 retrospectively with cumulative effect as adjustment to opening retained earnings on the date of initial application (January 1, 2019) Earlier application permitted in conjunction with IFRS 15 Date of initial application is the beginning of the annual period in which the Practical expedients available entity first applies IFRS 16 Transition choice Retrospectively in accordance with IAS 8; or Modified retrospective approach (only for lessee) Modified retrospective example: Jan 1, 2018 No restatement of comparatives Comparative period Jan 1, 2019 Date of initial application Dec 31, 2019 Current period

70 What is a lease? Two essential attributes that must be met at contract inception: Identified asset; and Right to control the identfied asset Key change from IFRIC 4 and SIC-27 A contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration.

71 Components Contract may contain lease and non-lease components Components within an arrangement are those items or activities that transfer a good or service to the customer Lease components provide the customer with rights to use an identified asset Examples of items that are not components: Property taxes Insurance Examples of nonlease components: Maintenance Consumables IFRS 16 requires each separate lease component to be identified and accounted for separately Criteria are similar to IFRS 15 ( distinct ) Lessee can benefit from the use of the asset; and Asset isn t highly dependent or interrelated

72 Discount rate Lease liability is discounted at the implicit rate if known; otherwise at the incremental borrowing rate, which is the rate of interest a lessee would have to pay to borrow on a secured basis over a similar term an amount equal to the lease payments in a similar economic environment.

73 Lease term Non-cancellable period + Optional renewal periods reasonbly certain to be exercised + Lessee s optional termination rights reasonable certain to be forfeited Lease commencement When asset is available for use (this includes rent-free periods)

74 Lease payments

75 IFRS 16: Impact Transition approach and expedients Transition approach full retrospective or modified retrospective Short-term and low-value lease exemptions Separating lease and non-lease components 1 Judgments Lease term Discount rate Embedded leases Lease vs. service agreements (IFRIC 4 conclusions) 2 Other accounting challenges FX impact of the lease liability vs. the ROU asset Intercompany leases Deferred tax impact Sale vs. leaseback transactions 3 Practical challenges Data quality, completeness of data, multiple locations and languages Impacts multiple business units and internal systems, and typically requires integration of real estate and equipment Lack of resources available to transition manually Calculation must be performed at the asset level vs. the lease level The extent and timing of early warning disclosures 4

76 IFRS 15: Revenue from contracts with customers

77 Timeline 1 Jan Dec Dec 2018 Start of comparative reporting period End of comparative reporting period End of IFRS 15 adoption reporting period 2017: Comparative reporting period 2018: First year of IFRS 15 adoption

78 Contracts What is in scope? Administrative services Incentive fees Non insurance contracts Non-refundable up-front fees Other fees. Performance Obligations 23

79 The 5-step approach Applying the core principles Core principle Revenue depicts the transfer of promised items in exchange for an expected amount of consideration 1 Identify the contract with the customer 2 Identify the performance obligations in the contract 3 Determine the transaction price 4 Allocate the transaction price 5 Recognize revenue when (or as) a performance obligation is satisfied

80 Key considerations for IFRS 15 When does a contract with a customer exist? Is the good or service distinct? What is the expected consideration? Are judgements required to estimate allocation of consideration? When does the customer obtain control? Over a period? At a point in time?

81 Other IFRS 15 reminders Don t forget... Contract costs Contract costs previously expensed as incurred will be required to be capitalized, if recoverable Practical expedient for incremental costs to obtain a contract Amortization period for contract costs may be longer than current GAAP Extensive disclosure requirements Reconciliation of contract balances (IFRS and.118) Remaining performance obligations (IFRS ) Disaggregated revenue (IFRS 15.B88) Transition requirements Adopting IFRS 15 on a full retrospective basis may result in the requirement to provide an opening balance sheet Modified retrospective method available as well as practical expedients

82 Wrap up of IFRS 15 IFRS 15 provides more specific guidance than existing standards Entity should work through the new model, do not assume no change There is no one size fits all answer the contract is the key Data may not be readily available in the current system There are systems, tax and other implications, accounting is just a small part start with the guidance in the standard Application is complicated Now is the time to take action!

83 Thank you. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisers PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. PwC refers to the Canadian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details.

84 Questions? Alodie Brew Partner Kyle Snyder Assurance Senior Manager Cassandra Rouse Assurance Manager For more information: