Insurance Accounting Transformation The journey of Indian insurers towards IFRS 4 Phase I and Phase II

Transcription

1 Speaker Name & Country : Francesco Nagari, Global IFRS Insurance Leader at Deloitte Topic: Insurance Accounting Transformation The journey of Indian insurers towards

2 The lack of comparability and the often poor quality of current accounting practices in the insurance industry around the world is clearly unacceptable. Investors know it and the insurance industry itself knows it too and I am happy to say the industry is very supportive of us creating a new Standard. Everybody agrees it is urgent that we fix this as soon as possible. That is why the IASB is determined to publish the Standard as soon as we can. Hans Hoogervorst, IASB Chairman September

3 IFRS 4 has been in use around the world since 2005 This has been referred to as the Phase I standard given its publication kicked off the IASB project (Phase II) on their goal to produce a comprehensive IFRS for insurance contracts The Phase II standard is due to be published next year IFRS 4 Phase II will become IFRS 17 Its mandatory effective date is expected to be chosen this month 3

4 Scope and classification is mainly set in IFRS 4 IFRS 4 IFRS 17 Classification of three transaction types based on a risk transfer test and presence of Discretionary Participation Features Scope exclusions Unbundling of deposit components Bifurcation of embedded derivatives Three new categories of insurance contracts: non-par, indirect par and direct par Unbundling of investment components more rigorous New unbundling of service components The key issue to watch for from IFRS 4: substantial proportions of life insurance contracts (from 15% up to 50%) failed the risk transfer test and moved to deposit accounting under IAS 39 4

5 Recognition and measurement comprehensive requirements in IFRS 17 only IFRS 4 IFRS 17 Grandfathering of non-ifrs accounting policies (old Indian GAAP) Five minimum requirements: the Liability Adequacy Test (LAT) is the key one IFRS 4 framework to incentivise change in accounting policies Single new measurement model for all insurance contracts Building blocks approach (BBA) depicting a current fulfilment value of the contract Highly transparent and data intensive The key issue to watch for from IFRS 4: the LAT grandfathers non-ifrs LAT if it is based on current estimates of cash flows including claims handling expenses and options and guarantees and recognises deficiency immediately in P&L. If the non-ifrs LAT fails the use of IAS 37 Provisions will be required at portfolio level. 5

6 Principles Measurement uses current estimate assumptions Contracts are grouped by similar profitability and risk profile Profit is measured and reported based on the entity-specific fulfillment of obligations Deferred profit absorbs assumption changes Discount rates based on market interest rates (currency, duration, liquidity) Expected profit from participating contracts is revalued based on asset sharing Total IFRS Insurance Liability Block 4: Contractual Service Margin Fulfilment cash flows Block 3: Risk Adjustment Block 2: Time Value of Money Block 1: Expected Future Cash Flows (unbiased probability weighted mean) Measured at inception as the expected contract profit to be earned as services are fulfilled. It is adjusted for future assumption changes An assessment of the uncertainty about the amount of future cash flows An adjustment that converts future cash flows into current amounts Expected (probability-weighted) cash flows from premiums and claims and benefits Measured as the difference between the risk-adjusted present value of expected inflows and outflows at inception. Probability-weighted estimate of cash inflows and outflows that will arise as the entity fulfils the contract. 6

7 Presentation requirements for life insurers are transformed in IFRS 17 IFRS 4 IFRS 17 Presentation requirements mainly grandfather the existing policies Prohibition to net reinsurance purchased with reinsured liabilities and P&L Shadow accounting policy choice moves interest volatility out of P&L Most general insurance contracts can follow a shortcut method to the BBA for the liability before claims are incurred (Premium Allocation Approach) Insurance revenue and expenses are calculated from balance sheet movements with disaggregation of any investment component OCI solution for interest rate volatility The key issue to watch for from IFRS 4: the major impact on presentation from IFRS 4 adoption was caused by contracts falling outside IFRS 4 (investment contracts without DPF) for which premiums were no longer reported in P&L and were moved to deposit accounting under IAS 39 / IAS 18 7

8 Source: IASB presentation, October

9 Disclosure is heavy in IFRS 4 and heavier in IFRS 17 IFRS 4 IFRS 17 Meticulous identification of IFRS 4 assets, liabilities, income and expenses Extensive explanation of accounting policies, assumptions and changes year on year Sensitivity analyses for insurance and financial risks, concentration statistics for all risks and ten year loss development tables (five years on FTA) Extensive quantitative disclosures based on roll forward tables and reconciliation tables between balance sheet, P&L and cash flow statement Each building block is disclosed separately Risk disclosures in IFRS 4 retained and expanded The key issue to watch for from IFRS 4: all disclosure requirements must be complied with figures that show the disclosed amount before and after the effect of reinsurance purchased (e.g. loss development tables should be before and after the effect of reinsurance) 9

10 Transition to a new IFRS for insurance will only take place with IFRS 17 IFRS 4 IFRS 17 Limited impact Some relief on disclosure Full restatement approach Three hierarchically sequenced methods: full restatement, simplified restatement approach and fair value approach Lots of data mining for life insurers The key issue to watch for from IFRS 4: the real impact on transition is that insurance liabilities do not change under IFRS 4 but all other assets and liabilities change with the adoption of IFRS. The interaction with financial assets accounting is particularly important. 10

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12 The transition to IFRS 4 will be demanding on all other areas of the balance sheet and for those contracts falling outside IFRS 4 grandfathering rule IFRS 17 will cause an expensive transition The benefits will be transparency and consistency globally for the insurance sector with lower cost of capital 12

13 Francesco Nagari Deloitte Global IFRS Insurance Leader Deloitte Insights into IFRS Insurance (i2ii) Deloitte IFRS Insurance Centre of Excellence 13

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