IFRS 17 - Brief overview. Fall School November 2017

Transcription

1 IFRS 17 - Brief overview Fall School November 2017

2 IFRS17 Intro IFRS today IFRS 17 brief overview 1. Scope 2. Level of aggregation 3. Fulfilment CFs 4. CSM/BBA/VFA 5. PAA 6. Presentation 7. Transition 2

3 IFRS today

4 IFRS today (IFRS4) PROS Definition of insurance contract -> determines scope Some (albeit limited) requirements around presentation Liability adequacy test CONS No measurement requirements Insurers are allowed to apply their local accounting policy Lack of comparability 4

5 Scope of IFRS 17 (issued: May, 2017 effective: 1 January, 2021)

6 Scope Insurance contracts* Investment contracts with discretionary participation features Fixed fee service contracts No significant changes in the scope compared to IFRS 4 In scope of IFRS 17 only if entity also issues insurance contracts Contract by contract choice: IFRS 17 or IFRS 15 NEW time value of money for assessment of significant insurance risk * issued direct insurance contract, issued and held reinsurance contracts 6

7 Level of aggregation

8 Level of aggregation 1. Objective Profitable vs onerous contracts No CSM* at the end of coverage period 2. Aggregation requirements** Top-down approach: Start at portfolio level (similar risks, managed together) 3 groups at inception ***: Onerous; Profitable with no significant risk of becoming onerous; and Other profitable contracts Risk of contracts becoming onerous: Internal reporting Sensitivity of fulfilment cash flows Requires that a group shall not include contracts issued more than one year apart *CSM=Contractual Service Margin (day 1: future unearned profit) **Exception for the level of aggregation on transition. ***There may be no contracts in one or two of the indicated profit groups. Source: PwC 8

9 Initial measurement (general model)

10 General Measurement Model Building Block Approach 4 th Block: Unearned profits (Contractual Service Margin) CSM 3 rd Block: Compensation for risk 2 nd Block: Discounting at current rate 1 st Block: Expected value of the future cash flows Risk adjustment Time value of money (discounting) Best estimate of cash flows Fulfilment Cash Flows 10

11 Contract Boundaries Until when should the contract be considered? Contract boundary Premium Benefit Benefit Premium Benefit Benefit Premiums and resulting benefits outside of CB 11

12 Life cycle of insurance liabilities Consistent measurement in the General Model Liability for Remaining Coverage During coverage period In essence the premium reserve Liability for Incurred Claims During claim settlement period (IBNR, RBNS) In essence the claim reserve 12

13 General Measurement Model Building Block Approach 4 th Block: Unearned profits (Contractual Service Margin) CSM 3 rd Block: Compensation for risk 2 nd Block: Discounting at current rate 1 st Block: Expected value of the future cash flows Risk adjustment Time value of money (discounting) Best estimate of cash flows Fulfilment Cash Flows 13

14 Best Estimate Cash Flows The estimates of cash flows used to determine the fulfilment cash flows shall include all cash inflows and cash outflows that relate directly to the fulfilment of the portfolio of contracts These estimates should be 1. Unbiased 2. Reflect the entity s perspective, but 3. Not contradict observable market prices 4. Current 5. Explicit (no allowance for non-financial risks in cash flows) 6. Include cash flows within the boundary of each contract (see next slides) 14

15 Cash flows Within the contract boundary Explicitly included Premiums Claims, IBNR, RBNS Directly attributable acquisition costs Claim handling costs Policy administration Taxes Anything else directly attributable Fixed and variable overheads E.g. accounting Directly attributable to fulfilling the portfolio that contains the insurance contract Allocated using systematic and rational methods Those methods are consistently applied to all costs that have similar characteristics Difference compared to Solvency II? 15

16 Cash flows Within the contract boundary Explicitly excluded Investments returns CFs resulting from re-insurance held (measured separately) CFs from future contracts Not directly attributable CFs, e.g. product development and training Abnormal amounts of wasted labour Income taxes Intra-entity cash flows Cash flows from components separated from the insurance contract Difference compared to Solvency II? 16

17 General Measurement Model Building Block Approach 4 th Block: Unearned profits (Contractual Service Margin) CSM 3 rd Block: Compensation for risk 2 nd Block: Discounting at current rate 1 st Block: Expected value of the future cash flows Risk adjustment Time value of money (discounting) Best estimate of cash flows Fulfilment Cash Flows 17

18 Effect of discounting Adjustment to reflect the time value of money and financial risks to the extent that those risks are not captured by cash-flow estimations Discount rates shall be consistent with characteristics of cash-flows and insurance contracts in particular, liquidity is to be included and credit risk must be excluded Different treatments for cash-flows based on the variability with returns on underlying items no requirement to separate cash-flows stochastic valuation Two approaches: bottom-up (risk-free plus liquidity spread) or top-down (yield of a reference asset portfolio minus spreads for non-relevant risks) Applicability of SII risk-free rates published by EIOPA? 18

19 General Measurement Model Building Block Approach 4 th Block: Unearned profits (Contractual Service Margin) CSM 3 rd Block: Compensation for risk 2 nd Block: Discounting at current rate 1 st Block: Expected value of the future cash flows Risk adjustment Time value of money (discounting) Best estimate of cash flows Fulfilment Cash Flows 19

20 Risk Adjustment for non-financial risks Compensation that the entity would require to make the entity indifferent between. Risk Adjustment fulfilling a liability that has a range of possible outcomes fulfilling a liability that will generate fixed cash flows SII risk margin is entity-specific? (e.g. CoC rate and diversification) 20

21 Required characteristics Risk adjustment for non-financial risks 5. Decreases, to the extent that emerging experience reduces uncertainty 1. Low frequency high severity > high frequency low severity risks 2. Longer duration = higher RA, for similar risks Does SII risk margin fulfil these characteristics? 4. The less is known about the current estimate, the higher the RA 3. Wider probability distribution = higher RA 21

22 Calculation methods Risk adjustment for non-financial risks No prescribed method Commonly used techniques: Confidence level (or VaR) Has to be quantified in any case! Conditional tail expectation (or TVaR) Cost-of-capital (~ SII risk margin) Explicit margin added to assumptions RA equal to the difference in liability value with best estimate and conservative assumptions PV cash flows VaR technique Probability density function Insurance liability Mean Value at Risk (At given p confidence level) Risk Adjustment 22

23 General Measurement Model Building Block Approach 4 th Block: Unearned profits (Contractual Service Margin) CSM 3 rd Block: Compensation for risk 2 nd Block: Discounting at current rate 1 st Block: Expected value of the future cash flows Risk adjustment Time value of money (discounting) Best estimate of cash flows Fulfilment Cash Flows 23

24 Contractual Service Margin Unearned profit Represents the unearned profit the entity will recognise as it provides services in the future CSM at initial recognition is the negative sum of: The fulfilment cash flows, and Any pre-coverage payments Concept similar to new business value under Embedded Value, but it cannot become negative If CSM would be negative, then this amount flows directly into the P&L. CSM is calculated on the level of Unit of Account (*). (*) UoA denotes groups of insurance contracts 24

25 Contractual Service Margin Recognition of profit in P&L Represents the unearned profit the entity will recognise as it provides services in the future This unearned profit: Is deferred and released over time into P&L as service is rendered Cannot be negative The release pattern is based on coverage units (see later slides) The CSM accretes interest at locked-in historical rates. 25

26 Contractual Service Margin Example Initial recognition At initial recognition: PV cash flows -355 Risk Adjustment +120 Fulfilment CF Example - initial recognition PV CF CSM CSM = Risk Adj. Insurance liability at initial recognition is zero 26

27 Subsequent measurement (general model)

28 Subsequent measurement Value after initial recognition Both retrospective and prospective valuation elements CSM Prospective (Same principles as at initial recognition) Risk adjustment Time value of money (discounting) Best estimate of cash flows Fulfilment Cash Flows 28

29 Contractual Service Margin Subsequent Measurement in the General Model CSM at end of period is equal to opening value, adjusted for: Effect of new contracts added Interest accreted (*) Changes in fulfilment cash flows relating to future service If CSM remains positive Amount recognised because of transfer of services in the period Valuation includes retrospective elements Interest accretion on locked-in interest rates (from initial recognition) (*) similar to unwind of interest in embedded value 29

30 Contractual Service Margin Release of CSM CSM remaining at the end of reporting period has to be allocated between current and future service, based on coverage units provided in current period and expected to be provided in future. For current coverage Recognise in P&L For future coverage Remains liability Opening Interest accretion Changes in FFCFs CSM before allocation Allocation 30

31 CSM release pattern Example 1 - continued Contractual Service Margin Category Initial recognition Year 1 Year 2 Year 3 Opening Interest accretion Changes related to future service Changes related to current service Closing Coverage unit - current period Coverage unit - total expected Ratio - CSM recognised 33% 50% 100% Additional information: - 3 year contract - One coverage unit provided in each year - Interest rate 5% CSM release pattern Year 1 Year 2 Year 3 Example 1 31

32 CSM release pattern Example 2 Contractual Service Margin Category Initial recognition Year 1 Year 2 Year 3 Opening Interest accretion Changes related to future service Changes related to current service Closing Coverage unit - current period Coverage unit - total expected Ratio - CSM recognised 50% 50% 100% Same as Example 1, but: - Only ½ coverage unit provided in Year 2 and Year 3 (Opening CSM still 235!) CSM release pattern Year 1 Year 2 Year 3 Example 1 Example 2 32

33 Unlocking the CSM CSM Subsequent Measurement in the General Model Changes related to future coverage unlock the CSM Risk Adjustment CFs Changes in market variables don t unlock the CSM In the general model Except for changes caused in Risk Adjustment Impact of changes on PV CFs measured on interest rates at inception Locked-in interest rates 33

34 CSM release pattern Example 2B negative assumption change Contractual Service Margin Category CSM release pattern 123 Initial recognition Year 1 Year 2 Year 3 Example 1 Example 2 Example 2B Year 1 Year 2 Year 3 Opening Interest accretion Changes related to future service Changes related to current service Closing Coverage unit - current period Coverage unit - total expected Ratio - CSM recognised 50% 50% 100% Same as Example 2, but: - Assumptions are revised at the end of Year increase in cash outflow expected for Year 3 This causes a decrease in CSM of 95 in year 2 34

35 Onerous contracts Definition An insurance contract is onerous at the date of initial recognition if the fulfilment cash flows allocated to the contract are a net outflow (i.e. positive liability). Fulfilment CFs > 0 A group of insurance contracts becomes onerous on subsequent measurement if Unfavourable changes to fulfilment CFs > Carrying amount of CSM Recognise the excess in P&L 35

36 Contracts with direct participation feature (previously: variable fee approach)

37 VFA - Scope For contracts with direct participation features Three eligibility criteria at inception: 1. the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items 2. the entity expects to pay to the policyholder an amount equal to a substantial share of the fair value returns on the underlying items 3. the entity expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of the underlying items

38 VFA different treatment from BBA Reduce volatility in P&L by adjusting the CSM Variable fee is equal to entity's expected share of returns on underlying items, less any expected cash flows that do not vary with the underlying items. Initial recognition is the same as in general model, only subsequent recognition is different CSM treatment BBA VFA Changes in economic assumptions Changes in operating assumptions Interest accretion Reported in P&L or OCI CSM is adjusted for the changes in variable fee* Future coverage: adjust the CSM Past or current services: recognized in P&L Accreted at locked in rate Accretion at current rate implicitly *unless risk mitigation measures, as defined by the standard are in place and the company opt for not recognising the changes in the CSM 38

39 Premium Allocation Approach

40 PAA: Eligibility for a simplified measurement model The measurement of liability for remaining coverage (LRC) may be simplified using the Premium Allocation approach, if either: 1. Material differences from the Building Block Approach is not expected by the entity; or 2. Coverage period 1 year. + onerous group of insurance contracts shall not be assumed Significant variability in the fulfillment cash flows estimated by the entity (e.g. due to assumption changes) 1 st condition is not met 40

41 PAA: Measurement Initial recognition LRC at initial recognition = + Premiums received Acquisition cash flows (if amortised) +/ Derecognition of any precoverage asset or liability + Excess liability for onerous contracts premium received Initial recognition acquisition derecognition onerous cost of pre- contracts coverage asset/liability closing PAA 41

42 PAA: Subsequent measurement LRC at end of period = LRC at beginning of period + Premiums received Acquisition cash flows (if amortised) + Amortisation of acquisition cash flows (if amortised) + Adjustment to any financing component Insurance revenue Investment component paid or transferred to the liability for incurred claims +/ Excess liability for onerous contracts and changes in previous loss component opening PAA PAA opening opening PAA PAA premium premium received received received Subsequent Subsequent measurement measurement acquisition cost cost acquisition cost cost financing insurance acquisition cost cost acquisition amortisation cost cost component financing insurance revenue amortisation component adjustment revenue revenue adjustment paid/transferred paid/transferred investment investment component component onerous onerous contracts onerous contracts closing PAA PAA closing closing PAA PAA 42

43 PAA: Additional notes Maximum possible difference between a given time instant within the coverage period and the related premium due date is no more than one year no requirement to adjust the carrying amount of liability for remaining coverage to reflect the time value of money (financing component) Additional liability shall be recognised for onerous contracts if facts and circumstances indicate Additional liability for onerous contracts and liability for incurred claims are based on the Building Block Approach 43

44 Presentation

45 Presentation Balance sheet - Assets Assets (Currently) Cash and cash equivalents Financial investments Segregated fund assets Accrued investment income Investment property Investments in associates Receivables from insurance business Reinsurance assets Deferred acquisition costs (where applicable) Property and equipment Goodwill and other intangible assets Deferred income tax assets Current income tax assets Other assets Total assets Assets (New) Cash and cash equivalents Financial investments Segregated fund assets Accrued investment income Investment property Investments in associates Insurance contracts assets* Reinsurance contracts assets* Property and equipment Goodwill and other intangible assets Deferred income tax assets Current income tax assets Other assets Total assets * including non-distinct investment and service components Source: PwC 45

46 Presentation Balance sheet - Liabilities Liabilities and equity (Currently) Liabilities and equity (New) Insurance contract liabilities Insurance accounts payable Investment contract liabilities Employee benefit obligations Derivative liabilities Deferred tax liabilities Other liabilities Senior debentures Subordinated debt Segregated fund liabilities Total liabilities Issued share capital and contributed surplus** Retained earnings and accumulated OCI** Total Equity Total liabilities and equity Insurance contracts liabilities* Reinsurance contracts liabilities* Investment contract liabilities Employee benefit liabilities Derivative liabilities Deferred tax liabilities Other liabilities Senior debentures Subordinated debt Segregated fund liabilities Total liabilities Issued share capital and contributed surplus Retained earnings and accumulated OCI Total Equity Total liabilities and equity *including non-distinct investment and service components Source: PwC 46

47 Presentation Income statement Income Statement (Currently) Revenue Premiums gross Less ceded Net premiums Net investment income (loss) Interest and other investment income Fair value and foreign currency changes on assets and liabilities Net gains (losses) on available-for-sale assets Fee income Total revenue Benefits and expenses Gross claims and benefits paid Increase (decrease) in insurance contract liabilities, reinsurance assets and investment contract liabilities Reinsurance expenses (recoveries) Commissions Operating expenses Premium taxes Interest expense Total benefits and expenses Income tax expense Net income (loss) attributable to participating policyholders Preferred shareholders dividend Common shareholders net income (loss) Income Statement (New)* Insurance revenue Insurance service expenses Insurance service result Insurance finance income or expense Investment income Investment result Profit or loss Other comprehensive income (if elected) Insurance finance income or expense Changes in FVOCI assets Total other comprehensive income Source: PwC 47

48 Fulfilment cash flows Change in estimates Overview of measurement model where to present changes? Contractual service margin Risk adjustment + Probability weighted discounted expected present value of cash flows Release of contractual service margin Interest accretion at inception rate Experience adjustments Release of risk adjustment* Time value of money and other assumptions related to financial risk* Profit or loss (insurance service result) Profit or loss (insurance finance income or expenses) * Accounting policy choice for future cash flows and risk adjustment. Source: PwC Other comprehensive income 48

49 Transition

50 Transition and effective date The effective date of IFRS 17 is 1 January The transition date is the beginning of the annual reporting period immediately preceding the date of initial application. Main rule: identify, recognize and measure each group of insurance contracts as if IFRS 17 had always applied = retrospective The liability for a group of insurance contract is measured as the sum of 1. Fulfilment CF Future cash flows Discounting Risk adjustment 2. Contractual Service Margin 50

51 Three approaches to transition to IFRS 17 Assess these on a group-by-group basis Is it impracticable to use a full retrospective approach? No Yes Full retrospective Modified retrospective approach, if possible Or Fair value approach 51

52 CSM at transition date Modified retrospective approach for contracts without direct participation feature Future CF on initial recognition Future CF adjusted for CFs that are known and occurred between the two dates CSM on initial recognition Discount rate on initial recognition 1. Use observable yield curve 2. Use Spread + Roll it forward for the remaining coverage Risk adjustment on initial recognition Risk adjustment at the date of transition adjusted for the expected releases 52

53 Modified retrospective approach for contracts with direct participation feature Adjustment for Amounts charged to PHs before transition Total fair value of underlying items at the date of transition Fulfilment CFs at the date of transition Amounts paid before transition that would not have varied based on the underlying items - +/- - Change in risk adjustment for nonfinancial risk caused by the release from risk before the transition CSM that relates to services provided before transition Proxy for the total CSM for all services (past and future) Source: KPMG 53

54 Fair value approach CSM at the transition date = the fair value of a group of insurance contracts at that date - the fulfilment cash flows measured at that date. Where: The fair value is the amount the entity would have to pay a third party to take on the obligations and risks of the group. 54

55 & tagja These set of slides were prepared by the members of the IFRS Working Group of the Hungarian Actuarial Association. Members of the IFRS Working Group presented their own views. The slides cannot be interpreted on their own and should be read together with IFRS17.