CIAA Financial Reporting and regulatory updates

Transcription

1 CIAA Financial Reporting and regulatory updates October 2015

2 Agenda for the session Topic Time Introductions 9:00 9:15 IFRS 9: Financial Instruments 9:15 10:00 Break 10:00 10:15 IFRS 4: Insurance Contracts 10:15 11:00 Risk and regulatory matters 11:00 11:30 AGM 11:30 12:00 Lunch 12:00 onward 2

3 Akif Siddiqui Akif Siddiqui Partner, Akif is a Partner in s financial services sectors specializing in P&C insurance industry. His experience of 17 years working in assurance and advisory services in Pakistan, United Arab Emirates and Canada is the basis of his strong understanding of insurance products and their accounting treatment under International Financial Reporting Standards (IFRS). Along with the responsibility of managing audits, Akif has reviewed accounting systems designed specifically for insurance products and the design and operation of the internal controls. 3

4 Owen Thomas Owen Thomas Assurance Senior Manager, Owen is a Senior Manager in the Financial Services practice with in Toronto. Owen has provided assurance and advisory services to financial services companies for over 12 years both in Canada and in the UK. He is extensively involved in the new IFRS 4 Insurance Contracts standard, sitting on s insurance working group and working with clients to understand and plan for the potential impacts. Owen is a regular presenter on accounting developments at client, industry and internal training courses. 4

5 Kyle Snyder Kyle Snyder, CPA, CA Assurance Senior Manager, Kyle has recently returned to Canada after two years in our assurance practice in the UK. His experience includes technical accounting, IFRS conversions, audits of complex internal control and IT environments, advisory services and regulatory compliance and reporting for a wide range of insurance clients in Canada and the UK. He has eight years of experience dedicated to both P&C and Life insurance sectors. Kyle is a leading member of the IFRS 9 team established to assist clients with implementation, assurance and advisory services to the insurance industry. 5

6 IFRS 9: Financial Instruments

7 Agenda 1. Technical refresher 2. Latest IASB discussions 3. Deferral and overlay approaches 4. What should insurers be doing now? 5. How we can help? 7

8 Technical Refresher 1 8

9 Classification & measurement A logical, single approach that reflects the business model and cash flow characteristics of financial assets Debt instruments Derivatives Equity instruments Is objective of the entity s business model to hold the financial assets to collect contractual cash flows? No Is the financial asset held to achieve an objective by both collecting contractual cash flows and selling financial assets? No Yes Is the equity instrument held for trading? Yes Yes No Do contractual cash flows represent solely payments of principal and interest? Yes Yes Does the company apply the fair value option to eliminate an accounting mismatch? No Yes No Has the company taken the election to present changes in fair value in OCI for equity instruments that are not held for trading? No No Yes Amortised cost 1 FV-OCI (with recycling) 1 Fair value through P&L FV-OCI (no recycling) 2 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. 9

10 Classification & measurement Business model definition requires an user s specific determination level & clear distinguishing criteria Definition of business models Key practical implications Hold to collect Collect contractual cash flows Hold & sell Manage the return of a portfolio by both holding & selling assets IFRS 9.B.4.1.4C, example 7: fund insurance contract liabilities; significant buying & selling activity to rebalance portfolio; holding and selling assets are integral to achieve this objective Methodology Level for business model determination Identification of business model criteria Identification of appropriate level for business model determination requires a specific, in depth analysis of investment management approach Different level for determination under discussion: # of business models Group/ Segment/ entity level Asset classes Managed portfolios Investment types Performance evaluation (e.g. return benchmarks) & reporting Risk management activities (e.g. credit and concentration risk) Compensation (e.g. fixed vs. variable, NAV-based) Sales activities (frequency/value/ timing/reasons) and expectations about sales activities Insurance specifics (e.g. asset-liability management, investment guidelines, funding needs for large claims) Residual e.g. manage the return of a portfolio by selling assets Process & governance Business model documentation Changes in business model needs to be tracked Hold to collect : strict requirements relating to sales activities require a regularly and comprehensive analysis and documentation to be approved by auditors Define standards for initial documentation 10

11 IAS 39 vs IFRS 9: Incurred vs. expected credit loss IAS 39 Portfolio Allowances Balance sheet exposure DCF Collateral Incurred Credit Loss Expected Credit Loss What is the probability that a counterparty has defaulted? Probability of Default (PD) What is the probability that a counterparty will default? x What is our exposure today? Exposure at Default (EAD) What will be our exposure at this point in time? x How much of this are we likely to lose? Loss given default (LGD) How much of this are we likely to lose? DCF IFRS 9 Future loss Future performance Collateral 11

12 Expected credit losses 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 12

13 Expected credit losses Deterioration model with 3 stages The three stages Decision tree Absolute credit quality Does the financial asset meet the definition of low credit risk at the reporting date? yes no no Credit-impaired Relative credit quality Has the credit risk increased significantly since initial recognition? Assessment based on payment status: If more than 30 days overdue! yes (rebuttable presumption) yes Does the financial asset meet the credit-impaired definition (same definition as in IAS 39)? no yes Performing 12-Months-EL (interest revenue on gross basis) Significant increase of credit risk EL over Lifetime (interest revenue on gross basis) Credit-impaired EL over Lifetime (interest revenue on net basis) 13

14 Interaction with IFRS 4 Avoiding mismatches IFRS 9 IFRS 4 Business model Policy choices FVO Proposed amendment to existing IFRS 4 Deferral = Interest sensitive in OCI Not interest sensitive FVOCI debt Amortized cost Insurance Liabilities = Interest sensitive in OCI or PL Overlay Not interest sensitive FVOCI equity OCI = Interest sensitive in P&L FVPL Equity 14

15 Latest IASB discussions October

16 Latest IASB discussions IASB delivers options to overcome the time lag between the first time adoption of IFRS 9 and IFRS IFRS 9 Effective date IFRS 4 Effective date Deferral approach Deferral of the effective date of IFRS 9 should be permitted rather than required and has an expiry date of to 1 January 2021 IASB response Time lag Issues raised by the industry Increased implementation cost Accounting mismatches Overlay approach Overlay adjustment: adjust P&L and OCI to remove the effect of newly measuring financial assets at FVPL in accordance with IFRS 9 Practical implications Governance Implementation road map: Integrated view/ interaction between IFRS 4/9 needs to be considered Project set up: Internal & external stakeholder communication and alignment is key 16

17 Roadmap: Deferral vs Overlay Predominantly insurance at reporting entity level? No bright line to determine predominant IASB may suggest a predominance threshold that is higher than two thirds Insurance groups with significant investment contracts, banking operations or other liabilities may fail criteria No Apply ifrs 9 Option to apply overlay approach Identify eligible financial assets Yes Option to defer IFRS 9 until IFRS 4 Phase II is effective (deferral option expires in 2021) Entity ceases to be eligible for deferral Designated as relating to insurance contracts FVPL under IFRS 9 but not under IAS 39 Not all assets relating to insurance activities need to be designated Deferral Financial and operational advantages (no increased P&L volatility; no full IFRS 9 implementation) but some disclosure requirements. Overlay Financial advantages (no increased P&L volatility) but operational challenges remain as IFRS 9 must be applied alongside IAS 39 for relevant assets. Remove from P&L effect of newly measuring financial assets at FVPL under IFRS 9 (taken to OCI). 17

18 Deferral and overlay approaches 3 18

19 Overlay approach: definition and eligibility Reclassification of effect from IFRS 9 adoption from profit or loss to OCI for certain assets Cannot be applied after adoption of IFRS 9 Optional Designation of eligible assets FVPL under IFRS 9 while Amortised Cost or FVOCI under IAS 39 Assets relate to insurance activity Not all assets relating to insurance activities have to be designated 19

20 Overlay approach: mechanics Starting application of Overlay Approach When IFRS 9 is first applied When Deferral Approach ceases to be accumulated OCI = fair value amortised cost Restate comparative if comparatives are restated under IFRS 9 Ceasing to apply the overlay adjustment Reclassify accumulated OCI to Retained Earnings retrospectively 20

21 Overlay approach: mechanics Redesignation Newly designated assets: Overlay Approach is applied prospectively Stop designation: Only when asset does not relate to IFRS 4 contracts Accumulated OCI is transferred to profit and loss (recycled) 21

22 Overlay approach: presentation and disclosure Presentation of the overlay adjustment in statement of comprehensive income Single line in profit or loss OR Single line in other comprehensive income OR Lines in profit or loss AND in other comprehensive income Disclosure State that entity is applying Overlay Adjustment Assets designation policy Explanation of the amount Effect of overlay adjustment in profit or loss if there is no separate line in profit or loss 22

23 Deferral approach: definition and eligibility Deferral approach cannot be applied after adoption of IFRS 9 or Overlay Approach Eligibility criteria Optional deferral till 1 January 2021 Deferral at the reporting entity level Insurance activities are predominant: threshold should be higher than 2/3 of total liabilities represent IFRS 4 liabilities (80%?) If eligibility criteria are not met in subsequent period Adopt IFRS 9 OR use Overlay approach from the NEXT annual reporting period Disclose that eligibility criteria are no longer met in the CURRENT reporting period Entities are permitted to stop applying deferral approach in any annual reporting period 23

24 Deferral approach: disclosure Not all disclosures under IFRS 9 will be required only limited information about the characteristics and credit quality of financial assets; The fact that the entity has chosen to delay application of IFRS 9; Explanation of how the entity concluded that it is eligible for the deferral; Disclosure on assets failing SPPI test. 24

25 What should insurers be doing now? 4 25

26 General project structure A robust & integrated implementation plan is required for insurers to cope with both IFRS 9 and IFRS IFRS 4 implementation IFRS 4 Effective date? 1 Phase 1 Design & Gap Analysis 2 Phase 2 Integration IFRS 9 implementation IFRS 9 Effective date IFRS 9 deferral 3 Phase 3 Implementation 4 Phase 4 Production & Testing IFRS 9 Design & Gap Analysis Gap analysis based on IFRS 9 functionalities/ outreach pilot OE Definition of investment accounting frameworks Decision on short cuts & methods Design new data flows, processes, governance and systems Specifications of required changes to IT systems, GL, interfaces, etc. IFRS 9 Integration Analysis interactions between IFRS 4 and IFRS 9 from a(n) conceptual, IT, process and governance perspective Impact analysis Stakeholder management required to define overall reporting strategy Identify key requirements for internal and external reporting (e.g. disclosure requirements, internal KPI s) Alignment between group/ OE s in terms of IT & governance Prototyping for new IT functionalities (e.g. SPPI tool) Alignment of accounting & risk processes IFRS 9 - Implementation Technical preparation Test Preparation Migration phase Clarify sub-ledger design Implementation of requirements within IT, Processes and Governance Implementation of Internal Controls Training of Staff IFRS 9 Production & testing Data sourcing and cleaning Integration/ migration test phases Create opening balance sheet Preparation for Go-live Possible dry run 26

27 IT & data New IFRS 9 functionalities require IT support SPPI test and impairment functionalities need to be set up in IT architecture Classification Impairment Key requirements Market & master data provisioning & storage for each investment (e.g. security type, coupon characteristics, prepayment/ termination options, subordination rank) Automated SPPI assessment logic for market traded investments Supporting manual SPPI assessments Implications on CoA Disclosure and transition requirements Parameter provisioning & storage (e.g. PD, LGD, EAD, rating) Stage transfer based on relative credit risk Calculation of gross/ net carrying amount Expected loss calculation considering a separation of unwinding and amortization effects New posting logic Implications on CoA Disclosure and transition requirements Practical implications Availability of required data, e.g. in terms of IFRS 9 scope, frequency Quality of market & security master data Market data provider (e.g. leading provider, data waterfall) Intelligent assessment logic/ decision tree based Local vs. central approaches Functionalities like stage allocation/ transfer, parameter provisioning and historization as well as a expected loss engine are required Availability of required data in terms of IFRS 9 scope, frequency and quality of data (e.g. data quality of risk systems) Consistency of risk parameters between IFRS 9 and risk management/solvency II Cash flow roll out for EAD calculation Local vs. central approaches Draft IT architecture Source and transactional systems Asset management systems Finance systems Risk & market data General accounting Consolidation Reporting Reporting Local vs. central 27

28 Summary of key considerations Key judgments need to be decided and documented Deferral vs. overlay Remember disclosure requirements regardless! Eligibility uncertain Interaction with IFRS 4 liabilities Systems, controls, processes, governance Think of the potential impact tomorrow 28

29 How we can help? 5 29

30 How we can help? Here are ways we can help: Hotline / ad hoc consultations on an ongoing basis Assist with drafting of policy papers Steering committee participation Provide gap analysis on key impact areas Ways we can help Assist in drafting incremental financial statement disclosures Provide insights on available IT solutions Valuation support Workshops and other training 30

31 Questions? 31

32 Break 32

33 Insurance contracts IFRS 4 Update

34 Agenda Introduction and timeline New measurement model overview Short duration contracts example Interaction with IFRS 9 What s left for the IASB to do? Next steps 34

35 Introduction and timeline Where are we now? IASB re-deliberations May 2007 July 2010 June ? 2019/2020? IASB Discussion paper (DP) published Phase II Exposure Draft (ED) IASB revised ED 5 key areas Final standard IASB Effective date of standard 2007 ~ 2010 ~ /8 2019/20 35

36 Introduction Why change? IASB s view that existing insurance accounting does not meet the needs of investors Existing accounting practice is mixed no global standard IASB objectives: Improve information for investors, lenders and other stakeholders Allow more meaningful comparisons Between insurers Across industries 36

37 Introduction Concerns from Canadian insurers Already have a model that works Volatility from separating asset and liability discount rates Volatility from using market observable discount rates Added complexity for preparers New performance measures for users to understand Doubts over comparability 37

38 Overview of measurement model Building Blocks Approach (BBA) For long duration contracts Premium Allocation Approach (PAA) For short duration contracts Contractual service margin Risk adjustment Unearned profit in the contract Replaces existing PFAD / margins Liability for remaining coverage Risk adjustment Probability weighted discounted expected present value of cash flows Best estimate liability Discounted using liability discount rates Probability weighted discounted expected present value of cash flows 38

39 Premium allocation approach Simplified approach for short duration contracts Similar to unearned premium approach used today Premium Allocation Approach (PAA) Liability for remaining coverage on initial recognition Incurred claims use building block measurement Revenue allocated to P&L as service is performed Choice of P&L or OCI for changes relating to discount rates Liability for remaining coverage DAC is netted here Include onerous liability (premium deficiency) if applicable Risk adjustment Probability weighted discounted expected present value of cash flows 39

40 Premium allocation approach - eligibility Optional - applies when: - Coverage period 12 months or less - Reasonable approximation of the building block model; or Reasonable approximation when there is not significant variability in the expected cash flows before the insured event occurs Variability in the expected cash flows increases with the length of the coverage period of the contract Additional considerations where insurance coverage relates to past events may not be eligible for PAA 40

41 Short duration contracts example 41

42 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% 42

43 Illustrative example short duration Assumptions Undiscounted income statement (in total) Undiscounted $ Insurance revenue 240,000 Claims expense - claims (156,000) Underwriting expenses (38,000) Acquisition costs (36,000) Underwriting result 10,000 Investment income 35,992 Profit / loss 45,992 All incurred in year 1 but settled over 5 years = $138,846 = $135,004 43

44 Illustrative example short duration Balance sheet (extract) IFRS 4 claims liability DCF's Year 1 Year 2 Year 3 Year 4 Year 5 Opening balance - 131, , ,115 75,000 Discount unwind at current rate - 5,242 4,828 4,085 3,000 Claims expense 138, Claims paid (7,800) (15,600) (23,400) (31,200) (78,000) Closing balance (A) 131, , ,115 75,000 - Risk margin Opening balance - 14,820 13,260 10,920 7,800 Change in risk margin 14,820 (1,560) (2,340) (3,120) (7,800) Closing balance (B) - 13,260 10,920 7,800 - Total claims liability (A+B) 131, , ,035 82,800 - Canadian GAAP claims liability DCF's Year 1 Year 2 Year 3 Year 4 Year 5 Opening balance - 127, , ,814 75,728 Discount unwind at current rate - 6,360 3,705 3,114 2,272 Claims expense 135, Claims paid (7,800) (15,600) (23,400) (31,200) (78,000) Closing balance (A) 127, , ,814 75,728 - Provision for adverse deviation (pfad) Opening balance - 14,820 13,260 10,920 7,800 Change in pfad - P&L claims expense 14,820 (1,560) (2,340) (3,120) (7,800) Closing balance (B) - 13,260 10,920 7,800 - Total claims liability (A+B) 127, , ,734 83,528-44

45 Illustrative example short duration Statement of comprehensive income Comprehensive Income New IFRS 4 Canadian GAAP Year 1 Year 2 Year 3 Year 4 Year 5 Total Year 1 Year 2 Year 3 Year 4 Year 5 Total Insurance revenue 240, , , ,000 Claims expense - claims (138,846) (138,846) (149,824) (4,800) (3,558) (1,903) 4,086 (156,000) Claims expense - change in risk margin* (14,820) 1,560 2,340 3,120 7, Underwriting expenses (36,000) (36,000) (36,000) (36,000) Acquisition costs (38,000) (38,000) (38,000) (38,000) Underwriting result 12,334 1,560 2,340 3,120 7,800 27,154 16,176 (4,800) (3,558) (1,903) 4,086 10,000 Interest expense - (5,242) (4,828) (4,085) (3,000) (17,154) Investment income 6,842 8,252 7,885 7,109 5,904 35,992 6,842 8,252 7,885 7,109 5,904 35,992 Net interest and investment income 6,842 3,010 3,057 3,024 2,904 18,838 6,842 8,252 7,885 7,109 5,904 35,992 Profit / loss 19,176 4,570 5,397 6,144 10,704 45,992 23,018 3,452 4,326 5,206 9,990 45,992 OCI (or new option to include in P&L) Total comprehensive income 19,176 4,570 5,397 6,144 10,704 45,992 23,018 3,452 4,326 5,206 9,990 45,992 *shown on separate line for IFRS 4 for illustrative purposes only IFRS 4 Loss ratio Year 1: 64%, Total: 58% CGAAP Loss ratio Year 1: 62%, Total 65% 45

46 Illustrative example short duration 46

47 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%) IFRS 4 claims liability DCF's Year 1 Year 2 Year 3 Year 4 Year 5 Closing balance - initial discount rate 131, , ,115 75,000 - Closing balance - current discount rate 131, , ,559 76,471 - Difference - - 3,444 1,471 - AOCI (or optionally in P&L) Opening (3,444) (1,471) Change in OCI - insurance contracts - - (3,444) 1,973 1,471 Closing - - (3,444) (1,471) - initial 4% rate current 2% rate 47

48 Illustrative example short duration Change in discount rates in year 3 Statement of comprehensive income Comprehensive Income New IFRS 4 Canadian GAAP Year 1 Year 2 Year 3 Year 4 Year 5 Total Year 1 Year 2 Year 3 Year 4 Year 5 Total Insurance revenue 240, , , ,000 Claims expense - claims (138,846) (138,846) (149,824) (4,800) (6,909) 6 5,528 (156,000) Claims expense - change in risk margin* (14,820) 1,560 2,340 3,120 7, Underwriting expenses (36,000) (36,000) (36,000) (36,000) Acquisition costs (38,000) (38,000) (38,000) (38,000) Underwriting result 12,334 1,560 2,340 3,120 7,800 27,154 16,176 (4,800) (6,909) 6 5,528 10,000 Interest expense - (5,242) (4,828) (4,085) (3,000) (17,154) Investment income 6,842 8,252 4,731 4,171 3,360 27,356 6,842 8,252 4,731 4,171 3,360 27,356 Net interest and investment income 6,842 3,010 (97) ,202 6,842 8,252 4,731 4,171 3,360 27,356 Profit / loss 19,176 4,570 2,243 3,206 8,160 37,356 23,018 3,452 (2,179) 4,176 8,888 37,356 OCI (or new option to include in P&L) - - (3,444) 1,973 1,471 - Total comprehensive income 19,176 4,570 (1,201) 5,180 9,630 37,356 23,018 3,452 (2,179) 4,176 8,888 37,356 *shown on separate line for IFRS 4 for illustrative purposes only IFRS 4 Loss ratio Year 1: 64%, Total: 58% CGAAP Loss ratio Year 1: 62%, Total 65% 48

49 Illustrative example short duration Change in discount rate in year 3 49

50 Illustrative example short duration What if the risk margin is not the same as current practice? Assume risk margin for IFRS 4 of 15% Assume current practice is PFAD of 10% 50

51 Illustrative example short duration What if the risk margin is not the same as current practice? Statement of comprehensive income Comprehensive Income New IFRS 4 Canadian GAAP Year 1 Year 2 Year 3 Year 4 Year 5 Total Year 1 Year 2 Year 3 Year 4 Year 5 Total Insurance revenue 240, , , ,000 Claims expense - claims (138,846) (138,846) (149,824) (4,800) (6,909) 6 5,528 (156,000) Claims expense - change in risk margin* (22,230) 2,340 3,510 4,680 11, Underwriting expenses (36,000) (36,000) (36,000) (36,000) Acquisition costs (38,000) (38,000) (38,000) (38,000) Underwriting result 4,924 2,340 3,510 4,680 11,700 27,154 16,176 (4,800) (6,909) 6 5,528 10,000 Interest expense - (5,242) (4,828) (4,085) (3,000) (17,154) Investment income 6,842 8,252 4,731 4,171 3,360 27,356 6,842 8,252 4,731 4,171 3,360 27,356 Net interest and investment income 6,842 3,010 (97) ,202 6,842 8,252 4,731 4,171 3,360 27,356 Profit / loss 11,766 5,350 3,413 4,766 12,060 37,356 23,018 3,452 (2,179) 4,176 8,888 37,356 OCI (or new option to include in P&L) - - (3,444) 1,973 1,471 - Total comprehensive income 11,766 5,350 (31) 6,740 13,530 37,356 23,018 3,452 (2,179) 4,176 8,888 37,356 *shown on separate line for IFRS 4 for illustrative purposes only IFRS 4 Loss ratio Year 1: 67%, Total: 58% CGAAP Loss ratio Year 1: 62%, Total 65% 51

52 Illustrative example short duration What if the risk margin is not the same as current practice? 52

53 Illustrative example short duration Recap Conceptually similar to today Potential differences illustrated in this example 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 53

54 Short duration contracts Additional considerations Eligibility for simplified approach Portfolio definition Best estimate liability Discount rates Risk margin Reinsurance Onerous contracts measurement and timing of recognition Deposit components 54

55 IASB re-deliberations 55

56 What s left to do? IASB re-deliberations Substantially complete except for participating contracts Participating contracts Final area being re-deliberated 3 critical issues remaining for participating policies Accounting for an entity s share of the participating policy Allocation of contractual service margin to income Calculating interest expense Consider any impacts on general model for decisions reached on participating contracts 56

57 Next steps 57

58 Next steps 5 Questions Audit Committees should be asking you 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? 58

59 Next steps What are Canadian insurers doing to prepare? Education for preparers and stakeholders Impact assessment - Gap analysis Identify the key impact areas for your business Identify data and systems requirements / gaps - Modelling of core products Profit signatures, ROI, transition adjustments - Assess synergies with ORSA and other risk, finance, actuarial projects Lay groundwork for detailed project plan once final standard is issued 59

60 Risk and Regulatory Matters

61 Agenda Why talk about risk and regulations The Research Couple more, while we are on risks Changes to P&C returns 61

62 The Research 1 62

63 The Research: Global CEO Survey The insurance industry is undergoing more upheaval than any other industry Changes in industry regulation 88% 66% Changes in customer behaviors 71% 61% Changes in distribution channels 69% 50% Increase in number of significant competitors traditional and new 64% 61% Changes in core technologies of production or service provision 61% 47% All Industries Q: How disruptive do you think the following trends will be for your industry over the next five years? Respondents stating very or somewhat disruptive 63

64 The Research: Global CEO Survey Insurance executives are preparing to navigate a market filled with nearly an equal amount of opportunities and threats 59% of insurance CEOs believe there are more growth opportunities than there were three years ago 61% of insurance CEOs see more threats than they did in 2012 Source: 18th Annual Global CEO Survey 64

65 The Research: Insurance Banana Skins The following research was conducted by the Centre for the Study of Financial Innovation (CSFI) and sponsored by. Questioned insurers on the following key areas: current risks, future trends, and their preparedness to respond to the risks. There were 806 participants from 54 countries involved. By Respondent By Region Observers Reinsurance Non-life Broking / Intermediary Life Europe: 51% 34% 28% 6% 5% North America: 10% Middle East / Asia: 2% Far East / Pacific: 20% 27% Africa: 5% Latin America: 12% 65

66 The Research: Insurance Banana Skins World results year on year - top 5 risks, Regulation Macro-economy Interest rates Cyber risk Investment Performance

67 The Research: Insurance Banana Skins Canada results 2015 vs Regulation Regulation (9) 2 Cyber risk Macro economy (13) 3 Interest rates Long tail liabilities (1) 4 Macro-economy Guaranteed products (-) 5 Change management Investment performance (6) 6 Guaranteed Products Natural catastrophes (15) 7 Distribution channels Climate Change (20) 8 Investment performance Innovation (-) 9 Quality of risk management Actuarial Assumptions (3) 10 Political Interference Political Interference (14) 2013 Responses in Bold did not make the 2015 Top 10 list. Responses in Red are new to the Top 10 list for

68 The Research: Insurance Banana Skins Canada vs. the World The Banana Skins Index measures the average score given by each country to the 25 risks listed in the questionnaire. The higher the score, the greater the implied anxiety level. Canada scored 3.01 on this year s index, below the global average of 3.21 suggesting Canadian insurers have a lower level of risk anxiety. World Canada 1 Regulation (1) 1 Regulation (1) 2 Macro-economy (3) 2 Cyber Risk (-) 3 Interest rates (-) 3 Interest Rates (-) 4 Cyber risk (-) 4 Macro-Economy (2) 5 Investment performance 5 Change Management (16) (2) 6 Change management (15) 6 Guaranteed Products (4) 7 Guaranteed products (6) 7 Distribution Channels (11) 8 9 Distribution channels (11) 8 Natural catastrophes (5) 10 Quality of risk management (7) Investment Performance (5) 9 Quality of risk management (14) 10 Political Interference (10) Big Movers : Global 2015 Big Movers (Up): Interest Rates Cyber Risk Change Management Big Movers (Down): Business Practices Quality Management Big Movers : Unique to Canada 2015 Big Movers (Up): Cyber Risk Change Management Quality of Risk Management Big Movers (Down): Climate Change Natural Catastrophes * (X) 2013 Rankings 68

69 Regulatory Landscape and Priorities for P&C Insurers Amidst increased regulatory requirements, the focus remains on controls, resilience, and enterprise wide risk measures. Priorities range from big data, risk mitigation strategies, operations, risk management effectiveness, and corporate governance. Quantitative Standards Ensures a robust risk-based capital test that responds to changing risks in the industry Operational Risk Credit Risk Market Risk Insurance Risk Enterprise Risk Environment Own Risk and Solvency Acceptance (ORSA) Guideline E-19 Enhances the understanding between the business and forward looking strategic planning OSFI, during the course of normal review, may review ORSA including risks, oversight and controls Capital Management Internal Audit Expected to have a view into each of these areas Crucial in maintaining board, investor and regulatory confidence Distinct Responsibilities Regulatory Compliance Management - Guideline E-13 Looking for clarity between the roles of risk, compliance, actuaries, and internal audit Emphasis is on distinct responsibility of independent monitoring and testing and appropriate level of Board reporting Big Data and Security Cybersecurity is a strategy Personal Information must be protected and managed securely Increased regulatory oversight requires proportionate data security measures such as risk based data management Ability to respond to a breach (access to capital) 69

70 Regulation Capital Is the path clearer or murkier? Conduct Intervention into distribution: truly changing the business model, with the potential to reestablish credibility and confidence in the long term Directives on personal taxation Corporate Taxes BEPS Corporate taxes: the number 2 worry in both CEO surveys behind overregulation Accounting IFRS 4/9 requiring finance transformation Insurance Modernization: a holistic vision of systems, processes, data requiring a greater alignment of risk, actuarial, and finance 70

71 The Research: Insurance Banana Skins Regulation place atop this year s list Development or implemented such as IFRS 4 phase II, changes in national and international regulatory capital requirements, and Client Relationship Model phase 2 (CRM2). Insurers growing understanding of regulatory risk management requirements. Companies have invested sizeable amounts to improve risk management over the past 12 to 18 months and the effort has served to make clear the sheer size of the task. Pressures such as recent Own Risk and Solvency Assessment (ORSA) requirements and regulators insistence that the industry must do more to manage its risk are likely also contributing to the general views on regulation overall. Banana Skins Index Regulation 1 Regulation 2 Cyber risk 2 Macro economy 3 Interest rates 3 Long tail liabilities 4 4 Guaranteed Macro-economy products 5 Change management 5 Investment performance We were somewhat surprised to see this, given that there is relatively little new happening on the regulatory front, as compared to two years ago. Clearly, though, regulatory matters especially the onerous capital requirements deflating industry performance and investor appetite, as one respondent put it remain a source of irritation. 71

72 The Research: Global CEO Survey 91% of insurance CEOs see over regulation as a threat to their growth prospects, more than any other sector Sources: 18th Annual Global CEO Survey 72

73 The Research: Insurance Banana Skins Over-regulation potentially strangles perfectly good and sound insurers from conducting good and sound business Our risks includes keeping up with the regulatory developments across jurisdictions developing at different paces throughout the world. This is taking place in an environment where profits have thinned due to the excess capacity in the market Every time regulators implement new capital requirements, there is a risk they will overdo it, for two reasons: they do not have enough experience and they are always conservative. 73

74 Couple more Cyber Risk Change Management 2 74

75 Cyber Risk Cyber Risk Change Management Cyber issues must be on the top of priorities for insurers Cyber risk shot up to second place this year in Canada, and fourth worldwide. Anxieties around cybercrime have doubtlessly been stoked by recent high-profile cyber breaches at Sony and two US health insurers. Cyber risk concerns are being driven by growing regulatory attention on data security and privacy. Insurers are struggling to come to terms with their cyber exposure, especially with respect to third parties and vendors. Customer demands for more online services and offerings are straining aging IT systems to their limits, potentially opening new cyber vulnerabilities. Banana Skins Index Regulation 1 Regulation 2 Cyber risk 2 Macro economy 3 Interest rates 3 Long tail liabilities 4 4 Guaranteed Macro-economy products 5 Change management 5 Investment performance As one Canadian respondent remarked, insurers are prime targets to be victimized given their rich data holdings, including credit card, medical and underwriting information. It s not a matter of if but when, was a common sentiment shared with respect to cyber breaches. 75

76 Change Management Cyber Risk Change Management Ability to cope with change particularly technological change is a source of anxiety Firms continue to lag in terms of responding to changing customer needs; few have ever had to segment their customers or understand the consumer lifecycle, much less engage them on social channels. Many firms struggle with what to do with telematics and other new technologies while they watch other firms simply diving into the same innovative new waters. Is the ability of insurers to deal with the scale and pace of change being hampered by the risk-focused, underwriting, claims-based people that have been so critical to their traditional success? Banana Skins Index Regulation 1 Regulation 2 Cyber risk 2 Macro economy 3 Interest rates 3 Long tail liabilities 4 4 Guaranteed Macro-economy products 5 Change management 5 Investment performance It feels like we may be on the precipice of change, where new technologies (e.g. big data, wearables, automation) could be game changers. There is so much being developed that it is difficult to predict which particular change will be the one to be the most concerned about. Chief financial officer, life insurance company 76

77 Innovation Technology is enabling disruption of other industries Demographic shifts World s most valuable retailer has no stock World s most popular media owner creates no content World s largest accommodation provider owns no real estate World s largest taxi company has no cars 77

78 Innovation 70% of Insurance CEO s see technology/ customer behavior change as disruptive to their business model more than any other industry Global CEO Survey January,

79 Innovation 67% Of consumers would be willing to have a sensor attached to their home or car if doing so would lower their premiums 79

80 Changes to P&C Returns 3 80

81 Changes to P&C Return 2015 Quarterly Return No significant changes in Q4 since the release of the 2015 Quarterly Return in late 2014 Main changes since prior year: 1. New MCT pages 2. New line of business split for liability and surety business 3. Row 34 on page 20.20/92.20 for Ceded Deferred Insurance Operation Expenses 2015 Annual Supplement No significant changes in comparison to prior year Classes of Insurance Page is now required to be submitted by companies who are licensed in Quebec and/or are provincially incorporated companies Page is not part of the Annual Supplement Return but is to be submitted as a separate filing 81

82 Changes to P&C Return 2016 Quarterly Return New rows added to to allow adjustments to capital available/ net assets available and capital/margin required for items outside of the prescribed return (specify rows) Asset securitization exposures have been added as a new deduction from capital available Capital (Margin) required for equity risk includes more detail break down of equity assets including hedging activities and long/short common shares and equity derivatives 82

83 Closing Remarks 83

84 Thank you! Akif Siddiqui Partner, Assurance T: Owen Thomas Senior Manager, Assurance T: Kyle Snyder Senior Manager, Assurance T: This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it All rights reserved. refers to the network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details.