General insurance reserving

Transcription

1 General insurance reserving Challenges for today and tomorrow IFRS Phase 2 by Richard Bulmer Tuesday 7 May Towers Watson. All rights reserved.

2 IFRS 4 Phase II: Project Objectives and Timeline Improve comparability Single accounting model for all insurance contracts Coherent principles-based framework Increase transparency Information on risk and uncertainty; highlight performance drivers; cost of fulfilling contracts Increase US GAAP convergence Re-exposure draft expected in June present June onwards IFRS4 Phase II Discussion Paper (DP) May 2007 Consultation including field tests in 2009 Exposure Draft (ED) July 2010 Re-Exposure Draft expected Final standard expected Possible effective date 1 January

3 IFRS 4 Phase 2 Re-Exposure Draft 2013 Full draft with questions expected to focus on five topics: Treatment of premiums in Statement of Comprehensive Income Treatment of unearned profits unlocking of the residual margin Presentation of changes in discount rates in Other Comprehensive Income Participating contracts Transitional arrangements for the new standard Respondents will also have ability to comment on any aspect of the proposals owing to lobbying by CFO Forum Final opportunity for industry input 3

4 What are the changes for P&C insurers? Some new concepts but familiar principles: Risk adjustment and residual margin, but retain earning concepts Alternative building block and premium allocation approaches for shortduration contracts Discounting and risk adjustment to calculate claim liabilities Additional disclosures on claims liability, risk and effect of discounting No loss of KPI information and historical claim development data 4

5 IFRS Insurance Contracts: The Building Block Approach Contract Liability Residual margin Risk adjustment Discounted probability weighted estimate of fulfilment flows Eliminates the expected gain at inception but released over time in a systematic manner Compensation the insurer requires for bearing the uncertainty inherent in the flows that arise as the insurer fulfils the insurance contract Best estimate technical provision explicit, unbiased, flows insurer expects to collect from premium and payment as it acquires, services, and settles the contract. Allowance for time value of money Discount rates: consistent with market prices for instruments with flows similar to the insurance contract liability. Including timing, currency and liquidity Top-down and bottom-up approaches can be used 5

6 Risk Adjustment Compensation the insurer requires to bear the uncertainty inherent in the flows Reflects uncertainties in timing and amount of fulfilment flows Re-measured using current assumptions at each reporting date May reflect diversification between portfolios No restriction on method three methods indicated Confidence level Conditional tail expectation Cost of capital Risk adjustment Discounted future flows X% 50% Distribution of present value of future flows Risk adjustment Discounted future flows Average of yellow field X% 50% Risk adjustment Discounted future flows Discounting Cost of capital rate Estimated capital required to fulfil liabilities in future period on specified basis Irrespective of method selected the implied confidence level must be disclosed 6

7 Residual Margin (Initial Measurement) Initial measurement Loss through P&L Risk adjustment Residual margin Present value of inflows Risk adjustment Present value of outflows Present value of inflows Present value of outflows Profitable insurance contract Unprofitable insurance contract The residual margin eliminates any gain at inception at portfolio level Allocate the residual margin over the coverage period on a systematic basis that is consistent with the pattern of transfer of services provided under the contract 7

8 Short-duration Contracts Premium Allocation Approach Premium Incremental acquisition costs Initial liability Pre-claims liability: simplified measurement model: Reduce liability amount over the coverage period on the basis of time (or by expected timing of incurred claims) Permitted but not required Subject to onerous contracts test to recognise legally-obliged losses upfront Post-claims liability: the same measurement model as for long-term contracts is to be used Reflect time value of money for all non-life long-tail claims Discounting not required if effect not material Use current estimates No residual margin May be applied for contracts with duration of one year or less. Effectively this largely maintains current non-life reporting principles subject to risk adjustment changes 8

9 Presentation Statement of Comprehensive Income Item Insurance contracts revenue Incurred claims and expenses Underwriting result Investment income Interest on insurance liability Net interest and investment Profit or loss Effect of discount rate changes on insurance liability Total comprehensive income 20XX X (X) X X (X) X X (X) XX 9

10 Some P&C Highlights Building block approach (BBA) and premium allocation approach (PAA) reporting could reduce comparability Residual margin releases conceptually mirror current earnings model Traditional KPI disclosure likely to be maintained: no further supplementary reporting needed? ED issues refined in tentative decisions: Direct incremental acquisition costs can be included on a portfolio basis should provide some help to direct marketing companies Reinsurance treatment consistent inwards and outwards US GAAP convergence may prove insurmountable Inconsistent with Solvency II reporting Although some issues remain, the IASB is converging on a sensible approach for P&C business 10

11 IFRS vs. Solvency 2: Key differences for P&C Topic Proposed IFRS 4 Phase 2 Solvency 2 Discount rate Risk adjustment / margin Residual margin Contract boundary Insurance vs. investment contracts Deferred Acquisition Costs (DAC) Not prescribed: top-down or bottom-up approach Not Prescribed: Fulfilment value from insurer s perspective Earnings concept: No Day 1 profit Recognise premium when coverage begins but onerous contract test on a bound basis Distinct treatment Incremental acquisition costs on portfolio basis Prescribed: risk-free rate with adjustments still to be agreed Prescribed: Based on 6% cost-of-capital basis Cash flow basis: Day 1 profit Recognise premium when insurer is bound Same for all business No DAC: Cash flow basis 11 Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

12 Preparing for Change Build up knowledge and consider the business impact Respond to the upcoming exposure draft and lobby if needed Earmark resources for appraisal of final standard Gap and implementation plan 12

13 2013 Towers Watson. All rights reserved. 13