7 th International Professional Meeting of Leaders of the Actuarial Profession and Actuarial Educators in Central and Eastern Europe

Transcription

1 7 th International Professional Meeting of Leaders of the Actuarial Profession and Actuarial Educators in Central and Eastern Europe Financial reporting for insurance companies: The implementation of IFRS4 and expected future developments in IFRS for financial instruments and insurance Stefan Engeländer Warszawa, September, 5 th 2006

2 Overview I. Background of IASB Insurance Project II. Implementation of IFRS 4 III. Phase II 2006 KPMG - 2 -

3 Overview I. Background of IASB Insurance Project II. Implementation of IFRS 4 III. Phase II 2006 KPMG - 3 -

4 IASB Insurance Project IASC IASB Steering Committee Insurance Project Advisory Committee Insurance Working Group Start Phase I Issues Paper DSOP ED 5 IFRS 4 Phase II IFRS 4 Phase II Split of Project Discussion Paper ED X Discussion with FASB Application 2006 KPMG - 4 -

5 IASB Insurance Project Time remaining for preparation Improving Information about Standard Today IFRS 4 Phase II Issuing First Statement Quarterly Report Annual Report Discussion Paper ED X Discussion with FASB Application 2006 KPMG - 5 -

6 Introduction of IFRS in the EU EU regulation 1606/2002: Consolidated accounts of publicly traded companies under IFRS as adopted by the EU Member states can allow or require IFRS as well for annual accounts of the company application to all companies Application of IFRS 4 by (at least) all publicly traded EU insurance companies since KPMG - 6 -

7 Overview I. Background of IASB Insurance Project II. Implementation of IFRS 4 III. Phase II 2006 KPMG - 7 -

8 IFRS 4 Defines Insurance Contract and Discretionary Participation Feature Interim guidance for those contracts: Continue prior accounting policies till issuing final IFRS 4 Few exemptions: Separation of some embedded derivatives Unbundling of unrecognized deposits Minimum standard for prudence of liabilities Possibility to change accounting policy with several restrictions Comprehensive principle-based disclosure requirements 2006 KPMG - 8 -

9 Interpreting IFRS 4: IASB IFRS 4 Appendix B: 30 paragraphs explanation of insurance contract IFRS 4 Implementation Guidance: 71 paragraphs guidance for Definition of insurance contracts Embedded derivatives Unbundling Shadow accounting Disclosure Technical guidance lacking (IFRIC unsuitable for technical matters) 2006 KPMG - 9 -

10 Interpreting IFRS 4: IASPs IAA issued 7 International Actuarial Standards of Practice as Class IV IASP (Practice Guideline) No. 2 Actuarial Practice No. 3 Classification of Contracts No. 4 Measurement of Investment and Service Contracts No. 5 Current Estimates No. 6 Liability Adequacy Testing No. 7 Discretionary Participation Features No. 8 Changes in Accounting Policies Several national actuarial organizations adopted or are going to adopt those nationally KPMG

11 Interpreting IFRS 4: IASPs Further 4 IASPs in development (issuance in November?) Embedded Derivatives Disclosure Reinsurance Business Combinations 2006 KPMG

12 Analyzing existing accounting policies Analysis required for continuation regarding Recognition of all deposit components to avoid unbundling Adequacy of prudence to avoid IFRS 4 Liability Adequacy Test Consideration of IFRS-imposed timing differences in case of participating contracts 2006 KPMG

13 Analyzing portfolio and products Analysis required regarding Distinguishing insurance and investment contracts Identifying embedded derivatives Identifying those embedded derivatives to be separated Review of the entire portfolio and product range needed Individually modified contracts with deviating characteristics to be identified 2006 KPMG

14 Disclosure Comprehensive disclosure principles require Analysis of information needs in the specific situation of the entity Investigation of available data and production of data required in addition Careful styling and organization of disclosure information Critical comparison of own disclosures with those of others to improve comparibility Disclosures are evolutionary process to meet comprehensive requirements in any specific situation 2006 KPMG

15 Overview I. Background of IASB Insurance Project II. Implementation of IFRS 4 III. Phase II 2006 KPMG

16 IASB Tentative Conclusions Unit of account No unbundling prescribed, not yet decided whether permissible If Exit Value = Fair value? No separation of embedded derivatives Unit of account = Portfolio of contracts managed as a unit Basis for determining risk margin unclear: Actual pool size or theoretical pool size of a potential acquirer after acquisition? 2006 KPMG

17 IASB Tentative Conclusions Contractual cash flows to be considered Enforceable premiums Cancelable premiums acquiring more valuable rights (onerous premiums) Benefits not subject to policyholders behavior Benefits subject to policyholders behavior, if acquiring premiums are considered (onerous benefits) Expenses needed to settle the contract in future But no investment earnings no gains from future policyholders behavior no benefits subject to insurer s discretion 2006 KPMG

18 IASB Tentative Conclusions Measurement attribute Current exit value = amount to pay to transfer all contractual rights and obligations to another entity If not observable (normal case) = Unbiased estimate (current estimate) of mean value of the present value of future risk weighted contractual cash flows 2006 KPMG

19 IASB Tentative Conclusions Measurement attribute Current Estimate = Consideration of all current information including observed trends, but no assumptions about effects of future events to further development, and orientated to the situation of a potential acquirer, not entity-specific (only market- or portfolio-specific data), supplementary adequately adjusted entity-specific or industry data in absence of market or portfolio-specific data 2006 KPMG

20 IASB Tentative Conclusions Measurement attribute Discount rate = market interest rate for cash flows of the same timing, currency and liquidity Risk weight = Market prices chargeable for the specific insurance deviation risk and the profits usually required by market participants for operational risks inherent in administrative services Consideration of credit characteristics of the insurer if relevant 2006 KPMG

21 IASB Tentative Conclusions Acquisition cost Expense when incurred, Covered by in a prospective approach by enforceable future premiums or by a policyholder relationship asset based on non-enforceable future premiums if they are necessary to retain rights of guaranteed insurability netted within the portfolio of commonly managed contracts 2006 KPMG

22 IASB Tentative Conclusions Participation rights To be recognized as liabilit: Contractually or legally fixed shares in surplus (e.g. in Germany, France etc.) Fixed policyholders rights based on regulatory approved dividend scales (e.g. in Switzerland) Not to be recognized as liability: Expected benefits subject to insurer s discretion, to be presented as separate component of equity 2006 KPMG

23 IASB Tentative Conclusions Linked benefits Linkage of benefits to an index which is unspecific for the insurer (i.e. not obliged to be hold by the insurer): Separate recognition and measurement of benefit and and linked asset Linkage of benefit to assets to be hold by the insurer: Special rules are envisaged, may be even off-setting in balance sheet 2006 KPMG

24 IASB Tentative Conclusions Reinsurance asset Measurement of reinsurance asset consistent with ceded liability (asset is overstated = negative margin!) Adjustment for default risk 2006 KPMG

25 Open Issues Calibration of estimates and margins Unlimited calibration of estimates (especially of margins) to eliminate initial gains (CFO Forum)? Adjustment of estimates within the range of vagueness to avoid initial gains without positive evidence? Avoiding initial gains by margins on considered persistency rates? How to measure future earnings which are not enforceable? Simplified in the size of initial cost spent? Repeated calibration for each subsequent measurement? 2006 KPMG

26 Open Issues Discretionary benefits How to consider regulatory pressure, which is not provable? How to consider impact of future discretionary benefits to persistency and new business volume? May future earnings subject to policyholders persistency be anticipated if expected to be returned in future discretionary? 2006 KPMG

27 Open Issues Presentational issues Are premiums (entirely or at least partly) to be recognized as revenue? How to present deposit, insurance and service parts of insurance contracts consistently with such stand-alone contracts in income statement? Are liabilities to be split in parts reflecting deposits and parts containing current insurance risk? When to off-set linked assets and liabilities? 2006 KPMG

28 Actuarial Challenge Sequence of work (1) Full current estimate of future cash flows and estimation of margins assumed to be market consistent (2) Subsequent calibrations, accounting adjustments etc. Data and techniques for a full current estimate needed Significant additional technical effort for any report Collection of data Estimation and projection techniques 2006 KPMG

29 Actuarial Challenge But: Current exit value allowing initial gains based on actuarial projections requires new rules for robustness and control Requirement of verifiability, reproducability and auditability Actuarial black boxes and use of dubious assumptions without positive evidence prohibited Transparency of limitations of estimation approaches, reliability of outcomes and reasonably justifiable alternative outcomes 2006 KPMG

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