INTRODUCTION TO IFRS 17

Transcription

1 INTRODUCTION TO IFRS 7

2 Christelle Bernhard, Consultant Kevin Poulard, Consultant & Marie-Cécile Verstappen, Senior consultant «After more than 20 years of discussions, IASB (International Accounting Standard Board) released IFRS 7 on the 8th May 207. This standard replaces IFRS 4 and will be applied from st January 202 with retrospective application as of However, most insurance companies want to be ready for dry running in 209. IFRS 7 is the first comprehensive and actual international IFRS Standard establishing the accounting for insurance contracts. IFRS 7 increases transparency and comparability between insurers and introduces consistent accounting for all insurance contracts based on a current measurement model. This revolution in the measurement of insurance contract liabilities and in disclosure will be sensibly aligned with the adoption of IFRS 9, financial instruments. The impacts will be major for insurance companies, both for the actuarial modelling and reserving fields and also for the production of accounts. Therefore, the implementation of IFRS 7 in an insurance company will have an impact on several actuarial departments and in particular on modelling, reserving and data management.» CONTENTS INTRODUCTION PREMIUM ALLOCATION 04 IFRS 7 OVERVIEW 06 BUILDING BLOCK 207 ADDACTIS Worldwide All rights reserved; any reproduction without written permission from ADDACTIS Worldwide is prohibited. 0 GLOSSARY VARIABLE FEE IFRS 7 JARGON

3 0 INTRODUCTION WHO IS CONCERNED? IFRS 7 TIMELINE Go live IFRS 7 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts. This new standard has to be applied to all insurance and reinsurance contracts separately (issued or held). This norm is principle based and its implementation will impact several actuarial sectors and in particular Modeling, Reserving, Accounting and Data Management. IFRS 7 is an international norm. For European countries, the norm is mandatory for listed companies. European companies seem to be more prepared thanks to the previous implementation of Solvency II. However, you should not underestimate IFRS 7 implementation cost Production of comparatives IASB (International Accounting Standard Board) has released the new accounting norm for insurance contracts named IFRS 7 (IFRS 4 Phase 2) SOLVENCY II VS IFRS 7 Project on insurance accounting approved IFRS 4 Phase issued 8th May 207 st January 2020 st January 202 SCOPE GROUP OF CONTRACTS PROFIT SOLVENCY 2 European Prescriptive Separating by homogenous risk groups (HRG) Recognized immediately in own funds IFRS 7 International Principle based Grouping by year of issue and profitability (separation between onerous and non onerous contracts) Amortization during the life of the group of contracts (No initial gain or loss recognition) 2004 RISK MARGIN Cost of capital 6% Method has to be chosen by the company TECHNICAL PROVISIONS CALCULATION Best estimate approach

4 02 IFRS 7 OVERVIEW LIFE OF A GROUP OF INSURANCE CONTRACTS Reporting date N- Reporting date N Reporting date N+ GOALS Initial recognition End of coverage period t Claim Reported Claim 2 Not yet reported Claim 3 Not yet occured Claim 4 Reported after closing date Increase transparency and comparability between insurers. Increase the understanding of the contracts. Produce financial statement & disclosure on a current measurement model Liability for incurred claims FCF related to claims incurred (reported or not) not yet paid Insurance contract liability Liability for remaining coverage FCF related to future services + CSM remaining LEVEL OF AGGREGATION At inception, when insurance contracts are recognized, Insurance contracts will be aggregated into groups. Once a group is formed, it cannot be modified. After initial recognition, calculations will be performed at the group level for the subsequent measurements and disclosures. Portfolio: Group composed of contracts with similar risks Annual cohort At initial recognition, groups of contracts should be disaggregated into group that are: Onerous (FCF Initial Recognition <0) Profitable, with no significant risk of becoming onerous (FCF Initial Recognition >Trigger) Profitable, with significant possibility of becoming onerous (0 FCF Initial Recognition Trigger) An Entity shall not include contracts issued more than one year appart in the same group - 22 IFRS 7 May Building Block Approach General Model Default model for insurance/reinsurance contracts MEASUREMENT ES BBA PAA VFA Premium Allocation Approach Simplification of the BBA for insurance/reinsurance contracts Can be used for contracts with coverage period less than year Typically non-life insurance contracts If claims are paid after the coverage period end, the group will not be extinct. For the reporting date following the end of the coverage period, the Insurance contract liability will be divided as follows: The Liability for Remaining coverage will be 0. The Liability for Incurred claims component is calculated based on the PV of the estimate of future CF (Claims paid). Therefore, this component will be different than 0. Variable Fee Approach Mandatory for contracts with discretionary participation features

5 03 BUILDING BLOCK SUBSEQUENT MEASUREMENT KEY COMPONENTS MEASUREMENT MODEL FCF CSM Present Value of Future Cash Flows + = Adjustment for Non-Financial Risk Fulfilment Cash Flows Unearned Profit + (Contractual Service Margin) = Insurance Obligations (Insurance Contract Liabilities Reported on the Balance Sheet) Changes in current estimates Past and Current Services: Release of Risk adjustment Changes in future CF Financial risk assumptions: Time value of money Interest rates accretion INITIAL RECOGNITION Future services: Changes in the Risk adjustment related to future services Changes in future CF Cash Inflows Cash Outflows Premiums Claims, Expenses Time Value of Money Discount rates Risk Adjustment Related to non financial risk Adjust CSM Or Fulfilment Cash Flows (FCF) Contractual Service Margin Other Comprehensive Income (OCI) Profit and Loss (P&L) Insurance service result The Contractual Service Margin represents unearned profit of a contract. One key idea behind IFRS 7 is that insurers are not allowed to recognize as profit the gain estimated at initial recognition. In consequence, at initial recognition: If Gain: CSM is written If Loss (Onerous contracts): Amount of Loss recognized in the P&L and CSM=0 CSM is calculated for a group of insurance contracts CSM allocation2 Accounting policy choice For a given period, insurance finance income or expenses could be: Recognized entirely in the P&L Disaggregated between: P&L for Insurance finance income or expenses calculated by using discount rates locked in at inception OCI for changes in discount rates 2 The allocation of the CSM in the P&L is calculated based on the number of coverage units provided during the period

6 04 PREMIUM ALLOCATION COMPARISON WITH THE GENERAL MODEL INITIAL RECOGNITION OF THE LRC Premiums received at inception Insurance acquisition CF paid at inception Derecognition of pre-coverage cash flows2 (+/-) Or Liability for Remaining Coverage at Inception The Premium Allocation Approach is a simplification of the General Model. It can be applied if the 2 following conditions are met: Short-term coverage insurance contract (coverage period less than year). No significant variability in the FCF related to the LRC measurement. LIABILITY FOR REMAINING COVERAGE LIABILITY FOR INCURRED CLAIMS BBA Estimate of future CF Time Value of Money Risk Adjsutment CSM Estimate of future CF Time Value of Money Risk Adjustment This simplified model will impact the insurance contract liability calculations: The Liability for Remaining Coverage will ba approximated and the CSM and RA components will not be computed. The Liability for Incurred Claims will be computed in the same way than the BBA. PAA Unearned Premiums (Time Value of Money)2 Estimate of future CF (Time Value of Money)3 Risk Adjustment Unless Onerous contracts that must be measured using the BBA 2 If the entity expects that the time between providing each part of the coverage and the related premium due date is more than a year, it should adjust the carrying amount of the LRC to reflect the TVM 56 IFRS 7 May If cash flows related to incurred claims are expected to be paid or received in more than a year from the claims are incurred, the entity is required to adjust future cash flows for the TVM 59(b) IFRS7 May 207 Liability for Remaining Coverage (BoP) SUBSEQUENT MEASUREMENT OF THE LRC Premiums received during the period (+) Insurance acquisition CF paid during the period3 (-) Amortization of the insurance acquisition CF3 (+) Accretion of interest4 (+) Insurance revenue for coverage 5 provided (-) Investment component paid or transferred (-) Liability for Remaining Coverage (EoP) Accounting policy choice: Insurance acquisition cash flows could be recognized as expenses when it occurs if the coverage period is no more than a year. In this case, this component will not appear in the LRC measurement 59(a) IFRS 7 May Related to the fact that an entity should recognize an asset or liability for insurance acquisition cash flows that it pays or receives before the group is recognized 27 IFRS 7 May Accounting policy choice: Insurance acquisition cash flows could be recognized as expenses when it occurs if the coverage period is no more than a year. In this case, this component will not appear in the LRC measurement 59(a) IFRS 7 May If cash flows related to incurred claims are expected to be paid or received in more than a year from the claims are incurred, the entity is required to adjust future cash flows for the TVM 59(b) IFRS7 May Insurance revenue for the period is equal to the expected premium received allocated to each period of the coverage B26 IFRS 7 May 207 : On the basis of the passage of time. On the expected timing of incurred insurance service expenses if the expected pattern of release of risk differs from passage of time (Ex: contracts with seasonal effects linked to hurricans)

7 05 VARIABLE FEE 07 IFRS 7 JARGON The Variable Fee Approach is a modification of the General Model at the level of the calculations of the CSM. It must be applied to insurance contracts with direct participation features. In these insurance contracts, the entity has an obligation to pay to the policyholder an amount equal to the share of the returns from the underlying items minus an insurer s fee. Changes to the insurer s fee adjust the CSM. 06 GLOSSARY IFRS 7 Insurance Contracts introduces fundamental changes to insurance accounting for some insurers. In the issue of The Essentials n 4 of September 207, IFRS Foundation has translated the existing terminology and metrics into the language of IFRS 7 to help investors adapt to the changes. ( investor-centre/the-essentials/). BBA: Building Block Approach the main measurement model under IFRS7. VFA: Variable Fee Approach - mandatory approach for contracts with direct participation features. PAA: Premium Allocation Approach simplification of the BBA which can be used for contracts with less than year coverage period. CSM: Contractual service margin: the amount of liability held on top of the best estimate liability and risk adjustment to eliminate any day one profits. Risk Adjustment: The amount required by entities to bear the uncertainty about the amount and timing of the cash flows arising from non-financial risk. CF: Cash flows. efcf: Fulfilment Cash Flows: Present value of the cash flows + Risk adjustment for non-financial risks. TVM: Time value of money. LIC: Liability for Incurred Claims. elrc: Liability for remaining coverage. P&L: Profit & Loss. OCI: Other Comprehensive Income. Onerous Contract: A contract that is expected to generate loss; the CSM of these contracts is equal to zero. BoP: Beginning of Period. EoP: End of Period. EXISTING METRICS Earned premiums Operating profit EQUIVALENT IFRS 7 MEASURE Insurance revenue Insurance service result plus net financial result IMPACT OF IFRS 7 Insurance revenue under IFRS 7 will be similar to earned premiums for non-life business. However, insurance revenue will be provided for all contracts, including life and participating contracts. Operating profit subtotals are not defined in IFRS 7 (or in other IFRS Standards), but are likely to refer to the sum of the insurance service result plus the net financial result. The amounts presented in the net financial result will be affected by whether and to what extent a company presents gains and losses in Other Comprehensive Income. ie insurance contracts meeting the following conditions at initial recognition: the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items; the entity expects to pay to the policyholder an amount equal to a substantial share of the returns from the underlying items; and a substantial proportion of the cash flows the entity expects to pay to the policyholder should be expected to vary with cash flows from the underlying items. 0

8 EXISTING METRICS New business profit Claims adjustments non-life Unearned premium reserves UPR Claim or loss reserves EQUIVALENT IFRS 7 MEASURE Contractual service margin CSM Experience adjustments and change in estimates Liability for remaining coverage LRC Liability for incurred claims LIC IMPACT OF IFRS 7 The CSM of new business determined under IFRS 7 represents the unearned profit on in-force business. The roll forward of the CSM will provide information about the amount of CSM added by new contracts written in the period. Prior-year claims adjustments are required to be separately disclosed as a component of the insurance contract liability roll forward. UPR will be included in the overall insurance liability in the balance sheet and be separately identified as the liability for remaining coverage in the notes with a detailed roll forward provided. Investors will be able to analyse the LRC by components present value of cash flows, adjustment for risk and CSM. Claim or loss reserves will be included in the overall insurance contract liability on the balance sheet, and separately identified as liability for incurred claims in the notes, with a detailed roll forward. The liability equals the probability-weighted expected cash outflows plus explicit adjustment for risk. Discounting will be applied if material. Deferred acquisition costs DAC Value in force VIF Contractual service margin CSM DAC will not be presented as an asset under IFRS 7. Contract acquisition costs are included in insurance contract fulfilment cash flows and are therefore reflected in the overall insurance contract liability without being identified as a separate component in the balance sheet (although the allocated acquisition cost expense is reported separately in the income statement). Equivalent to the CSM portion of the liability under IFRS 7, although the measurement principles differ. contact@addactis.com 2 3

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