IFRS 4 / IND AS 104 As applicable to General Insurance Companies

Transcription

1 TATA AIG GENERAL INSURANCE COMPANY LTD IFRS 4 / IND AS 104 As applicable to General Insurance Companies MIRANJIT MUKHERJEE

2 AGENDA 1. Background of IFRS 4 2. Background of IND AS What is IFRS 4 / IND AS Recognition and measurement under IND-AS Insurance Contracts 6. Examples of Insurance Contracts 7. Liability Adequacy test and examples 8. Disclosures principles and summary 9. Comparison of IND AS 104 vs current requirements 10. Balance Sheet IND AS Additional disclosures under IND AS Key issues for implementation 13. Impact of IND AS 104 / IFRS on general insurers 14. Terms Used 2

3 IFRS 4 Phase I BACKGROUND April 2001 Comprehensive insurance contracts project carried over from IASC to new IASB May 2002 Short-term insurance contracts project split off from comprehensive project July 2003 Exposure Draft ED 5 Insurance Contracts 31 st Mar 2004 IFRS 4 Insurance Contracts 1 st Jan 2005 Effective date of IFRS 4 3

4 IND AS 104 BACKGROUND 2009 IRDA issues exposure draft on IFRS Compliance 2010 Exposure Draft AS 39 on Insurance Contracts 25 Feb 2010 MCA notifies 35 IFRS (IND AS) incl IND AS April 2012 Insurance cos prepare opening bal sheet as per IND AS Date -? Preparation of opening bal sheet as per IND AS 4

5 WHAT IS IFRS 4 PHASE I IND AS 104 Interim standard - focused primarily on disclosures and classification of insurance contracts. Introduces a definition for an insurance contract based on the contract containing significant insurance risk. Required only limited changes to existing accounting practices for insurance contracts and extensive disclosures. IFRS 4 does not affect the business fundamentals since there is No change in the underlying transactions No change in real cash flow 5

6 RECOGNITION AND MEASUREMENT UNDER IND AS 104 In most respects, IND AS 104 allows an entity to continue to account for insurance contracts under its previous accounting policies. However, the standard makes some limited improvements to accounting for insurance contracts Liabilities only on existing contracts : Catastrophe provisions and equalization provisions are not permitted. They are not liabilities. Liability Adequacy Test : The adequacy of insurance liabilities must be tested at the end of each reporting period. The liability adequacy test is based on current estimates of future cash flows. Any deficiency is recognized in profit or loss. Impairment testing : Furthermore, reinsurance assets are tested for impairment. No offsetting : Insurance liabilities are presented without offsetting them against related reinsurance assets. No offsetting : Insurance expense or income against related reinsurance income or expense. 6

7 INSURANCE CONTRACTS IND AS 104 covers insurance contracts It applies to insurance contracts where policy holders pass insurance risk to insurance companies OR where insurers pass insurance risk to re-insurers What is an insurance contract In the contract one party accepts significant insurance risk from another party The party accepting insurance risk agrees to compensate the policy holder If a specified uncertain future event affects the policyholder What is an insurance risk The risk in the contract must be insurance risk, which is any risk except for financial risk This specified uncertain future event is known as the insured event while the uncertain future event that is covered by an insurance contract creates insurance risk. Uncertainty Uncertainty is the essence of an insurance contract. At least one of the following is uncertain at the inception of the contract : Whether an insured event will happen When will it occur How much the insurer needs to pay 7

8 INSURANCE CONTRACTS Insurance Contract Insurer accepts Insurance Risk Significant Risk Insurer accepts Significant Risk No numerical range fixed for what is significant risk Meaning of significant : Payment of significant additional benefit Another Party Insurer must accept risk from another party. Insurer must be separate from the policy holder. Accordingly self insurance is not an insurance contract as per IND AS 104 8

9 SIGNIFICANT INSURANCE RISKS INSURANCE RISK The underlying tenet behind insurance transactions. The purpose of this action is to take a specific risk, which is detailed in the insurance contract, and pass it from one party who does not wish to have this risk (the insured) to a party who is willing to take on the risk for a premium (the insurer). RISK TRANSFER Underwriting risk Risk transfer Conditions Timing Risk Amount Risk 9

10 INSURANCE CONTRACTS Significant insurance risk Insurance Contract Contract Insignificant insurance risk Investment Contract NB : IFRS 4 applies to insurance contracts not to insurance companies 10

11 EXAMPLES OF INSURANCE CONTRACTS - IND AS 104 Insurance contracts covered Contracts to be excluded Theft / Damage to property Product / Professional Liability Accident and Health Marine Engineering Product Warranty ( excl issued by manufacturer / dealer / retailer ) Title Insurance Travel Insurance Reinsurance Contracts Self Insurance Credit related guarantee Weather derivative Catastrophic Bonds 11

12 LIABILITY ADEQUACY TEST Must assess at each reporting date whether recognised insurance liabilities are adequate based on current estimates of future cash flows under insurance contracts. The assessment must use current assumptions and consider all contractual cash flows. If existing accounting policies include an assessment that meets the specified minimum requirements, no further action required. If not? If no sufficient assessment, the carrying amount of the liability must be tested and, if necessary increased 12

13 HOW DO YOU CARRY OUT LIABILITY ADEQUACY TEST If the present value of the expected cash flows arising out of future claims exceeds the unearned premium liability then the unearned premium liability is deficient. The recognized deficiency has to be recorded in the income statement. This should not be an issue in India as insurers are already required to create a premium deficiency in their accounts in the current accounting principles. 13

14 EXAMPLES OF LIABILITY ADEQUACY TESTS Royal Sun Alliance At each balance sheet date an assessment is made of whether the provisions for unearned premiums are adequate. A separate provision is made, based on information available at the balance sheet date, for any estimated future underwriting losses relating to unexpired risks. The provision is calculated after taking into account future investment income that is expected to be earned from the assets backing the provisions for unearned premiums (net of deferred acquisition costs). The unexpired risk provision is assessed in aggregate for business classes which, in the opinion of the directors, are managed together. Zurich A provision should be made for unexpired risks where the expected value of claims and expenses attributable to the unexpired periods of policies in force at the balance sheet date exceeds the unearned premiums provision in relation to such policies after the deduction of any deferred acquisition costs. The need for an unexpired risk provision has been considered separately by reference to classes of business that are managed together, after taking into account the relevant investment returns. An unexpired risk provision was not found necessary for any business classes and therefore a provision is not raised in the accounts. SCOR RE For the Non Life segment the test is performed in the event the ultimate underwriting combined ratio is in excess of 100% to the unearned premium reserve net of deferred acquisition costs. The liability adequacy test is performed on the level of the actuarial segment and then aggregated at the entity level. 14

15 PRINCIPLES OF DISCLOSURES UNDER IFRS 4 Disclosure is particularly important for information relating to insurance contracts, as entities can continue to use local GAAP accounting policies for measurement. IFRS 4 has two main principles for disclosure. Entities should disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts. Information that enables users of its financial statements to evaluate the nature and extent of risks arising from insurance contracts. 15

16 SUMMARY OF DISCLOSURES REQUIRED UNDER IFRS 4 Information that helps users understand the amounts in the financial statements arising from Insurance contracts Accounting policies for insurance contracts Recognized Assets, Liabilities, Income, Expenses and Cash Flows arising from these contracts Assumptions that impact value of Assets, Liabilities, Income and Expenses Historic claims development ( loss development triangle ) Nature and extent of risks arising from Insurance contracts Risk management policies and objectives Information about insurance risk sensitivity and concentration Information about credit risk, liquidity risk and market risk 16

17 EXISTING ACCOUNTING REQUIREMENT VS IND AS 104 ISSUE EXISTING AS PER IND AS / IFRS Ref 1 Financials Revenue A/cs, P/L, B/S, Cash Flow, Notes Income Stat, B/S, SOCE, Cash Flow, Disclosures, Notes 2 Format As laid down by Insurance Act / Regulations No specified format 3 Segments Fire, Marine and Miscellaneous Criteria specified + those reviewed by decision makers DAC Not permitted by Regulations IND AS 104 takes reference to DAC Investments Debt instruments (HTM ) / Equity (MTM) FVTPL ( MTM ) / HTM / AFS ( MTM ) 6 UEPR Minimum as per Sec 64V of Insurance Act As per Liability Adequacy Testing ( LAT ) UEPR Fire, Marine and Miscellaneous As per Liability Adequacy Testing ( LAT ) LAT Premium Deficiency specified by IRDA circular As per IND AS Solvency Workings as per Insurance Act / Regulations Not clear. 10 Disclosures Disclosures as laid down by Regulations. Detailed disclosures laid down for Insurance transactions / Risks 104 No disclosures on risks 17

18 BALANCE SHEET UNDER IND AS 104 / IAS 39 Investments Deferred Tax Asset Fixed Assets Cash and Bank Balances Advances and Other Assets Reinsurance share of insurance liab ASSETS Reinsurers recovery have to be shown separately Share Capital Reserves and Surplus Fair Value Change Account Borrowings Deferred Tax Liability Insurance Liabilities - gross Other Liabilities & provisions LIABILITIES Insurance Liabilities have to be Grossed up INVESTMENTS - EXISTING VALUATION INVESTMENTS - IND AS VALUATION Debt Instruments Amortised cost Fair value through P&L MTM Equity Shares MTM Held to Maturity Amortised cost Available for Sale MTM 18

19 ADDITIONAL DISCLOSURES UNDER IND AS 104 Section on Risk Management Insurance Risk ( underwriting risk / concentration risk ) Financial Risk Market Risk ( Interest rate / Currency / Equity ) Credit Risk Liquidity Risk Operational Risk Capital Management Liability Adequacy Test Impairment of Reinsurance Assets Loss development triangle 19

20 KEY ISSUES THAT NEEDS TO BE ADDRESSED Start date Date for the opening balance sheet needs to be fixed Amendment Amendment required to the Insurance Act / Regulations F. Statements As per IND AS or existing basis or both Solvency Based on existing regulations or IND AS 20

21 IMPACT OF IND AS 104 / IFRS ON INDIAN GEN INSURERS Ins Contracts Not very significant Disclosures Significant effort during the earlier years of implementation Investments Accounting and measurement would have a big impact LAT Segment wise LAT would impact solvency Op Segments Companies monitor performance on their chosen segments Solvency Would be impacted by Investments measurement / LAT 21

22 TERMS USED MCA : Ministry of Corporate Affairs DAC : Deferring of acquisition costs LAT : Liability Adequacy Test URR : Unexpired Risk Reserve HTM : Held to Maturity MTM : Mark to Market AFS : Available for Sale SOCE : Statement of Change in Equity B/S : Balance Sheet 22