Session 79 PD, FASB Targeted Improvements and IFRS 17. Moderator: Kyle Baxter Stolarz, FSA, MAAA

Transcription

1 Session 79 PD, FASB Targeted Improvements and IFRS 17 Moderator: Kyle Baxter Stolarz, FSA, MAAA Presenters: Steven F. Malerich, FSA, FLMI, MAAA Gavin Thomas Stewart, FSA, MAAA Kyle Baxter Stolarz, FSA, MAAA SOA Antitrust Disclaimer SOA Presentation Disclaimer

2 FASB TARGETED IMPROVEMENTS Steve Malerich, FSA, MAAA Life & Annuity Symposium, May 8, 2018

3 Tentative Decisions Traditional non-participating contract liability Universal life liabilities Participating contract liability Deferred acquisition costs Market risk benefits Presentation and disclosure 2

4 TRADITIONAL NON-PAR LIABILITY 3

5 Traditional non-par contract liability Cash flow assumptions Discount rate assumptions Issue year cohorts Transition Current estimate Without PAD Expected value Annual review (update) Retrospective unlocking Actual experience Expense Clarification Loss recognition Net premium ratio cap 4

6 Traditional non-par contract liability Cash flow assumptions Discount rate assumptions Issue year cohorts Transition Upper-medium grade At issue Quarterly update 5

7 Traditional non-par contract liability Cash flow assumptions Discount rate assumptions Issue year cohorts Transition Common issue year Multiple issue years Features 6

8 Traditional non-par contract liability Cash flow assumptions Discount rate assumptions Issue year cohorts Transition Prospective Issue date Discount rate Future unlocking Cohorts Retrospective 7

9 UNIVERSAL LIFE LIABILITIES 8

10 Universal life liabilities Unchanged Account balance Additional liability Indirectly changed Sales inducement asset Unearned revenue liability Additional liability Loss Recognition Clarified Assessments 9

11 PARTICIPATING CONTRACT LIABILITY 10

12 Participating contract liability No change to calculation Expanded disclosure 11

13 DEFERRED ACQUISITION COSTS 12

14 Deferred acquisition costs Scope Constant basis Transition All contracts Non-participating Participating Universal life o Deferred annuities Other intangibles o PGAAP Sales inducements Unearned revenue 13

15 Deferred acquisition costs All contracts Constant basis Transition Expected life Current assumptions Prospective revision Expected future deferrals Interest accretion Contract or cohort Excess terminations Distortions Recognition Assessments 14

16 Deferred acquisition costs Prospective Retrospective All contracts Constant basis Transition 15

17 MARKET RISK BENEFITS 16

18 Market risk benefits Scope Measurement Transition Deposit contracts Separate account Fixed account Market risk 17

19 Market risk benefits Scope Measurement Transition Fair value Changes Net income Other comprehensive income 18

20 Market risk benefits Scope Measurement Transition Retrospective Hindsight Change at transition Accumulated other comprehensive income Retained earnings 19

21 PRESENTATION AND DISCLOSURE 20

22 Presentation and disclosure Presentation Disclosure Market risk benefits Reserve changes due to changing assumptions 21

23 Presentation and disclosure Presentation Disclosure Quarterly Roll-forwards Unobservable techniques Expected margin Annually Assumption information Nature of capitalized costs Policy for sales inducements Transition Roll-forward Effect 22

24 Resources FASB Tentative Board Decisions Projects: Technical Agenda Recognition & Measurement: Insurance Tentative Board Decisions Reached to Date The Financial Reporter 23

25 2018 SOA Life & Annuity Symposium STEVE MALERICH, FSA, MAAA GAVIN STEWART, FSA, MAAA KYLE STOLARZ, FSA, MAAA Session FASB Targeted Improvements and IFRS 17 May 8, 2018

26 SOCIETY OF ACTUARIES Antitrust Compliance Guidelines Active participation in the Society of Actuaries is an important aspect of membership. While the positive contributions of professional societies and associations are well-recognized and encouraged, association activities are vulnerable to close antitrust scrutiny. By their very nature, associations bring together industry competitors and other market participants. The United States antitrust laws aim to protect consumers by preserving the free economy and prohibiting anti-competitive business practices; they promote competition. There are both state and federal antitrust laws, although state antitrust laws closely follow federal law. The Sherman Act, is the primary U.S. antitrust law pertaining to association activities. The Sherman Act prohibits every contract, combination or conspiracy that places an unreasonable restraint on trade. There are, however, some activities that are illegal under all circumstances, such as price fixing, market allocation and collusive bidding. There is no safe harbor under the antitrust law for professional association activities. Therefore, association meeting participants should refrain from discussing any activity that could potentially be construed as having an anti-competitive effect. Discussions relating to product or service pricing, market allocations, membership restrictions, product standardization or other conditions on trade could arguably be perceived as a restraint on trade and may expose the SOA and its members to antitrust enforcement procedures. While participating in all SOA in person meetings, webinars, teleconferences or side discussions, you should avoid discussing competitively sensitive information with competitors and follow these guidelines: Do not discuss prices for services or products or anything else that might affect prices Do not discuss what you or other entities plan to do in a particular geographic or product markets or with particular customers. Do not speak on behalf of the SOA or any of its committees unless specifically authorized to do so. Do leave a meeting where any anticompetitive pricing or market allocation discussion occurs. Do alert SOA staff and/or legal counsel to any concerning discussions Do consult with legal counsel before raising any matter or making a statement that may involve competitively sensitive information. Adherence to these guidelines involves not only avoidance of antitrust violations, but avoidance of behavior which might be so construed. These guidelines only provide an overview of prohibited activities. SOA legal counsel reviews meeting agenda and materials as deemed appropriate and any discussion that departs from the formal agenda should be scrutinized carefully. Antitrust compliance is everyone s responsibility; however, please seek legal counsel if you have any questions or concerns. 2

27 Presentation Disclaimer Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice. 3

28 IFRS 17 Insurance Contracts Society of Actuaries Life & Annuity Symposium May 8, KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.

29 Scope 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.

30 How does IFRS 17 define an insurance contract? An insurance contract is a contract under which one party the issuer accepts significant insurance risk from another party the policyholder. Contract Under the contract, the issuer agrees to compensate the policyholder if a specified uncertain future event the insured event adversely affects the policyholder. No significant changes compared to IFRS KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 6

31 The general measurement model 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.

32 A new, comprehensive accounting model IFRS 17 s general measurement model (GMM) is based on a fulfilment objective and uses current assumptions It introduces a single, revenue recognition principle to reflect services provided And is modified for certain contracts 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 8

33 Initial recognition Key components Fulfilment cash flows Risk-adjusted present value of future cash flows e.g. premiums, claims Future cash flows Inflows 2 Discounting 3 Risk adjustment Contractual service margin (CSM) Represents unearned profit results in no gain on initial recognition 4 Outflows 4 CSM 0 Net cash outflows result in no CSM a loss is recognized immediately 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 9

34 Subsequent measurement Composition Total liability of a group of insurance contracts Liability for remaining coverage (LRC) Fulfilment cash flows related to future services, plus CSM (unearned profit) remaining + Liability for incurred claims (LIC) Fulfilment cash flows for claims incurred, but not yet paid 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 10

35 Subsequent measurement Changes in current estimates Fulfilment cash flows CSM Financial risk assumptions Past and current services Future services Adjust the CSM Either Or CSM allocation 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 11

36 Recognizing insurance revenue Insurance revenue is derived from the changes in the LRC for each reporting period, covering Expected insurance claims and expenses Risk adjustment CSM allocation Acquisition cash flows These items represent a company s consideration for providing services 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 12

37 Level of aggregation The CSM is determined for groups of insurance contracts Portfolio Annual cohort Group Insurers will need to account for their business performance at a more granular level IFRS 17 limits offsetting of onerous contracts against profitable ones 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 13

38 Level of aggregation Life insurance entity Portfolio A Term life insurance contracts Cohort A-20X5 Cohort A-20X3 Cohort A-20X6 Cohort A-20X4 Each portfolio should have at least 3 groups, unless no contracts fall into one or more of the groups. Groups are limited to contracts issued no more than one year apart. Cohort A-20X6 Group A-20X6-1 Group A-20X6-2 Group A-20X6-3 Contracts that are onerous at initial recognition Contracts that at initial recognition have no significant possibility of becoming onerous subsequently All remaining contracts in Cohort A-20X KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 14

39 Modifications to the GMM 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.

40 Premium allocation approach (PAA) The PAA is an optional, simplified model for measuring the LRC. Total liability of a group of insurance contracts Liability for remaining coverage (LRC) PAA replaces the GMM for short-duration contracts + Liability for incurred claims (LIC) May need to be discounted Premium is recognized over time as revenue unless release of risk follows a different pattern. While unearned premium is a familiar concept, the revenue recognition pattern could differ KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 16

41 When can the PAA be applied? YES Eligible for the PAA Is the coverage period of each contract in the group one year or less? NO Apply the GMM NO Is the PAA a reasonable approximation to the GMM? YES Eligible for the PAA 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 17

42 Variable fee approach (VFA) The approach considers the variable fee associated with direct participating contracts Obligation to = policyholder Obligation to pay fair value of underlying items - Variable fee (the entity s share in the FV of the underlying items) Subsequent measurement Accounting for changes recognized immediately Adjusts the CSM The VFA reduces the volatility of net results 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 18

43 Presentation and disclosures 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.

44 Presentation Investment components are excluded from insurance revenue and service expenses Entities can choose to present the effect of changes in discount rates and other financial risks in profit or loss or OCI to reduce volatility 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 20

45 Disclosures Information should be disclosed at a level of granularity that helps users assess the effects contracts have on Financial position Financial performance Cash flows New disclosures relate to expected profitability and attributes of new business 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 21

46 Transition 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.

47 Full retrospective approach is required but expedients can be used Full retrospective approach Is it impracticable to use a full retrospective approach? No Yes Either Modified retrospective approach, if possible* Or Fair value approach A company can apply different approaches for different groups *If reasonable and supportable information cannot be obtained to apply the this approach, the fair value approach is applied KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 23

48 Modified retrospective approach The objective is to use reasonable and supportable information that is available without undue cost or effort to achieve the closest possible outcome to full retrospective application. Each modification is used only to the extent that an entity does not have reasonable and supportable information to apply a full retrospective approach KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 24

49 Fair value approach The CSM or loss component at the transition date is based on the difference between the fair value and the FCFs of the group at that date. In determining how to identify groups, reasonable and supportable information is used: Based on what an entity would have determined at the date of inception or initial recognition; or That is available at the transition date. When identifying groups of insurance contracts, an entity may group contracts issued more than one year apart. However, it may divide groups into those issued within a year if it has reasonable and supportable information to make the division KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 25

50 Potential accounting changes for insurers 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.

51 The changes could significantly affect insurers Profitability patterns Volatility of financial results and equity Level of transparency about profit drivers Equity levels The magnitude of the accounting change for life and non-life insurers will be different 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 27

52 Other things to think about Accounting mismatches may occur but accounting policy choices and transition provisions could reduce them More consistency and transparency for options and guarantees 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 28

53 Thank you 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

54 FASB targeted improvements and IFRS 17 Earnings emergence Kyle Stolarz, FSA, MAAA Life & Annuity Symposium, 8 May 2018 Page 1

55 Introduction and disclaimer Kyle Stolarz Consultant The views expressed by the presenter are not necessarily those of Ernst & Young LLP or other members of the global EY organization. These slides are for educational purposes only and are not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. Page 2 FASB targeted improvements and IFRS 17

56 Traditional product earnings emergence Earnings will emerge differently under each accounting basis Current US GAAP As a level percent of premium As the Provision for Adverse Deviation (PAD) is released DAC amortization pattern as a level percent of premium Proposed US GAAP Assumptions are no longer locked-in No PADs DAC amortization pattern based on insurance in-force IFRS 17 Earnings realized as insurance services are provided and risk is released Page 3 FASB targeted improvements and IFRS 17

57 Illustrative examples Page 4 FASB targeted improvements and IFRS 17

58 Illustrative examples Product description 10-year level term insurance Annual renewable premium scale after the 10-year level period 100% lapse after year 20 Female, nonsmokers, issue age 30 1,000 policies with average size of $250,000 Page 5 FASB targeted improvements and IFRS 17

59 Illustrative examples Key assumptions Assumption Current GAAP Proposed GAAP IFRS 17 Mortality Best estimate + provision for adverse deviation Lapse Best estimate + provision for adverse deviation Discount rate Expected investment yield (4.4%) Best estimate Best estimate High-quality fixedincome instrument yield (3.5%) Best estimate Best estimate Top-down approach (3.9%) Risk adjustment N/A N/A 0.002% of face amount in-force CSM amortization N/A N/A Discounted face amount in-force Page 6 FASB targeted improvements and IFRS 17

60 Illustrative examples Cash flows 300,000 Undiscounted cash flows 200,000 Amount ($) 100,000 - (100,000) (200,000) (300,000) Year Premiums Premium tax Commissions Acquisition expense Maintenance expenses Death benefits Net cash flow Page 7 FASB targeted improvements and IFRS 17

61 Earnings emergence Current GAAP Page 8 FASB targeted improvements and IFRS 17

62 Current GAAP Baseline 300,000 Current GAAP Pre-tax income 200,000 Total revenue 100,000 Amount ($) - (100,000) (200,000) Expenses and DAC amortization Death benefits and reserve release (300,000) Year Total revenue Total benefit and reserve release Total expense Pre-tax income Page 9 FASB targeted improvements and IFRS 17

63 Earnings emergence Proposed GAAP Page 10 FASB targeted improvements and IFRS 17

64 Proposed GAAP compared to current GAAP Reserve balance 300,000 Reserve Balance 200,000 Amount ($) 100,000 - (100,000) (200,000) (300,000) Year Current GAAP Proposed GAAP Page 11 FASB targeted improvements and IFRS 17

65 Proposed GAAP compared to current GAAP DAC balance 300,000 DAC balance 200,000 Amount ($) 100,000 - (100,000) (200,000) (300,000) Year Current GAAP Proposed GAAP Page 12 FASB targeted improvements and IFRS 17

66 Proposed GAAP Earnings emergence 300,000 Proposed GAAP Pre-tax income 200,000 Amount ($) 100,000 - (100,000) (200,000) (300,000) Year Total revenue Total benefit outflow Total expense Pre-tax income Page 13 FASB targeted improvements and IFRS 17

67 Proposed GAAP compared to current GAAP Revenue 300,000 Proposed GAAP vs. current GAAP Pre-tax income 200,000 No change in revenue Amount ($) 100,000 - (100,000) (200,000) (300,000) Year Total revenue Total benefit outflow Total expense Pre-tax income Total revenue (current GAAP) Page 14 FASB targeted improvements and IFRS 17

68 Proposed GAAP compared to current GAAP Pre-tax income 300,000 Proposed GAAP vs. current GAAP Pre-tax income 200,000 Amount ($) 100,000 - (100,000) (200,000) Changes to DAC amortization and reserve release (300,000) Year Total revenue Total benefit outflow Total expense Pre-tax income Total revenue (current GAAP) Total benefit outflow (current GAAP) Total expense (current GAAP) Pre-tax income (current GAAP) Page 15 FASB targeted improvements and IFRS 17

69 Earnings emergence IFRS 17 Page 16 FASB targeted improvements and IFRS 17

70 Earnings emergence IFRS 17 Cash flows Discounting Risk adjustment Contractual service margin Probabilityweighted best estimate cash flows Discounted using a topdown or bottom-up yield curve Reflects uncertainty in the amount and timing of cash flows Deferred profit Page 17 FASB targeted improvements and IFRS 17

71 IFRS 17 Liability balances 300,000 IFRS ,000 Amount ($) 100,000 - (100,000) (200,000) (300,000) Year Present value of future cash flows (PV FCF) Risk adjustment (RA) Contractual service margin (CSM) Net liability Page 18 FASB targeted improvements and IFRS 17

72 IFRS 17 Earnings emergence 35,000 IFRS 17 Pre-tax income 30,000 25,000 Amount ($) 20,000 15,000 10,000 5, Year Insurance finance income Release of RA Release of CSM Pre-tax income Page 19 FASB targeted improvements and IFRS 17

73 Earnings emergence Current GAAP, proposed GAAP, and IFRS 17 35,000 Pre-tax income 30,000 Amount ($) 25,000 20,000 15,000 10,000 Potential mismatch of premiums and DAC amortization 5,000 - DAC amortization over insurance in-force Year Current GAAP Proposed GAAP IFRS 17 Page 20 FASB targeted improvements and IFRS 17

74 Other scenarios Page 21 FASB targeted improvements and IFRS 17

75 Earnings emergence Scenarios to consider Experience never emerges as expected and each accounting basis treats changes differently Current GAAP reserve and DAC projections are locked in and do not change Proposed GAAP reserve and DAC projections are unlocked to use current information IFRS 17 the Best Estimate Liability and Risk Adjustment are measured using current assumptions; the CSM is unlocked for changes that impact future cash flows What happens when there are: Differences in actual cash flows (experience adjustments) Assumption changes Page 22 FASB targeted improvements and IFRS 17

76 Earnings emergence Current GAAP, proposed GAAP, and IFRS 17 35,000 Pre-tax income After the changes 30,000 25,000 Amount ($) 20,000 15,000 10,000 5, Year Current GAAP Proposed GAAP IFRS 17 Page 23 FASB targeted improvements and IFRS 17

77 Q&A Page 24 FASB targeted improvements and IFRS 17

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