Insurance contracts. Agenda. Overview of IASB and FASB s proposals on insurance. Presenters/Administrative. Overview of proposals.

Transcription

1 Insurance contracts Overview of IASB and FASB s proposals on insurance 28 June 2013 KPMG International Standards Group Agenda 1 2 Presenters/Administrative Overview of proposals 1. Background and overview 2. Scope 3. Separating non-insurance components 4. Recognition 5. Measurement models 6. Reinsurance 7. Business combinations and portfolio transfers 8. Presentation 9. Disclosures 10.Transition 3 4 Business Impacts Q&A 2 1

2 Presenters Darryl Briley Vice-Chair KPMG Global Insurance Contracts Topic Team Partner US DPP Jennifer Austin Partner US DPP Neil Parkinson Canadian Member - KPMG Global Insurance Contracts Topic Team Canadian Insurance Sector Leader 3 Administrative CPE regulations require that online participants take part in online questions Must respond to a minimum of four questions per 50 minutes for today s webcast, you must answer 7 CPE questions to receive credit. Polling questions will appear on your media player, and will be pushed out silently during today s presentation Results will be reviewed in the aggregate; no responses will be tracked back to any individual or organization Do not view the presentation on slide show mode polling questions will not appear To ask a question, use the Ask a Question icon on your media player. Help Desk: or outside the United States at

3 Insurance contracts project milestones IASB Exposure Draft FASB Discussion Paper rations Joint delibe IASB Targeted Re- Exposure Draft FASB Exposure Draft Redelibera ations IASB final standard? FASB final standard? Prepare for transition Effective dates? to 1Q 2013 June H 2013 to 2014 late 2014 or early 2015? 2015 Jan 2015 IFRS 9 Effective date Jan 2017 earliest effective date Jan 2018 Potential effective date The effective date of the final IFRS standard will be approximately three years after the standard is issued. The IASB staff currently estimate that the issuance date will be late 2014 to early The IASB has stated that it expects the earliest possible effective date to be for annual reporting periods beginning on or after 1 January The FASB decided not to include a minimum time period between the issuance of the standard and the effective date in its ED, but rather to ask a question about the key drivers affecting the timing of implementation. 5 Background and overview Major changes since the 2010 proposals IASB Re-exposure will include full text of proposed standard Limited questions to avoid re-opening of issues Measurement proposals IASB does not intend to revisit Treatment of other aspects of proposed standard after re-exposure IASB intends to undertake fieldwork during re-exposure contractual service margin (unlocking- IASB only) Treatment of participating contracts FASB will have a full exposure draft FASB intends to undertake fieldwork during the exposure period The comment period for the exposure drafts will end 25 October Presentation proposals Presentation of premiums, claims and expenses in profit & loss Presentation of changes in discount rate in OCI Approach to transition Retrospective application if practical Estimate of margin on transition 6 3

4 Background and overview Key changes to 2010 proposals Areas with significant changes Areas with significant clarifications Scope of financial guarantees Future cash flows Unbundling Recognition Contract boundaries Acquisition costs Premium-allocation approach (PAA) Contractual service margin(iasb)/single margin(fasb) Participating contracts Reinsurance Use of OCI Presentation of statement of comprehensive income Transition Discount rate Risk adjustment Investment contracts with a discretionary participation feature (DPF) Presentation of statement of financial position Premium-allocation approach (PAA) Disclosures 7 Background and overview Key IASB and FASB differences Scope - Investment contracts with DPF Scope - Financial guarantee insurance (including mortgage) Building block approach (BBA) 3 vs. 4 building blocks Definition of a portfolio, unit of account for releasing margins Acquisition costs successful vs. unsuccessful Mechanics for contract cash flows that vary with underlying items Unlocking the residual margin vs. Locked in single margin Premium allocation approach permit vs. require Reinsurance approach BBA vs. PAA permit vs. require Transition- practical expedients and re-designation of financial assets 8 4

5 Scope In Scope Out of Scope Contracts that an entity issues that transfer significant insurance risk, including: Contracts that an entity issues that do not transfer significant insurance risk, including: Financial Instruments issued by insurers Containing DPFs # Financial Instruments Without DPFs Service Contracts Financial Guarantee Contracts* Financial Guarantee Contracts* Contracts specifically excluded, e.g. certain fixed fee service contracts that t are currently accounted for as insurance contracts # not t currently accounted for as insurance contracts # *The FASB has decided on specific exceptions to the inclusion of financial guarantee contracts in the insurance contracts standard. #IASB only 9 Scope exceptions The proposals would apply to all insurance contracts except: Product warranties issued directly by a manufacturer, dealer or retailer; Residual value guarantees provided by a manufacturer, dealer or retailer, as well as lessee s residual value guarantee embedded in a finance lease; Employers assets and liabilities under employee benefit plans and retirement benefit obligations reported by defined benefit retirement plans; Contractual rights or contractual obligations that are contingent on future use of, or right to use, a non-financial item; Contingent consideration payable or receivable in a business combination; Direct insurance contracts that an entity holds, i.e. direct insurance contracts in which an entity is the policyholder. Does not apply to a reinsurance contract that an insurer holds; Fixed-fee service contracts that have as their primary purpose p the provision of services and meet certain criteria's below; Contracts are not priced based on an assessment of risk with individual customer Contracts typically compensate customers by providing a service rather than cash The type of risk transferred are primarily related the use (or frequency) of services 10 5

6 Separating non-insurance components The separation of certain components from an insurance contract ( unbundling ) would be required. Unbundling gprohibited if not required. Guidance on closely related embedded derivatives, distinct investment components and distinct goods and services is provided Insurance component Distinct goods and services Embedded derivatives (not closely related) Distinct investment components Non-distinct investment component Measured under the insurance standard Measured under the insurance standard, but excluded from the aggregate premium Measured under the financial instrument standard Measured under the revenue recognition standard 11 Recognition An insurance contract would be recognized from the earliest of: the beginning of the coverage period; the date on which the first payment from the policyholder becomes due #; and if applicable, the date on which facts and circumstances indicate that the portfolio of insurance contracts to which the contract belongs is onerous. In the absence of a contractual due date, the first payment from the policyholder would be deemed to be due once it has been received. Onerous contract Recognize consideration Bound by terms of Coverage begins = contract premium due 1 November 1 January # IASB only 12 6

7 Proposed measurement models The building-block model Four building blocks IASB preference Three building blocks FASB preference Expected future cash flows Explicit, unbiased and probability-weighted estimates of future cash outflows less future cash inflows Time value of money Discounted using current rates to reflect the time value of money Risk adjustment To adjust for the effects of uncertainty about the amount and timing of future cash flows Contractual service margin To remove any profit at inception. Released over coverage period. Interest accreted on the contractual service margin. Single margin To remove any profit at inception. Released over coverage and claims handling period. Interest accreted on the single margin. 13 Proposed measurement models Fundamentals Level of measurement An insurer would measure the present value of the fulfilment cash flows excluding the risk adjustment at the portfolio level of aggregation for insurance contracts. No level of measurement prescribed for the risk adjustment. Portfolio IASB - contracts that are subject to similar risks and priced similarly relative to the risk taken on and managed together as a single pool. FASB - contracts that are subject to similar risks and priced similarly relative to the risk taken on and have a similar duration and similar expected patterns of release of the single margin. Margins IASB- unit of account used to determine the contractual service margin should be at portfolio level. l Unit of account used to release not prescribed but consistent t with the objective of release. FASB- unit of account to determine and release the single margin is at portfolio level. 14 7

8 Proposed measurement models Building block 1 Cash flows Estimates of cash flows would include all cash inflows and outflows related directly to the fulfilment of the portfolio of contracts the contract belongs to and would: Be explicit (i.e. separate from estimates of discount rates that adjust for the time value of money and the risk adjustment) Reflect the perspective of the entity (market variables would be consistent with observable market prices) Incorporate, in an unbiased way, all available information that relates to the cash flows of the contract Be current and consistent with market prices, i.e. use of estimates of financial market variables such as interest rates Include only cash flows arising from existing contracts within the contracts boundaries Estimates of cash flows would be updated each reporting period and measured at a portfolio level of aggregation for insurance contracts. Insurance liability under the building block approach and the onerous contract liability under premium allocation approach reflects estimates of cash flows at the reporting date. 15 Proposed measurement models Building block 1 Acquisition costs Acquisition costs to be included in the initial measurement of a portfolio of insurance contracts should be all the direct costs that the insurer will incur in acquiring the contracts in the portfolio. Acquisition costs incurred before a contract s coverage period begins should be recognized as part of the insurance contracts liability for the portfolio of contracts. Measurement would exclude indirect costs including: rent and occupancy software dedicated to contract acquisition equipment maintenance and depreciation agent and sales staff recruiting and training administration advertising utilities other general overhead FASB only - limited to those costs related to successful acquisition efforts IASB only - no distinction between successful and unsuccessful efforts (all direct costs included) FASB lines up with current U.S. GAAP other than eliminating direct response advertising and the transition expedient in ASU

9 Proposed measurement models Building block 2 Time value of money Example bottom-up and top-down approach Financial instrument yield of 5.25% (based on actual assets held or a reference portfolio) Either a top-down or a bottom-up approach may be used to determine an appropriate discount rate. In theory, both approaches should result in the same discount rate, however in practice, differences are expected. The top-down approach may result in a higher rate, as illustrated. Top-down approach: 3.75% Bottom-up approach: 3.50% Market risk premium expected losses (1%) Market risk premium for unexpected losses (.5%) Difference between top-down and bottom up approach (.25%) Liquidity premium (.5%) Risk-free rate 3% No specific method prescribed. Regardless of the approach used, the discount rate should be consistent with the characteristics of the insurance contract liability, e.g. timing, currency and liquidity. 17 Proposed measurement models Building block 2 Use of OCI to present changes in discount rates Present in OCI Cumulative OCI Difference between liability discounted at the current rate and the liability discounted at the (locked-in) rate at inception Present in profit or loss Interest expense at locked-in rate Current period OCI Equals interest expense at current rate less interest expense at locked-in rate Changes in interest sensitive cash flow assumptions (e.g. minimum interest guarantees and lapse rates) (a) Note: (a)unless offset against an unlocked contractual service margin Key attributes The use of OCI to present the effect of discount rate changes would be required (rather than permitted) No loss recognition test To recognise the effect of changes in cash flow assumptions in profit or loss using the locked-in rate 18 9

10 Proposed measurement models Building block 2 interaction with the financial instruments proposals Business model assessment Amortized Cost FV-OCI FV-Profit or Loss Held and managed within a business model whose objective is to hold assets to collect contractual cash flows Held within a business model whose objective is both to hold the assets to collect contractual cash flows and to sell the assets Residual category (i.e., all other assets and includes assets that do not meet the SPPI test as well as those that are held for sale) 19 Proposed measurement models Building block 3 Risk adjustment (IASB only) If there are techniques that could represent faithfully the risk inherent in the insurance obligations, then the Risk inclusion Adjustment: of an explicit The risk compensation adjustment would the insurer provide requires relevant for information bearing to the users. uncertainty Under the about IASB s the amount approach, and the timing measurement of the cash of an flows insurance that arise contract as the should entity contain fulfils an the explicit insurance risk adjustment. contract IASB has not prescribed a unit of account for measurement of the risk adjustment. If there are techniques that could represent faithfully the risk inherent in the insurance obligations, then the inclusion of an explicit risk adjustment would provide relevant information to users. Under the IASB s approach, the measurement of an insurance contract should contain an explicit risk adjustment. IASB has not prescribed a unit of account for measurement of the risk adjustment. The IASB would not limit the range of available techniques and related inputs to the risk adjustment. However, if a technique other than confidence level is used, that technique and the equivalent confidence level % is to be disclosed. Re-measured each reporting gperiod and changes are recognized in profit or loss. Replicating asset approach based on the fair value of the replicating asset may be appropriate. Level of measurement is not prescribed as long as measurement meets objective

11 Proposed measurement models Building block 4 Contractual service margin (IASB only) Contractual service margin (IASB) Single margin (FASB) Arises when the present value of the fulfilment cash flows * is less than zero (i.e. remove day-one gains) If the present value of fulfilment cash flows is positive, recognise a loss in profit or loss at inception Prospectively adjusted for changes in the estimates of cash flows relating to future coverage or other future services; cannot become negative in subsequent measurement (unlocking) Systematic release over coverage period based on the pattern of transfer of services provided Classified as part of the insurance liability Interest accretion using discount rate at inception The single margin would not be re-measured subsequently (no unlocking) Recognises profit as the entity satisfies its performance obligation to the policyholder (i.e. released from exposure to risk as evidenced by a reduction in the variability of cash outflows) Separate presentation in statement of financial position Interest accretion using discount rate at inception * defined as the expected present value of the future cash outflows less cash inflows plus risk adjustment 21 Proposed measurement models The mirroring exception The measurement for these contracts can be illustrated as follows: Contracts that specify a link to underlying items that the entity is required to hold Cash flows vary directly with underlying items Cash flows vary indirectly with underlying items Cash flows do not vary with underlying items Measurement: mirrors underlying items, i.e. Amortized cost, FVTPL, FVOCI Measurement: risk-adjusted expected present value of cash flows Contracts that do not specify a link to underlying items that an entity is required to hold (i.e. universal life, index-linked products or other types of contracts in which the participation p features are discretionary) would be measured under the building-block approach. FASB: The mirroring exception would not apply to situations in which 1) the policyholder s participation is determined on a basis other than that used to measure the underlying item in the GAAP F/S and does not reflect a timing difference or 2) cash flows for which the entity has the discretion on the amounts relating to the policyholder participation. Additionally, when an entity expects changes to the crediting rates, reset rates in a manner that recognises changes in estimated interest crediting and related ultimate cash flows on a level-yield basis over the life of the contract

12 Proposed measurement models The premium-allocation approach Simplified measurement approach for some short-duration contracts and similar approach to current practices for non-life contracts. Consistent with revenue recognition proposals. Intended to be proxy for building blocks and permitted (IASB only), if: the coverage period at initial recognition is one year or less; or Produces measurements that are a reasonable approximation to those of the BBA i.e. at inception, the entity expects no significant variability in the fulfilment cash flows. PAA Onerous contract liability measured under BBA, if applicable Liability for incurred claims measured under the BBA Liability for the remaining coverage, measured by reference to unearned premium BBA All three components measured under one approach FASB: PAA would be required, if the insurance contract is one year or less; or it is unlikely that there will be significant variability in the expected value of net cash flows required to fulfil a contract before a claim is incurred. 23 Proposed measurement models The premium-allocation approach Initial measurement- Liability for remaining coverage Pre claims liability at inception = Initial premium Directly attributable - acquisition costs - Onerous contract liability Similar in many ways to current practice for non-life contracts Discounting required if there is a significant financing component using discount rate at inception Directly attributable acquisition costs can be expensed if coverage period is less than 1 year Released on a systematic basis representing the transfer of services Onerous contract test when facts and circumstances indicate it might be onerous Subsequent measurement- Liability for remaining coverage Previous carrying amount + Interest accretion + Premium received in period Revenue recognized for coverage - - Change in onerous contract liability 24 12

13 Proposed measurement models The premium-allocation approach Liability for claims incurred under the PAA is measured at the fulfilment cash flows Risk Fulfilment cash flows Unbiased probability-weighted current estimates of future cash flows Discounted at current rates to reflect the time value of money adjustment (IASB only) When a liability for incurred claims is discounted - use the discount rate at the inception of the contract to determine the amount of the claims and interest expense in profit and loss. Discounting not needed if cash flows are expected to be paid or received in one year less 25 Reinsurance Reinsurance assumed Evaluate the applicable approach in same manner as a direct contract IASB -Permit Eligibility Principle * Contracts eligible if the PAA would produce measurements that are a reasonable approximation of buildingblock approach. * A contract would qualify automatically under both approaches if coverage period is one year of less FASB - Require Eligibility Criteria * Apply the BBA rather than the PAA if at contract inception: it is likely that there will be significant variability in the expected value of net cash flows required to fulfil a contract before a claim is incurred

14 Reinsurance Reinsurance ceded Premium allocation approach (PAA) Building block approach (BBA) Direct contract Reinsurance ceded FASB requires symmetrical approach Reinsurance ceded PAA permitted if proxy for BBA Reinsurance ceded (BBA) IASB allows for either approach regardless of direct contract 27 Reinsurance Reinsurance ceded example Measurement example for BBA at initial recognition Present value of fulfilment cash flows > Zero Present value of fulfilment cash flows < Zero Input Measurement Input Measurement Reinsurance premium paid (premium ceded Reinsurance premium paid (premium ceded to (70) to reinsurer lump sum paid up-front) reinsurer lump sum paid up-front) (100) Ceding commission received 7 Ceding commission received 7 Reinsurance recoverable cash inflows (after allowance for expected credit losses) 80 Reinsurance recoverable cash inflows (after allowance for expected credit losses) 80 Discounting (15) Discounting (15) Risk adjustment 10 Risk adjustment 10 Contractual service margin/liability (12) Expense at inception 1 ; or (Debit) contractual service margin/asset Loss at inception when the coverage period is for past events, i.e. retroactive reinsurance. 2. Reinsurance asset, such as prepaid premium, when the reinsurance contract is for future events. FASB: No risk adjustment would be included; the remaining single margin on reinsurance contracts that provide coverage for future events would be recognized consistently with the margin on underlying contracts covered by the contract 28 14

15 Business combinations and portfolio transfers Recognition Contracts acquired in a business combination or portfolio transfer would be recognized at the date of the business combination or portfolio transfer Measurement The consideration received for insurance contracts acquired would be treated as a pre-coverage cash flow. An entity would determine the expected present value of the fulfillment cash flows and compare that amount with the consideration received for those contracts, after adjusting the consideration for any other assets and liabilities acquired in the same transaction Business combinations Portfolio transfers Consideration received > PVFC Recognize the difference as contractual service margin Recognize the difference as contractual service margin PVFC > consideration received Recognize the difference as an adjustment to the initial measurement of a gain or goodwill # Recognize the difference as a loss # FASB: Difference would be recognized as a loss 29 Presentation Statement of financial position An entity would present separately: portfolios of insurance contracts that are in an asset position; and portfolios of insurance contracts t that t are in a liability position Reinsurance contract assets from insurance contract liabilities General IAS 1 presentation requirements would apply FASB proposals also include separate presentation of: building-block and premium-allocation approaches further disaggregation of insurance contract assets and liabilities separate presentation of any unconditional right to premiums BBA - premium receivable and single margin (includes acquisition costs expected to be paid) PAA - premium receivable and liability for remaining coverage 30 15

16 Presentation Presentation of the statement of profit or loss and OCI Initial recognition: Expected cash inflows Building block 1 Building block 2 Building block 3 # Building block 4 Expected cash outflows Discounting Risk adjustment Presentation of changes in profit or loss and OCI (# IASB only): Contractual service (or single) margin Recognized in profit or loss if no contractual service margin zero Changes in cash flows unrelated to services: profit or loss Changes in cash flows related to past and current services: profit or loss Unwind of locked- in discount rate: profit or loss Changes in discount rate: OCI Changes in risk adjustment: profit or loss # Release of margin: profit or loss Offset changes related to future services # Changes in cash flows related to future services: Offset against the margin * # 31 Presentation Presentation of the statement of profit or loss and OCI Present of profit or loss and OCI IAS 1 applies: presentation of revenue, claims incurred, interest based on locked-in discount rate FASB requires disaggregation of PAA and BBA, ceded balances, and interest accretion Mirroring exception to presentation of changes Mirrored cash flows align with underlying item All changes in value of cash flows that vary indirectly with underlying items presented in profit or loss Discount rate used to measure interest expense in profit or loss is updated when the entity expects changes in returns on underlying items to affect the amount of cash flows to the policyholder. That rate is either at contract inception or when the rate is updated (IASB only) When an entity expects changes to the crediting rates, reset in a manner that recognizes changes in estimated interest crediting and related ultimate cash flows on a level-yield basis over the life of the contract. (FASB only) 32 16

17 Presentation Presentation of the statement of profit or loss and OCI Insurance contract revenue Premiums are allocated to periods in proportion to the value of coverage (and other services) by reference to the estimated pattern of expected claims and expenses. Allocated premiums exclude the present value of the amounts to be paid to policyholders regardless of whether an insured event occurs ( the investment component ) Earned premium presentation (an example) Insurance contract revenue 475 Claims and benefits incurred -320 Expenses incurred -60 Amortisation of acquisition costs -20 Changes in estimates of future cash flows (if not offset against the contractual service margin) -10 Unwind of previous changes in estimates 5 Underwriting result (Gross margin) 70 Investment income 60 Interest on insurance liability -54 Profit or loss 76 Other comprehensive income: Change in insurance contract liability due to changes in discount rate 9 Fair value movements on FVOCI assets -10 Total comprehensive income Presentation Presentation of the statement of profit or loss and OCI Simplified example of insurance contract revenue presentation Assumptions Portfolio of 2-year contracts incepted at the beginning of period 1 Time value of money immaterial No investment component, acquisition costs, expenses, changes in estimates or experience adjustments, losses on initial recognition All claims and benefits paid immediately Expected cash flows, risk adjustment and margin release pattern as presented in table to the right Expected cash flows Year 1 Year 2 Premiums received Expected claims and benefits Fulfillment cash flows Release of risk adjustment (IASB only) Release of contractual service margin/single margin Presentation Year 1 Year 2 Insurance contract revenue* Actual claims and benefits (amounts incurred) Underwriting margin * Insurance contract revenue is the sum of expected claims and benefits, change in risk adjustment and release of contractual service margin/single margins 34 17

18 Disclosures New disclosures Additional disclosure requirements include: Amounts recognized in financial statements Significant judgements Nature and extent of risks Additional reconciliations as a result of the new measurement model in tabular format, including components of changes. Reconciliation from premiums received to revenue. Inputs used to determine revenue recognized in the period Effect of the insurance contracts initially recognized in the period. Additional transition disclosures. More detailed disclosures of methods and processes for estimating inputs. Effect of changes in the methods and inputs, including explanations for the reasons for changes. Disclosure of confidence level to which the risk adjustment corresponds. Disclosure of the yield curve used to discount cash flows that do not depend on returns from underlying items. Quantitative information about effect on profit or loss and equity of contracts sensitivities to insurance risk. Reconciliation of disclosures about claims development with the carrying amounts of the insurance liabilities. For liquidity risk, the amounts payable on demand, in a way that highlights the relationship between these amounts and the carrying amounts of the related contracts. 35 Transition Overview Retrospective application Limited ability to redesignate some financial assets Includes margin for in-force contracts at Re-designations under the fair value date of transition option permitted to eliminate or significantly reduce accounting Full retrospective application mismatches Practical expedients provided for determination of contractual service/single margins and discount rate if retrospective application is impracticable Additional guidance for determining locked-in discount rate to adjust AOCI at date of inception and subsequent interest expense in profit or loss if cant be determined retrospectively Election of OCI category for investments in certain equity instruments permitted FASB proposals would allow financial assets that relate to insurance business to be re-designated under the relevant financial instruments guidance in effect as if the insurer had adopted that guidance on transition. Early adoption permitted (IASB only) 36 18

19 Transition Estimating the contractual service margin at transition What practical expedient would be used to determine the contractual service/single margin? Estimate what the margin would have been if the insurer had been able to apply the new standard retrospectively. When retrospective application is impracticable, an insurer would estimate the contractual service margin by maximizing the use of objective data, i.e. an insurer would not calibrate the residual margin to the insurance liability as it was measured using previous GAAP. (IASB only) An insurer would determine the contractual service margin on transition assuming all changes in estimates of cash flows between initial recognition and the beginning of the earliest period presented were known at initial recognition. (IASB only) If no objective information to retrospectively adopt, estimate margin to zero (FASB only) Practical expedient to determine the margin based on an insurer s existing definition of a portfolio and allocate that margin to the new portfolios on transition (FASB only). What discount rate would be used? The discount rate used is a key determinant of the margin established at transition and amounts would be recognized in OCI and the interest expense recorded in profit or loss. Insurers may find it difficult to determine the discount rate in the retrospective period using either the top-down or bottom-up approaches. Practical expedient when determining the discount rate would otherwise be impracticable for contracts written prior to transition. 37 Business impacts How will the proposals affect your organization? Operational performance People and processes Product design and pricing and asset- liability management Data and systems Possible volatility in equity and profit or loss Capital management 38 19

20 Business impacts Changes to asset liability management Increased volatility possible in profit or loss and equity Impacts on asset-liability management and financial instruments accounting Volatility may increase because current information and assumptions would be used in measuring insurance liabilities. Applying the new financial instruments proposals may mitigate or increase volatility. The degree of volatility would depend on how insurance liabilities and financial assets are measured under current and proposed requirements. Discounting insurance liabilities would be a big change for many property and casualty insurers. Effective date of financial instrument proposals may precede effective date of the insurance proposals. Interaction with future financial instruments models may impact investment allocations and assetliability management. Entities would have limited ability to redesignate some financial assets on initial application. Accounting mismatches may result if: changes in conditions have offsetting effects on the economic values of assets and liabilities; but gains and losses are not recognized symmetrically. 39 Business impacts Changes to operating performance Measurement and reporting of operational performance Proposed measurement model changes how insurance liabilities are presented and consequently operating performance. Presentation and disclosure proposals are expected to change the communication of performance because: performance metrics would be less familiar; multi-line business may be more complex to explain; reporting processes may take longer; non-gaap measures may be used to explain financial performance; and IFRS vs. US GAAP differences may need to be considered. Broad business impacts May change decisions on product profile and features, or product pricing. Growing businesses may see negative impact on results if earnings patterns become more back-ended on long duration contracts. More volatile products may become less desirable e.g. long-duration insurance products with guarantees. New reporting basis may have tax implications in some jurisdictions. Capital management and interaction with regulatory capital requirements in some jurisdictions Increased volatility in reported equity may impact capital positions. Insurers would need to incorporate accounting change into planning for solvency and regulatory reporting. Analysts, investors and shareholders may need time to understand the new reporting

21 Business impacts People impacts Significant impacts on people Compensation arrangements and performance targets may be changed. Additional resources may be needed to manage transition. Actuarial and accounting resources will be in high demand. IT resources will be needed to address changing actuarial valuations and systems developments. Some resource gaps may be addressed by additional hiring, outsourcing to third parties, internal training, and redeploying existing resources within the organization. 41 Next steps Insurance Contracts Accounting, tax and reporting Perform a comprehensive review of insurance contracts to assess how they would be measured under the BBA or PAA. Consider how best to communicate performance, due to less familiar performance metrics and presentation and duration of reporting processes. Evaluate need to supplement disclosures and use non-gaap measures. Assess possible alignment with solvency and regulatory reporting. Identify magnitude of any impact on regulatory capital requirements. Assess impact on the taxation treatment of insurance contracts. Identify sources contributing to volatility of financial results under new model. Assess interaction with application of financial instruments proposals and identify possible accounting mismatches. Identify possible impacts arising from the revenue recognition proposals e.g. for unbundling components of unit-linked contracts. Assess impacts on separate entity reporting. Update accounting and reporting manuals

22 Next steps Insurance Contracts Systems and processes Upgrade accounting systems to ensure that they can handle new requirements. Upgrade actuarial modeling capabilities, and valuation and financial reporting systems. Evaluate data collection needs and co-ordinate significant actuarial and finance involvement. Identify processes affected by the proposals and establish processes for: evaluating contract classification and unbundling requirements; calculating insurance contract liabilities, including determining the discount rate, risk adjustment and contractual service margin; and disclosures. Evaluate changes needed to key internal controls over financial and regulatory reporting. Consider the need to outsource processes. Consider implementation of revised IT strategy. Develop a transition plan for parallel runs and dual reporting. 43 Next steps Insurance Contracts Business Review product profile and consider changes to product design and pricing. Revisit investment allocations and asset-liability management. Consider entering into reinsurance and outsourcing arrangements. Assess impacts on key performance metrics. Budget for necessary changes to people, processes and systems. Assess impact on general business issues such as contractual terms, treasury practices, and risk management practices

23 Next steps Insurance Contracts People and change Determine staff needs in particular, actuarial, IT and finance resources. Train finance and actuarial teams, as well as IT, underwriting, risk management and investor relations. Evaluate impact on compensation arrangements and performance targets and measures. Communicate changes for stakeholders to understand new metrics and performance results. Assess how changes to processes may impact how work is performed in particular, for actuaries and risk managers. 45 Questions? 46 23

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