IFRS 17 Insurance Contracts Breakfast Briefing Series Launch event 30 May PDF Free Download

Breakfast Briefing Series Launch event 30 May 2017

Agenda Agenda Items Introduction Scope of IFRS 17 Measurement Presentation and disclosures Transition IFRS 4 and IFRS 9 considerations Programme Delivery Closing remarks Speaker Eimear McCarthy Maaz Mushir Maaz Mushir Carla Dunne Carla Dunne Carla Dunne David Walsh. Ciara Regan 2 2017 Deloitte Ireland. All rights reserved.

Introduction

Welcome and Introduction Meet our team Accounting Eimear McCarthy Partner - Audit and Assurance E: emccarthy@deloitte.ie T: +353 1 417 2685 Processes, People and Technology Donal Lehane Partner Consulting E: dlehane@deloitte.ie T: +353 1 417 2807 Carla Dunne Manager - Audit and Assurance E: cadunne@deloitte.ie T: +353 (0) 1 417 3863 David Walsh Manager Consulting E: davwalsh@deloitte.ie T: +353 1 417 3943 Actuarial Ciara Regan Partner - Audit and Assurance E: cregan@deloitte.ie T: +353 1 407 4856 Angela McNally Director - Audit and Assurance E: amcnally@deloitte.ie T: +353 1 417 2279 Maaz Mushir Manager - Audit and Assurance E: mamushir@deloitte.ie T: +353 1 417 2234 4 2017 Deloitte Ireland. All rights reserved.

IASB s insurance contracts project April 1999 25 Oct 2013 Comment deadline 2014 and H1 2016 Board redeliberations 12 Sep 2016 IFRS 9 decoupling Deferral possible for some insurers to 1/1/2021 16 Nov 2016 Approval of postfield test staff recommendations 1 Jan 2018 Effective date IFRS 9 (full application or overlay approach) 1 Jan 2021 Effective date IFRS 17 and IFRS 9 (deferral approach) Project commenced 20 Jun 2013 ED Issued 16 Feb 2016 IFRS 17 deliberations complete, balloting begins 23 Sep 2016 Completion of field testing 18 May 2017 Publication date for IFRS 17 1 Jan 2020 * Comparatives and IAS 8 disclosures Transition date IFRS 17 & IFRS 9 * Illustrative for entities with 31 December year-end 6 2017 Deloitte Ireland. All rights reserved.

Introduction Key objectives of IFRS 17 The key objectives of the IASB s insurance project are to: Introduce for the first time a single IFRS accounting model for all types of insurance contracts; Make the new accounting model highly transparent; and Align as much as possible insurance accounting with the general IFRS accounting of other industries. The key change from the existing standard will be the prescription of the valuation method for insurance liabilities and the recognition of revenue. The new presentation and disclosure requirements will also report revenue in a way that is more consistent globally and across industries. Full retrospective application of the new requirements is required, unless this is impracticable. While there are many similarities between the new Insurance IFRS and Solvency II framework, their goals are quite different. IFRS focuses on shareholders interests while Solvency II is designed to protect policyholders. 7 2017 Deloitte Ireland. All rights reserved.

Solvency II vs IFRS 17 Balance Sheet Solvency II IFRS 17 Typical balance sheet Typical balance sheet Income statement Callable capital instruments Ancillary Own Funds Goodwill Shareholder equity Excess of assets over liabilities Subordinated liabilities Basic Own Funds Other liabilities Other liabilities Contractual Services Margin ( CSM ) Release of CSM Assets Risk Margin BEL Technical provisions Assets Risk Adjustment ( RA ) Best estimate liability ( BEL ) Release of RA related to current period Changes in cash flows related to past & current services Interest on Insurance liability Income statement (underwriting result) Income statement (investment result) Changes in discount rates Other comprehensive income ( OCI ) 8 2017 Deloitte Ireland. All rights reserved.

Fact sheet ❶ ❷ Who is affected? One One accounting model for all insurance contracts in all IFRS jurisdictions. ❸ When? 450 listed insurers using IFRS Standards 2021 mandatory effective date of the new Standard $13 trillion total assets of those listed insurers 3.5 years for companies to implement the new requirements ❹ What changes? More useful and transparent information Better information about profitability ❺ How was industry feedback collated? 600 comment letters 900 meetings, roundtables and discussion forums 9 2017 Deloitte Ireland. All rights reserved.

Scope of IFRS 17

What has improved under IFRS 17? 1 Valuation of technical provisions Use of current assumptions. Consideration of time value of money. Use of consistent discount rates. 2 Profitability Consistent recognition of profit about current and future profitability. Profit will be earned in a consistent manner as insurance services are provided to insurance clients. Reporting of onerous contracts. 3 Comparability among companies IFRS 17 increases comparability between insurance companies in the same jurisdiction or across different jurisdictions. 4 Comparability between insurance contracts IFRS 17 increases comparability between insurance companies issued by the same company or companies within a group. Several multi nationals consolidate their subsidiaries using non-uniform accounting policies. 5 Comparability among industries The principles of revenue and profit recognition under IFRS 17 make it consistent with other industries. 11 2017 Deloitte Ireland. All rights reserved.

Scope of IFRS 17 IFRS 17 will apply to a range of different contracts, which fall under the following categories: Insurance and reinsurance contracts issued; Reinsurance contracts that an entity holds ( ceded reinsurance ); and An investment contract with a discretionary participation feature ( DPF ) that it issues, provided that the entity also issues insurance contracts Remaining contracts which are typically issued by insurance companies are those which comprise investment components, normally referred to as investment contracts. These are financial instruments in substance and thus are accounted for in accordance with IFRS 9. 12 2017 Deloitte Ireland. All rights reserved.

Measurement

Three approaches to the measurement of insurance contracts Premium Allocation Approach Building Block Approach Variable Fee Approach Short-term general insurance Short-term life and certain group contracts Long-term business Whole life insurance Term assurances Protection business Annuity Contracts Reinsurance written Certain general insurance contracts Unit-linked contracts, Variable annuities and equity index-linked contracts Continental European 90/10 contract UK with profits contracts Unitised with profits 14 2017 Deloitte Ireland. All rights reserved.

Building Blocks Approach (BBA) Principles Measurement model uses a building block approach Measurement objective is to quantify the notion of the insurer s fulfilment of obligations under the contract Measurement is current assumptions must not be locked-in, except the discount rate used to calculate CSM Discount rate can be developed from market interest rates using either a top down or bottom up approach Discount rates based on market interest rates whose characteristics match those of the liability (currency, duration, liquidity) Contractual service margin (CSM) eliminates the recognition of any future accounting profit at inception Total IFRS Insurance Liability Block 4: Contractual Service Margin Fulfilment cash flows Block 3: Risk Adjustment Block 2: Time value of money Block 1: Expected Future Cash Flows (unbiased probabilityweighted mean) Obligation to provide service, measured at inception as the expected contract profit. Compensation for uncertainty for certain liability cash flows. Similar to Risk Margin concept in Solvency II. Use a market discount rate that considers the currency, timing and liquidity of liability cashflows. Expected cash flows from premiums and claims and benefits. 15 2017 Deloitte Ireland. All rights reserved.

Building Blocks Approach (BBA) Principles Measurement model uses a building block approach Measurement objective is to Read the overview quantify the notion of the insurer s fulfilment of obligations under the contract Measurement is current assumptions must not be locked-in, except the discount rate used to calculate CSM 0 Discount rate can be developed Divergence 7 from market interest rates using from either a top down or bottom Benchmark CSM = 0 up approach Discount rates based on market interest rates whose characteristics match those of fee the liability (currency, duration, liquidity) Contractual service margin (CSM) eliminates the recognition of any future accounting profit at inception The CSM represents the most fundamental change in Total IFRS Insurance Liability the measurement of insurance How it works contract liability from the current accounting and solvency standards. Block 4: Contractual Service Margin If fulfillment cash flows <0, Fulfilment cash flows CSM = (Block 1 + Block 2 + Block 3). Block 3: Risk Adjustment Rounding 5of shareholder Block transactions 2: Time 0 value of money If fulfillment cash flows >0, 6 0 4 Design of Class performance Block 1: Specific Expected Future Cash Transactions methodology Flows (unbiased probabilityweighted mean) 0 Obligation to provide service, measured at inception as the expected contract profit. Compensation 0 for uncertainty for 0 certain liability cash flows. Similar to Risk Hedging 3 Margin concept in Solvency Forced 1 II. Ratio Hedging Use a market discount rate that considers the currency, 0 timing and liquidity of liability cashflows. Allocation 2of share class Expected cash specific flows from premiums and claims and expenses benefits. The level of aggregation (unit of account) applied in the calculation of CSM is going to be a key challenge for insurers in the implementation of the standard. 16 2017 Deloitte Ireland. All rights reserved.

Subsequent measurement under BBA Recognition of changes in estimates and assumptions Total IFRS Insurance Liability Block 4: Contractual Service Margin Fulfilment cash flows CSM is adjusted by changes in estimates and is allocated to profit or loss on basis of passage of time. For some contracts, changes in estimate include entity share of policyholder s assets. Block 3: Risk Adjustment Block 2: Time value of money Block 1: Expected Future Cash Flows (unbiased probabilityweighted mean) In each reporting period, an entity remeasures the fulfilment cash flows using updated assumptions about cash flows, discount rate and risk. 17 2017 Deloitte Ireland. All rights reserved.

An extremely simplistic illustration of the differences in SII and IFRS 17 Insurance Liabilities There are four broad categories to adjust SII contract value to that defined under IFRS 17. However, the devil is always in the details. Risk margin Contractual Service margin Best Estimate Liabilities Solvency SII II contract Technical boundaries Provisions Risk Margin Discount Rates Risk adjustment PV of Fulfilment Cashflows CSM IFRS 17 Insurance Liabilities 18 2017 Deloitte Ireland. All rights reserved.

Evolution of IFRS 17 vs Local GAAP profits over time (measured under BBA) Term Assurance Annuities 12000 18000 10000 8000 6000 4000 2000 0-2000 -4000-6000 -8000 1 3 5 7 9 11 13 15 17 19 16000 14000 12000 10000 8000 6000 4000 2000 0 1 2 3 4 5 6 7 8 9 1011121314151617181920 Local GAAP IFRS 17 Local GAAP IFRS 17 19 2017 Deloitte Ireland. All rights reserved.

Premium Allocation Approach PAA is the option to use premium as proxy for the valuation of insurance contracts for short term incepted but unexpired risks Fulfilment CF value for claims reserves Fulfilment CF value for unexpired and unincepted risks CSM Minimum liability for unincepted contracts or unexpired coverage. Risk Adjustment Discounted probability weighted average of expected future cash flows AND Risk Adjustment Discounted probability weighted average of expected future cash flows OR Premium Allocation Approach (PAA) OR Onerous Premium Allocation Approach (PAA) Incurred Liability Liability prior to date when claims are incurred Building Blocks Approach/ General Model 21 2017 Deloitte Ireland. All rights reserved.

Presentation and disclosures

New IFRS balance sheet Significant changes to the balance sheet 1. Liabilities under insurance contracts (including unallocated surplus) will change with the underlying valuation basis 2. Reinsurer s share of liabilities will change in line with underlying inwards valuation basis 3. Deferred acquisition costs will no longer exist 4. Other assets / payables and other financial liabilities will no longer include inwards and outwards future premiums 5. Intangible assets that relate to future profits will be deferred as part of the CSM 6. Retained earnings will differ due to: Retrospective application of Standards at inception Different emergence of profit KPIs will change as a result 23 2017 Deloitte Ireland. All rights reserved.

New IFRS Income Statement Fundamentally different 1. Gross written premiums - replaced by Insurance Revenue comprising of: Release of CSM +/- Change in Risk Adjustment + Expected net cash flows 2. Claims and change in insurance liabilities will include actual net cash outflow, fundamentally changing to reflect the measurement basis 3. Acquisition costs: Attributable expenses included in BEL Non-attributable expenses recognised in income statement immediately 4. Finance costs: Unwind of initial discount a cost in each period based on discount rates at inception New discount rate option to take the impact of changes through profit/loss or other comprehensive income KPIs will change as a result 24 2017 Deloitte Ireland. All rights reserved.

Disclosures overview An entity shall disclose qualitative and quantitative information about: The amounts recognised in its financial statements that arise from insurance contracts; (explanation of recognised amounts) The significant judgements, and changes in those judgements; and (significant judgements) The nature and extent of the risks that arise from contracts within the scope of the Standard. (risks) There are also extensive disclosures relating to transition. 25 2017 Deloitte Ireland. All rights reserved.

Transition

IFRS 17 Transition Overview Three possible approaches to be applied The retrospective approach should be applied to groups of insurance contracts, unless it is impracticable or if groups at inception of contracts in force on transition cannot be identified. An entity is then permitted to choose between the modified retrospective approach and the fair value approach. Where impracticable to apply the modified retrospective approach, a fair value approach is applied from the date of transition. Key definitions in transition Impracticable: Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. (IAS 8.5) Fair value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (IFRS 13.A) 27 2017 Deloitte Ireland. All rights reserved.

1/1/2020 1/1/2021 (effective date) 31/12/2021 IFRS 17 Transition Illustration (effective date: 1/1/2021) The objective of the modified retrospective approach is to approximate full restatement The use should be only to the extent the entity does not have reasonable and supportable information to restate - 14 yr - 13 yr - 12 yr - 11 yr - 10 yr Maximum Comparative Periods BS = Balance Sheet IS = Statement of Comprehensive Income - 9 yr IMPRACTICABILITY ARISES Each bar represents all of the groups of contracts issued in those years and part of the different portfolios IMPRACTICABILITY ARISES - 8 yr - 7 yr - 6 yr - 5 yr - 4 yr - 3 yr - 2 yr - 1 yr IS1 IS2 BS1 BS2 BS3 Retrospective approach Modified retrospective approach Fair value approach 28 2017 Deloitte Ireland. All rights reserved.

IFRS 4 and IFRS 9 considerations

IFRS 9 Key Principles 1. Classification and Measurement 2. Impairment 3. Hedge Accounting Financial assets in the scope of IFRS 9 Loan commitments (unless @ FVTPL) Financial guarantees (unless @ FVTPL) Lease receivables Contract assets (IFRS 15) Subsequent measurement FVTPL/ FVTOCI Option for certain equity instruments AC FVTOCI Outside the scope of the impairment model Within the scope of the impairment model 30 2017 Deloitte Ireland. All rights reserved.

IFRS 4 Interaction with IFRS 9 Overview IFRS 9 Financial Instruments is effective from 1 January 2018. As such, IFRS 17 will have a later implementation date than that of IFRS 9 which may cause: additional accounting mismatches; and volatility in profit or loss that may arise in this gap period. As a result, the IASB amended IFRS 4 to introduce two options for insurers: 1. Overlay Approach 2. The Temporary Exemption apply IFRS 9, but adjust profit or loss to remove volatility for designated assets arising from the accounting mismatches available to all insurers effective when an insurer first applies IFRS 9 apply IAS 39 in the financial statements available to insurers whose activities are predominantly connected with insurance eligible at reporting entity level deferral option to 2021 31 2017 Deloitte Ireland. All rights reserved.

IFRS 4 Interaction with IFRS 9 The Overlay approach Statement of Comprehensive Income IFRS 9 is applied in full. Reclassify between P&L and OCI the difference between amounts reported applying IFRS 9 and amounts that would have been reported applying IAS 39. For financial assets: measured at FVTPL under IFRS 9 but would not have been measured at FVTPL in their entirety under IAS 39; and that relate to contracts within the scope of IFRS 4. Insurance contracts revenue Incurred claims and expenses Operating result Investment income IFRS 9 Interest on insurance liability Overlay approach-adjustment Investment result Profit / (Loss) Overlay approach-adjustment Effect of discount rate changes on insurance liability Other comprehensive income Total comprehensive income X (X) X X (X) (X) X X X (X) X X 32 2017 Deloitte Ireland. All rights reserved.

IFRS 4 Interaction with IFRS 9 The Temporary Exemption To qualify for the temporary exemption an insurer must have: not previously applied IFRS 9 significant IFRS 4 liabilities compared to total liabilities activities predominantly connected with insurance being: *P > 90%; or 80% < *P 90% (and no significant activity unconnected with insurance) *P = (Liabilities from IFRS 4 contracts + Investment contracts at FVTPL + Other connected liabilities) / Total Liabilities The temporary exemption is effective for annual periods beginning on or after 1 January 2018, with a fixed expiry date of 2021. 33 2017 Deloitte Ireland. All rights reserved.

IFRS 4 Interaction with IFRS 9 Key considerations IFRS reporter Do you qualify for the temporary exemption? Judgement involved. Need to consider both qualitative and quantitative factors. Are you are planning to early adopt IFRS 17 before 1 January 2021? If so, you must also apply IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers. IGAAP reporter with IFRS group reporting Have you considered the implications on your group reporting requirements? Need to consider the costs and complexities of preparing financial information under both IAS 39 and IFRS 9. IGAAP reporter with no IFRS group reporting What is the timing for FRS 102 to change? 34 2017 Deloitte Ireland. All rights reserved.

Programme Delivery

IFRS 17 Programme Delivery Kicking off your IFRS 17 project Project Planning IT Solutions Operating Model Communications Resource Planning Budget Planning Workstream identification Programme structure Programme governance Implementation Roadmap Data Requirements System Requirements Vendor Benchmarking System Build V Buy analysis Day 2 readiness Processes, people and technology Management Information (MI) Month End KPIs Internal Controls Transition & Post Go Live Controls Internal Comms Investor Relation Comms Treasury Comms 36 2017 Deloitte Ireland. All rights reserved.

Closing remarks

What should you do next? Start early, start small and keep it simple Understand the impact of IFRS 17 and IFRS 9 changes on your business Understand the impact on your profit profiles, accounts and KPIs Early planning, resources and training Complete a business case and secure budget Educate senior management and the market Future-proof inflight initiatives 38 2017 Deloitte Ireland. All rights reserved.

Deloitte Next Steps Series of upcoming breakfast briefings: JULY 11 AUGUST 2 SEPTEMBER 5 Deep dive of the new Insurance Contracts Standard, IFRS 17 Understanding the financial and practical impacts for reserving Understanding the impact across the entire business: from IT to actuarial and finance Launch of new series of on demand webcasts and eminence papers on topical issues that will follow the insurers IFRS 17 journey to implementation Publication of an IFRS 17 practical guide Deloitte interpretative guidance on IFRS 17 will be released continuously on our online accounting research tool IASPlus.com 39 2017 Deloitte Ireland. All rights reserved.

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IFRS 17 Insurance Contracts Breakfast Briefing Series Launch event 30 May 2017