IFRS 4 (Life) Modeling the impact on products Nazir Valani, FSA, FCIA, MAAA KPMG LLP Partner & National Leader, Actuarial Practice December 5 th, 213
1 year Renewable and Convertible Term M Ns Age 4 Priced for 12% ROI using CTFS PPM reserves used as proxy to CALM Assumptions at Issue: PPM Best Estimates PADs Mortality: 65% x CIA 8692 M Ns N 1/e x Interest Rates: 3.9% 44bps (Padded rate is 2.65%) Lapse: 15%, 1%, 9%, 9%, 7% to age 7 (at EOY). 4% bump at renewals. 12.5% x sign[csv - res(no PAD)], use net res Expense: Per Policy (BOY) Acq. Year 1: $16 1% Maint Year 1+: $4 1% Inflation 1.5% none 2
1 year Renewable and Convertible Term M Ns Age 4 Best Estimates PPM Reserves PADs Block 1: Expected CFs Block 2: Time Value IFRS Reserves Block 3: Risk Adj. Mortality: 65% x CIA 8692 M Ns N 1/e x Same (PPM BE) n/a Same (PPM MfAD) Block 4: Contr. Serv. Margin Int. Rates: 3.9% 44bps (Padded rate 2.65%) n/a 2.31% none Lapse: 15%, 1%, 9%, 9%, 7% to age 7 (at EOY). 4% bump at renewals. 12.5% x sign[csv - res(no PAD)], use net res Same (PPM BE) n/a Same (PPM MfAD) Expense: Per Policy (BOY) Acquisition Year 1: $16 1% Year 1: $12 n/a Same (PPM MfAD) Maint Year 1+: $4 1% Year 1+: $36 n/a Same (PPM MfAD) Inflation 1.5% none Same (PPM BE) n/a none Unwinding over the life of the contract with Unpadded decrements 3
IFRS 4 P2 1Yr R&C Insurance Liability 3 2 1-1 -2-3 -4 Insurance Contract Liability PPM Insurance Contract Liability -5 4
IFRS 4 P2 1Yr R&C Required Capital 6 5 Required Capital (2% Target Ratio) PPM Required Capital (2% Target Ratio) 4 3 2 1 5
IFRS 4 P2 1Yr R&C Total Balance Sheet Requirement 5 45 4 35 3 25 2 15 1 5 Total Balance Sheet approach (Required Capital + Reserve) PPM Total Balance Sheet approach (Required Capital + Reserve) 6
IFRS 4 P2 1Yr R&C Statement Profits 25 2 15 IFRS Total Statement Profit excluding tax PPM Total Statement Profit excluding tax 1 5 7
IFRS 4 P2 1Yr R&C Contribution to Free Surplus & ROI 2 1-1 -2 IRR (on CTFS) - 1years IFRS 8.% Need 15% increase in prem for 12% PPM 12.% -3-4 -5 Contribution to Free Surplus [CTFS] PPM Contribution to Free Surplus [CTFS] 8
IFRS 4 P2 1Yr R&C Free Surplus 8 6 Free surplus PPM Free surplus 4 2 (2) (4) (6) 9
1Yr R&C Statement of Comprehensive Income IFRS 4 P2 Liability Measurement IFRS 4 P1 Presentation of the Statement of Comprehensive Income 213 214 215 216 217 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Premium Income 247 21 189 172 156 Net Investment Income (2) 1 4 7 9 Total Revenue 245 211 193 179 165 Gross Policy Benefits (28) (32) (35) (38) (4) Changes in Provision for Future Policy Benefits 142 (73) (63) (52) (46) Net Policy Benefits 114 (15) (98) (9) (87) Commissions (99) (1) (9) (9) (8) General Expenses (2) (35) (32) (29) (27) IIT and premium tax (5) (4) (4) (4) (4) Total Operating Expenses (34) (49) (45) (42) (39) Income Before Income Taxes 55 57 5 47 4 Income Tax Expense (17) (17) (15) (14) (12) Net Income 39 4 35 33 28 Other Comprehensive Income (net of taxes) Total Comprehensive Income 39 4 35 33 28 1
IFRS 4 P2 1Yr R&C Proposed Earned Premium Presentation IFRS 4 P2 Liability Measurement Proposed Earned Premium presentation under IFRS 4 P2 213 214 215 216 217 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Insurance Contract Revenue 196 151 138 131 119 Claims and Benefits Incurred (28) (32) (35) (38) (4) Repayments of Investment Components Recognized Acquisition Costs (33) (19) (15) (14) (1) Other Expenses (85) (49) (45) (42) (39) Changes in estimates of future CFs Underwriting Result (Gross Margin) 5 51 43 39 31 Investment Income (2) 1 4 7 9 Interest on Insurance Liability 8 5 3 2 1 Profit or Loss 56 57 5 47 4 Corporate Tax on Profit or Loss (17) (17) (15) (14) (12) Net Income 39 4 35 33 28 Changes in Ins Contract liability due to discount rate Fair Value Movements in FVOCI assets Other Comprehensive Income (net of taxes) Total Comprehensive Income 39 4 35 33 28 Breakdown of Insurance Contract Revenue 213 214 215 216 217 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Expected benefits (latest estimates) 28 32 35 38 4 Acquisition Costs Recognized 33 19 15 14 1 Expected Other Attributable Expenses (latest estimates) 41 46 42 39 36 Contractual Service Margin Recognized 52 32 26 24 18 Release of Risk Adjustment 42 22 2 18 16 Insurance Contract Revenue 196 151 138 131 119 11
Non Par Whole Life Male NS Age 4 Priced for 12% ROE using CTFS PPM reserves used as proxy to CALM Assumptions at Issue: PPM Best Estimates PADs Mortality: 65% x CIA 8692 M Ns N 1/e x Interest Rates: 4.1% 54bps (Padded rate is 3.47%) Lapse: 1%, 7%, 5% for life (at EOY) 12.5% x sign[csv - res(no PAD)], use net res Expense: Per Policy (BOY) Acq. Year 1: $16 1% Maint Year 1+: $4 1% Inflation 1.5% none 12
Non Par Whole Life Male NS Age 4 Best Estimates PPM Reserves PADs Assumptions at Issue Block 1: Expected CFs IFRS Reserves Block 2: Time Value Block 3: Risk Adj. Block 4: Contr. Serv. Margin Mortality: 65% x CIA 8692 M Ns N 1/e x Same (PPM BE) n/a Same (PPM MfAD) Int. Rates: 4.1% 54bps (Padded rate is 3.47%) n/a 2.97% none Lapse: 1%, 7%, 5% for life (at EOY) 12.5% x sign[csv - res(no PAD)], use net res Same (PPM BE) n/a Same (PPM MfAD) Unwinding over the life of the contract (6 years) Expense: Per Policy (BOY) Acquisition Year 1: $16 1% Year 1: $12 n/a Same (PPM MfAD) Maint Year 1+: $4 1% Year 1+: $36 n/a Same (PPM MfAD) Inflation 1.5% none Same (PPM BE) n/a none 13
IFRS 4 P2 WL Insurance Liability 12, 1, 8, 6, 4, 2, 31Dec212 215 218 221 224 227 23 233 236 239 242 245 248 251 254 257 26 263 266 269 272 Insurance Contract Liability PPM Insurance Contract Liability -2, 14
IFRS 4 P2 WL Required Capital 1,4 1,2 1, 8 6 4 2 269 31Dec212 215 218 221 224 227 23 233 236 239 242 245 248 251 254 257 26 263 266 272 Required Capital (2% Target Ratio) PPM Required Capital (2% Target Ratio) 15
IFRS 4 P2 WL Total Balance Sheet Requirement 12, 1, 8, 6, 4, 2, Total Balance Sheet approach (Required Capital + Reserve) PPM Total Balance Sheet approach (Required Capital + Reserve) -2, 31Dec212 215 218 221 224 227 23 233 236 239 242 245 248 251 254 257 26 263 266 269 272 16
IFRS 4 P2 WL Statement Profits 45 4 35 3 25 2 15 1 5 215 218 221 224 227 23 233 236 239 242 245 248 251 254 257 26 263 266 269 IFRS Total Statement Profit excluding tax PPM Total Statement Profit excluding tax 17
IFRS 4 P2 WL Contributions to Free Surplus & ROI 2 1-1 -2 31Dec212 215 218 221 224 227 23 233 236 239 242 245 248 251 254 257 26 263 266 269 272 IRR (on CTFS) - 3years -3 IFRS 9.7% Need 5.5% increase in prem for 12% PPM 12.% -4-5 -6 Contribution to free surplus [CTFS] PPM Contribution to free surplus [CTFS] -7 18
IFRS 4 P2 WL Free Surplus 1, 8, 6, 4, 2, 31Dec212 215 218 221 224 227 23 233 236 239 242 245 248 251 254 257 26 263 266 269 272 Free surplus PPM Free surplus (2,) 19
Single Premium Immediate Annuity (SPIA) Male age 65 PPM Reserves IFRS Reserves Best Estimates PADs Block 1: Expected CFs Block 2: Time Value Block 3: Risk Adj. Block 4: Contr. Serv. Margin Mortality: 9% x IAM83 Male 5% Same (as PPM Best Estimate) n/a Same (as PPM MfAD) Improvement: 1% to att age 9 and grading to % by att age 1 1% to att age 9 and then grading to % by att age 1 Int. Rates: 4.1% 54bps (Padded rate is 3.47%) n/a 2.97% none Lapse: n/a n/a Same (as PPM Best Estimate) n/a Same (as PPM MfAD) Expense: Per Policy (BOY) Acquisition Year 1: $16 1% Year 1: $12 n/a Same (as PPM MfAD) Maint Year 1+: $4 1% Year 1+: $36 n/a Same (as PPM MfAD) Inflation 1.5% none Same (as PPM Best Estimate) n/a none Unwinding over the life of the contract with Unpadded decrements 2
IFRS 4 P2 SPIA Insurance Liability 12, 1, 8, Insurance Contract Liability PPM Insurance Contract Liability 6, 4, 2, 21
IFRS 4 P2 SPIA Required Capital 4,5 4, 3,5 3, Required Capital (2% Target Ratio) PPM Required Capital (2% Target Ratio) 2,5 2, 1,5 1, 5 22
IFRS 4 P2 SPIA Total Balance Sheet Requirement 12, 1, 8, Total Balance Sheet approach (Required Capital + Reserve) PPM Total Balance Sheet approach (Required Capital + Reserve) 6, 4, 2, 23
IFRS 4 P2 SPIA Statement Profits 2, 1, (1,) (2,) (3,) (4,) IFRS Total Statement Profit excluding tax PPM Total Statement Profit excluding tax (5,) 24
IFRS 4 P2 SPIA Contributions to Free Surplus & ROI 2, -2, -4, IRR (on CTFS) IFRS 7.8% Need 1.5% decrease in annuity payments for 9.7% PPM 9.7% -6, -8, -1, Contribution to free surplus [CTFS] PPM Contribution to free surplus [CTFS] 25
IFRS 4 P2 SPIA Free Surplus 1, 8, 6, 4, 2, 31Dec212 215 218 221 224 227 23 233 236 239 242 245 248 251 254 257 26 263 266 269 272 Free surplus PPM Free surplus (2,) 26
IFRS 4 P2 SPIA Statement of Comprehensive Income IFRS 4 P2 Liability Measurement IFRS 4 P1 Presentation of the Statement of Comprehensive Income 213 214 215 216 217 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Premium Income 1, - - - - Net Investment Income 4,126 3,87 3,685 3,557 3,423 Total Revenue 14,126 3,87 3,685 3,557 3,423 Gross Policy Benefits (6,78) (6,78) (6,78) (6,78) (6,78) Changes in Provision for Future Policy Benefits (99,216) 3,873 3,989 4,18 4,23 Net Policy Benefits (15,996) (2,97) (2,791) (2,672) (2,55) Commissions (4,) General Expenses (2) (41) (41) (42) (42) IIT and premium tax Total Operating Expenses (4,2) (41) (41) (42) (42) Income Before Income Taxes (6,69) 859 852 843 831 Income Tax Expense 1,821 (258) (256) (253) (249) Net Income (4,249) 61 597 59 582 Other Comprehensive Income (net of taxes) Total Comprehensive Income (4,249) 61 597 59 582 27
IFRS 4 P2 SPIA Proposed Earned Premium Presentation IFRS 4 P2 Liability Measurement Proposed Earned Premium presentation under IFRS 4 P2 213 214 215 216 217 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Insurance Contract Revenue 7,92 6,926 6,93 6,934 6,938 Claims and Benefits Incurred (6,78) (6,78) (6,78) (6,78) (6,78) Loss incurred on initial recognition (7,14) Repayments of Investment Components Recognized Acquisition Costs (31) (153) (157) (162) (167) Other Expenses (8) (41) (41) (42) (42) Changes in estimates of future CFs Underwriting Result (Gross Margin) (7,182) (47) (48) (49) (51) Investment Income 4,126 3,87 3,685 3,557 3,423 Interest on Insurance Liability (3,12) (2,9) (2,784) (2,664) (2,541) Profit or Loss (6,68) 859 852 843 831 Corporate Tax on Profit or Loss 1,82 (258) (256) (253) (249) Net Income (4,248) 61 597 59 582 Changes in Ins Contract liability due to discount rate Fair Value Movements in FVOCI assets Other Comprehensive Income (net of taxes) Total Comprehensive Income (4,248) 61 597 59 582 Breakdown of Insurance Contract Revenue 213 214 215 216 217 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Expected benefits (latest estimates) 6,78 6,78 6,78 6,78 6,78 Acquisition Costs Recognized 31 153 157 162 167 Expected Other Attributable Expenses (latest estimates) 36 37 37 38 38 Contractual Service Margin Recognized Release of Risk Adjustment (34) (43) (44) (45) (47) Insurance Contract Revenue 7,92 6,926 6,93 6,934 6,938 28
IFRS 4 P2 SPIA Insurance Contract Revenue vs Premium Income 12, 1, Premium Income Insurance Contract Revenue 8, 6, 4, 2, - 213 214 215 216 217 218 219 22 221 222 223 224 225 226 227 228 229 23 231 232 233 234 235 236 237 238 239 24 241 242 29