IFRS and Solvency* PD-10 2008-08-22 *connectedthinking
Agenda/Contents 1. Abbreviations 2. Where are we? 3. What does it mean to me? a. IFRS 4 Phase I b. IFRS 4 Phase II
Abbreviations AcSB: Accounting Standards Board (Canadian Body) IASB: International Accounting Standards Board IFRS: International Financial Reporting Standards IAS: International Accounting Standards (preceded IFRS) IAA: International Actuarial Association CGAAP: Canadian GAAP
Where are we? Canadian Implementation Schedule More than 100 countries require, permit, or are converging to IFRS. All major capital markets changing even the US? IFRS Converging US GAAP Page 4
Where are we? Canadian Implementation Schedule February 13, 2008 AcSB announce the adoption of IFRS - Effective January 1, 2011 Adoption is on two fronts: - IFRS as defined at January 1, 2007 to be adopted into CGAAP - Any changes to IFRS between Jan 1,2007 and Jan 1, 2011 will be brought into CGAAP through the issuance of corresponding exposure draft Page 5
Canadian Implementation Schedule IFRS is now CGAAP for Publicly Accountable Enterprises starting 2011 IFRS Standard 4 (IFRS 4) pertains to insurance accounting Problem is that IFRS is not yet fully defined Page 6
Canadian Implementation Schedule IFRS 4 is one that is not yet fully defined - IFRS 4 Phase 1 is only an interim standard and pertains to the definition of an insurance contract - IFRS 4 Phase 2 pertains to measurement and is still debated - IFRS 4 is applicable to all entities who issue insurance contracts not just insurers Page 7
Canadian Implementation Schedule Impact of adopting IFRS Today IFRS Financial Statements Issued 2008 2009 2010 2011 2012 2013 2011 Financial Statements will include: 2011-12-31 Balance Sheet 2011 Income Statement 2010-12-31 Balance Sheet 2010 Income Statement 2009-12-31 Balance Sheet Page 8
Canadian Implementation Schedule Impact of adopting IFRS for Insurance Companies Solvency II IFRS 4 Phase 2 Financial Statements Issued Today IFRS 4 Phase 1 Financial Statements Issued 2008 2009 2010 2011 2012 2013 2011 Financial Statements will include: 2011-12-31 Balance Sheet 2011 Income Statement 2010-12-31 Balance Sheet 2010 Income Statement 2009-12-31 Balance Sheet Q1 2001 will be first statement under IFRS with comparatives Page 9
Canadian Implementation Schedule Basis of Presentation Current CGAAP IFRS 4 Phase 1 IFRS 4 Phase2 2009 Balance Sheet X X 2010 Income Statement X X 2010 Balance Sheet X X X 2011 Income Statement X X 2011 Balance Sheet X X 2012 Income Statement X 2012 Balance Sheet X Page 10
What does it mean to me? IFRS Philosophy Insurance Contract: Definition ( IFRS 4 Phase I) Decisions to be made for Phase I Insurance Contract: Measurement ( IFRS 4 Phase II ) Decisions to be made for Phase II
IFRS Philosophy PRINCIPLE BASED - More judgment involved - More documentation required - More Notes to Financial Statements. Page 12
Definition of Insurance Contract IFRS 4 Phase 1 Definition of a Financial Risk: Risk of potential future change in one or more of a: 1. Specified Interest Rate 2. Financial Instrument Price 3. Index of prices or rate 4. Credit rating or credit index 5. Other variables including non-financial if variable not specific to a party to the contract Page 13
Definition of Insurance Contract IFRS 4 Phase 1 a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing the to compensate the policyholder if a specified uncertain future event (the insured event) adversely affect the policyholder [IFRS 4 App A] Page 14
Definition of Insurance Contract IFRS 4 Phase 1 a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing the to compensate the policyholder if a specified uncertain future event (the insured event) adversely affect the policyholder [IFRS 4 App A] Insurance Risk is any risk other than Financial Risk Page 15
Definition of Insurance Contract IFRS 4 Phase 1 a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing the to compensate the policyholder if a specified uncertain future event (the insured event) adversely affect the policyholder [IFRS 4 App A] result in the payment of significant additional benefits in any scenario, excluding scenarios that lack commercial substance Page 16
Definition of Insurance Contract IFRS 4 Phase 1 a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing the to compensate the policyholder if a specified uncertain future event (the insured event) adversely affect the policyholder [IFRS 4 App A] At least one of: uncertainty of occurrence uncertainty of timing uncertainty of quantum Page 17
Definition of Insurance Contract IFRS 4 Phase 1 a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing the to compensate the policyholder if a specified uncertain future event (the insured event) adversely affect the policyholder [IFRS 4 App A] Effective March 2011, a 2009 Balance sheet will have to be prepared in compliance with this definition Page 18
Decisions to be made for IFRS Phase I Page 19
Decisions to be made for IFRS Phase I Split Contract Page 20
Decisions to be made for IFRS Phase I Example: Auto Insurance uncertainty of occurrence uncertainty of timing uncertainty of quantum Page 21
Decisions to be made for IFRS Phase I Example: A property management company undertakes to maintain and repair the properties owned by an investment company for a period of 5 years for a fixed fee uncertainty of occurrence uncertainty of timing uncertainty of quantum (will a repair be required?) (if yes when?) (extent of damage?) Page 22
Decisions to be made for IFRS Phase I Example: Insurance Company issues a contract compensating an Ice Cream distributor if the summer is on average below 20C. Definition of a Financial Risk: 5: Other variables including non-financial if variable not specific to a party to the contract Page 23
Decisions to be made for IFRS Phase I Other: Policy where deductible equal limits? Fronting? Self insured Retentions? Page 24
Decisions to be made for IFRS Phase I Possible outcome: IFRS Scope OSFI +Scope Current Policy Liabilities Scope Page 25
Insurance Contract: Measurement ( IFRS 4 Phase II ) IFRS 4 Phase II is a work in progress - Expected delivery date: late 2009 - Expected effective date: 2012 or beyond Until pronounced current Canadian rules apply Page 26
Insurance Contract: Measurement ( IFRS 4 Phase II ) A contract will be measured and its impact on the financial statements recognized when the policy is issued Page 27
Insurance Contract: Measurement ( IFRS 4 Phase II ) What is to be expected from Phase II Contract value includes time value of money Margins for uncertainty are expected No linkage of assets and liabilities Page 28
Insurance Contract: Measurement ( IFRS 4 Phase II ) Valuation Basis: IASB started with several possible valuation methods: Amortised cost; Fair value; Entry value; Current exit value Page 29
Insurance Contract: Measurement ( IFRS 4 Phase II ) Valuation Basis currently favoured: Current exit value Amount the insurer would expect to have to pay today to another entity if it transferred all its remaining contractual rights and obligations immediately to that entity excluding any payment for other rights and obligations. Page 30
Insurance Contract: Measurement ( IFRS 4 Phase II ) Recognized Profit at time of issue: PV (Policy Inflow Policy Outflow including Margins) Page 31
Insurance Contract: Measurement ( IFRS 4 Phase II ) Impact on financial statement presentation: Assets DPAC Reinsurer share of UPR Reinsurer share of unpaid claim Liabilities Unearned Premium Unearned Commission Premium deficiency Unpaid Claim Reinsurance Contracts Insurance Contracts Page 32
Insurance Contract: Measurement ( IFRS 4 Phase II ) Impact on financial statement presentation: Income Statement Insurance Premium revenue Fee income Investment income Net income Claims Expenses Profit before tax Tax Profit XXX XXX XXX XXX XXX XXX XXX XXX XXX Page 33
Insurance Contract: Measurement ( IFRS 4 Phase II ) IFRS is principle based and the IASB will not issue specific guidance. Do not expect IASB to issue guidance on margins for example. This is why Note Disclosure will become so important (50 to 100% increase in length) Page 34
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