Transcript IFRS for General Insurers - New Zealand Society of Actuaries

New Zealand Society of Actuaries
Financial Services Forum
27 November 2009
©2005 Deloitte & Touche LLP
IFRS: Insurance Accounting
Charles Hett
November 2009
Audit. Tax. Consulting. Actuarial. Financial Advisory
.
Agenda
Recap the Insurance Project to date
Key Features of the Phase II Framework
Issues and recent developments
What this means for NZ reporting
Implications and other
IFRS/Reporting factors
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Recap the
Insurance Project.
Insurance Accounting timeline
Thinking/Concern
IFRS
IFRS 4
Phase 1
Issues Paper
1999
IASB
IFRS
NZ
1 Jan 07
DSOP
Issued
1990s
5
July
2001
January
2005
IFRS Phase II
Development
Discussion
Paper
May’07
??
Back to the
Drawing
Board
Extended
Consultation
2007
2008+
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IFRS 4 Phase I
Temporary measure to continue until Phase II standard emerges
Life insurance
companies
Insurance & Participating Contracts – Local GAAP
Investment Contracts – IAS 39
Non-life
companies
Insurance Disclosures
NZ FRS 35
Contract
classification
NZ FRS 34
Assumptions and risk objectives
•Intangible assets
Risk concentration
Best Estimate
Analyses & Reconciliations
OCR / IBNR
UPR, DAC
Planned Margins
(recover AC)
Central Estimate
Sensitivities
Risk Margin
Claims development
Liability Adequacy
NZ ~ Little methodology change, mostly level of disclosure
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IFRS Insurance Accounting - November 2009
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Development of Phase II.
The Proposed Model
3 building blocks to measure insurance liabilities :
Explicit, unbiased, probability weighted and current estimates of the
contractual cash flows;
Current market discount rates that adjust the estimated cash flows for the
time value of money;
Margin:
Explicit - Bearing risk (a risk margin) and providing other services (a service margin)
Composite - Single margin (calibrate to premium)
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IFRS Insurance Accounting - November 2009
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Phase II – Measurement: Three Building Blocks
Estimates of future cash flows
Explicit and Current view (Balance Sheet date)
Unbiased and Probability weighted
Considerations
Not necessarily most recent information
Availability of “market” data for insurance liabilities
As consistent as possible with observed market prices
“Market consistent” vs. “Entity specific”
Complexity of possible stochastic scenarios – Looks unlikely
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IFRS Insurance Accounting - November 2009
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Phase II – Measurement: Three Building Blocks (cont’d)
Discounting
Observable market rates:
1) Timing
2) Currency
3) Liquidity
Considerations
Consistency with observable market rates
Availability of market rates for long term insurance liabilities
Does not reflect risk inherent in cash flows
Own insurer’s credit position in measuring liabilities – unlikely
Use of asset-based rates – only if directly linked to liabilities
Liquidity Premium (avoid annuity mismatching)
Further guidance – unlikely (Fair Value measurement: IAS39)
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IFRS Insurance Accounting - November 2009
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Phase II – Measurement: Three Building Blocks (cont’d)
Margins – Composite or Explicit
Composite: single margin calibrated to premium (essentially current MoS)
Risk Margin: Allow for variance and skew in underlying distribution(s)
(Uncertainty in projected cash flows)
Service Margin: The amount for servicing the contract
Considerations:
• Risk Margin methods can have very different outcomes
– Percentile Basis (~ NZ non-life margin: 75% confidence level)
– Cost of Capital (~ Solvency II)
– Economic Capital (~ Adverse Scenarios/MCEVs)
– Not a shock absorber
• Availability of “market participant” data on servicing
– “Sub-contractor” profit margin or use “entity-specific” basis
• Residual Margin: To ensure no Day 1 profits
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IFRS Insurance Accounting - November 2009
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Phase II
Key Issues.
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Other Key Issues
DAC and Revenue Recognition
Exit Price or Fulfilment Value : IAS 37
Margins
Future Premiums: Contract Boundary
½
Profit/Loss at Inception
Other Issues
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IFRS Insurance Accounting - November 2009
©2009 Deloitte, Touche Tohmatsu
Position at Mid-October 2009
• IASB
• FASB
• Initial Measurement
• Initial Measurement
– Selling should not affect measurement
– Day 1 revenue to cover acquisition costs
– AcqCosts – direct and incremental
– Contract liability based on consideration
– Prohibit DAC (No Service at PoS)
• IAS 37 approach (draft) • Current Fulfilment (CFV)
– IAS 37 influenced by Insurance Project
– Consistency with other liabilities
– No market info. => Entity based estimates
• Explicit Margins
– (Risk, Service, Residual)
– Risk/Service Margin remeasured
– Not inconsistent with IAS 37 (draft)
• Composite Margin
– Consistency with approach to Revenue
• Expense Initial Costs as incurred • Expense Initial Costs as incurred
• No Profit/Loss at Inception
• No Profit/Loss at Inception
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Proposed Models – Mid October 2009
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IFRS Insurance Accounting - November 2009
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Proposed Models – Mid October 2009
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IFRS Insurance Accounting - November 2009
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Proposed Models – Mid October 2009
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IFRS Insurance Accounting - November 2009
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Recent
Developments.
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Late October 2009
Unwelcome Convergence!
• Revenue recognition is paramount
• Acquisition Costs expensed as incurred
• IASB agreed margins calibrate to full contract
premium (after PoS)
• FASB agreed explicit margin for Risk (Uncertainty)
• Revisiting Policyholder Accounting
– Insurance Policies held by Customers (as assets) – reconsider, no decision
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Proposed Models – Before 28 October 2009
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Proposed Models – After 28 October 2009
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Other Issues
Yet to be Discussed/Resolved
Policyholder Accounting
Policyholder Participation Rights
Credit Characteristics of insurance liabilities
Unbundling
UPR, Recognition, IAS 39
Disclosure
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What This Means.
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Timetable (Updated 18 Nov)
Next two years
• Exposure Draft to be issued January April 2010
• A joint IASB/FASB Exposure Draft
• Comment period to May August 2010
• Standard to be in place by June 2011
• Substantial IASB membership changes July 2011
IASB/FASB appear to be allocating resource
to ensure this timetable can be met
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Implications for New Zealand
• Many similarities to NZ MoS (composite margin)
• Some differences:
• Explicit assessment of Risk & Service margins
• Residual Margin may not be remeasured
• No income to cover acquisition costs (No DAC, -’ve PL)
• No mention of Tax (anywhere) => Gross of Tax liabilities and
margins
• Reinsurance treated explicitly (as current)
• Financial Advice at Point of Sale a service?
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Business Implications for the Insurance Industry
Need to review impacts on:
Systems, data,
models & processes
External reporting, disclosures
and financial communication
Experience Monitoring
Assumption setting
Management reporting and
budgetting
Product pricing and design
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IFRS
Phase II
Regulatory Reporting
Asset and Liability matching
Capital Management
Tax and Tax Planning
Value Creation
IFRS Insurance Accounting - November 2009
©2009 Deloitte, Touche Tohmatsu
Three key areas to consider
Valuation
Increased reliance on
actuarial models
Analysis to derive explicit
margins ~ risk margin
Product Development
Reporting incentives to
structure products
(contract boundaries)
Assumption changes =>
not Re-spread ~ volatility
Higher profit volatility
Use of Reinsurance
Yet more disclosure?
Impact of acquisition
cost reporting loss on
distribution costs
Risk Management
Risks and Controls for
valuation models
Managing market risk to
mitigate profit volatility
(closer link between risk
management and reporting)
Risk Margins  Risk
Management
IFRS 4 Phase II will likely be the chance to move more fully to a gross
of tax profit reporting requirement (separate IAS 12 tax treatment)
Overall a more explicit risk based reporting requirement should lead
to stronger links between reported profits, risk management,
reinsurance and investment strategy and capital requirements
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©2009 Deloitte Touche Tohmatsu.
Contacts
Charles Hett
Head of Actuarial Services
+64 4 470 3866
+64 21 616 040
[email protected]
Margaret Cantwell
Manager - Actuarial Services
+64 4 470 3537
+64 21 267 0975
[email protected]
Klaas Stijnen
Manager - Actuarial Services
+64 4 470 3660
+64 (0)21 273 0303
[email protected]
©2005 Deloitte & Touche LLP
This presentation and the accompanying handouts cover topics only in general terms and are intended to
give a wide audience an outline understanding of certain issues relating to Phase II of the IASB insurance
project, and therefore cannot be relied on to cover specific situations; applications of the principles set out
will depend on the particular circumstances involved. Furthermore, responses given in the presentation to
questions are based on only an outline understanding of the facts and circumstances of the cases and
therefore do not form an appropriate substitute for considered specific advice tailored to your
circumstances. We recommend that you obtain professional advice before acting or refraining from acting
on any of its contents. We would be pleased to advise you on the application of the principles
demonstrated at the seminar and other matters to your specific circumstances but in the absence of such
specific advice cannot be responsible or liable.
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IFRS Insurance Accounting - November 2009
©2009 Deloitte, Touche Tohmatsu
New Zealand Society of Actuaries
Financial Services Forum
27 November 2009
©2005 Deloitte & Touche LLP