Transcript Slide 1

IFRS4 Insurance Contracts
Phase I
Topical Actuarial Issues, 1.4.2004, Prague
Jiří Fialka
Agenda
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Reasons for issuing the standard
Approach
Difficulties
Scope of IFRS4
Solutions for Phase I
Changes from ED5 to IFRS4
Outlook
Reasons for issuing the standard
 No IFRS on insurance contracts
 Diverse current practices
 IFRS intended to form EU accounting basis
from 2005
Approach
Fair value approach proposed in DSOP, but
because „not feasible for the IASB to complete
its insurance project .. in 2005“
IASB decided to
 Make limited improvements to accounting
practices
 without requiring major changes that may
need to be reversed, and
 require detailed disclosure.
Difficulties – What is fair value?
 No observable market evidence about fair
value of insurance liabilities
 Existing practices contradictory to other IFRS
standards and even framework
 To get „calculated fair value“, number of
theoretical and implementational issues need
to be resolved
 Market value margins, Embedded derivatives,
Market/Entity specific data
Difficulties – Who is against fair
value?
Powerful lobby against the new standard
 „North American Insurers“
 But Canadian and Mexican insurers did not join
the initiative
 Is US GAAP the accumulated wisdom?
 European insurers
 Japanese insurers
 Number of them might be virtually insolvent, if
realistic valuation introduced
Difficulties – IFRS4/IAS39 mismatch
 Most commentators criticised the
inconsistencies between the measurement of
assets (IAS39) and liabilities (existing
insurance accounting) – mismatch
 Various solutions considered
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Relax tainting rules on HTM assets
Create new asset category
Adjust measurement of liabilities
Shadow accounting
Scope of IFRS4
IFRS4 is applicable to:
 Issued (re)insurance contracts and held
reinsurance contracts
 Issued financial instruments with a discretionary
participation feature (!)
IFRS4 is not applicable to:
 Product warranties issued directly by a
manufacturer, dealer or retailer
 Direct insurance contracts that the entity holds
(policyholder accounting)
Scope – definition of insurance
contract
“An insurance contract is a contract under
which one party (the insurer) accepts
significant insurance risk from another party
(the policyholder) by agreeing to compensate
the policyholder or other beneficiary if a
specified uncertain event (the insured event)
adversely affects the policyholder or other
beneficiary.”
Solutions for Phase I
 To classify products as insurance or
investment
 To use current accounting practice for
insurance contracts
 To eliminate extreme features contradicting
framework
 To allow some improvements
 To prevent divergence from framework
 To introduce Liability adequacy test
 To require disclosure
Solutions: To classify products as
insurance or investment
3 groups of products:
 Insurance products – subject to IFRS4
 Investment contracts with discretionary
participating features – subject to IFRS4, subject
to minimum calculated by IAS39
 Other investment contracts – subject to IAS39
 IAS39 Demand Deposit Floor, limited DAC
Discretionary participating features (DPF)
 Contractual right to receive additional payments
 Likely to be significant portion of total payments,
 Amount or timing at the discretion of the insurer, and
 Based on performance of the company (assets return or
other criteria)
Solutions: To use current accounting
practice for insurance contracts
 What are current accounting practices?
 Local or consolidation?
 Could different accounting policies be
consolidated?
 Are all CEE practices compliant?
Solutions: To eliminate extreme
features contradicting framework
 Catastrophe and equalization provisions are
not liabilities
 If currently recognized liabilities are not
adequate, additional liability should be
provided for
 No offset of insurance liabilities and
reinsurance assets
Solutions: To allow some
improvements
 Accounting policies for insurance contracts
may be changed if, and only if, the change
makes the financial statements more
relevant and reliable, judged by the criteria
in IAS 8
 The change need not be sufficient to achieve
full compliance with all those criteria
 When changes in the accounting policies for
insurance liabilities are made, some or all
financial assets may be reclassified into the
category measured at fair value with all
movements in the profit and loss account
Solutions: To prevent divergence
from framework
An insurer may continue to apply, but not
change to:
 Non-discounting insurance liabilities
 Do not introduce additional prudence in insurance
liabilities
 Including future investment margins in insurance
liabilities
 Measuring contractual rights to future investment
management fees
 Using non-uniform accounting policies for the
insurance liabilities and related DAC of
subsidiaries
 Recognition of future investment margins
Solutions: To introduce Liability
adequacy test
 If there is an existing liability adequacy test
using current estimates of future cash flows,
resulting in the recognition of any potential
inadequacy, IFRS4 does not impose further
requirements
 If no LAT required, IAS37 should be used
Solutions: To require disclosure 1
Explanation of reported amounts
 Accounting policies
 Material amounts of assets, liabilities, income and
expenses
 Process used to determine significant assumptions
and, when practicable, quantified disclosure of
assumptions
 Effects of changes in assumptions, showing
separately effect of each change with material
effect on financial statements
 Changes in insurance liabilities, reinsurance assets
and DAC
Solutions: To require disclosure 2
Amount, timing and uncertainty of cash flows
 Objectives in managing risks and its policies to
mitigate risk
 Terms and conditions of insurance contracts which
have a significant impact on cash flows
 Information about insurance risk including
sensitivity to key variables, concentrations of
insurance risk, details of actual claims compared
with previous estimates (10 year maximum)
 Information about interest risk and credit risk
 Sensitivity of embedded derivatives to interest
risk and credit risk
Changes from ED5 to IFRS4
 Clarified definition
 Permission to remeasure some insurance
liabilities for changes in interest rates
 Exemptions
 Liability adequacy test
 Changes in accounting policies
 Reinsurance accounting
 Disclosure
 Discussed solutions of AL mismatch
Changes from ED5 to IFRS4 Clarified definition
 Improved wording on the definition of
significant insurance risk
 Plausible scenario  Scenario with commercial
substance
 Trivial  Insignificant
 Surrender charges waived on death not
sufficient for insurance product classification
 Pure endowment is insurance, unless risk
transfer is insignificant, portfolio approach
 Investment contracts with DPF – closer
treatment to insurance contracts than in ED5
Changes from ED5 to IFRS4 - Permission
to remeasure some insurance liabilities
for changes in interest rates
 Permitted but not required
 Might be applied to some liabilities, but not to
all similar liabilities as IAS8 would otherwise
require
 Assumed use of simplified models that give
reasonable effect of interest rate changes
Changes from ED5 to IFRS4 Exemptions
 Exemptions confirmed, which resulted in
some board members dissenting from IFRS4
 Deleted sunset clause that would have made
the exemption expire in 2007
 New exemption allowing different accounting
policy for some insurance liabilities
Changes from ED5 to IFRS4 Liability adequacy test
 ALL contractual cash flows should be
considered (incl. expenses and cash flow
from embedded options and guarantees)
 Premature to specify how to treat embedded
options and guarantees
Changes from ED5 to IFRS4 Changes in accounting policies
 More general approach replaced strict
individual rules – guidance, what is more,
and what is less relevant and reliable
 Changed wording to excessive prudence
paragraph: do not introduce additional
prudence
 Rebuttable presumption that introducing
future investment margins will result in less
relevant and reliable financial statements
Changes from ED5 to IFRS4 Reinsurance accounting
 Restriction of the profit or loss recognised at
inception of the reinsurance contract was
removed
 Instead, requirement for cedant to disclose
extent to which profit or loss include gains
that arose at inception of reinsurance
contracts
Changes from ED5 to IFRS4 Disclosure
 Insurer has to make judgement calls on
emphasis and aggregation
 Insurer should disclose a sensitivity analysis
for all variables that have material effect,
including observable market prices and rates
 Disclosure includes material changes in
insurance liabilities, reinsurance assets and
DAC … as reconciliation
Changes from ED5 to IFRS4 Discussed solutions of AL mismatch
 Shadow accounting
 Recognised but unrealised gain or loss on asset
may affect the measurement of insurance
liabilities in the same way that a realised gain or
loss does … through equity
 Permission to remeasure some insurance
liabilities for changes in interest rates
 Rejected assets solutions
 Relaxing tainting rules for Held-to-maturity
portfolio
 Creating new category of „Assets Held to Back
Insurance Liabilities“
Outlook - Timetable
ED for
phase 2?
ED for
phase 1
31/12/02
Fair value disclosures
Opening
IAS
balance
sheet
31/12/03
First IAS
financial
statements
Interim
reporting?
31/12/04
Period covered in first
IAS financial
statements
31/12/05
Phase II?
31/12/06
31/12/07
Period covered in first
IAS financial
statements
SUNSET CLAUSE
Outlook – Phase II
Board decisions November 2003
 Phase II should be a high priority project
 On restarting the Board should return to a study of the basics
 Round discussions and field visits should be conducted during
exposure draft phase
 Specialised task forces should be established to assist staff
 Insurance Advisory Committee should be retained as forum for
staff to discuss higher-level issues and as convenient means of
obtaining feedback on progress
 Working group of staff experts from national standard setters
should assist staff
 Selected industry participants should make presentations to Board
on problematic issues
 Project should restart in May 2004
 Board should aim to complete exposure draft by June 2005
 Board should encourage “non insurance” parties to become more
actively involved
Discussion
 How would IFRS4 influence CEE insurance
markets?
 Only accounting rules, or change in the
business management?
Thank you for your attention!
Contact: [email protected]