Transcript Slide 1
IFRS4 Insurance Contracts
Phase I
Topical Actuarial Issues, 1.4.2004, Prague
Jiří Fialka
Agenda
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
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]