Transcript Title (Arial bold 30 point) second line title

IFRS 4 Phase II Insurance contracts
Key Issues for Western Europe and
Implementation Considerations
Christine Holmes, Partner, The Netherlands
Key Issues for Western Europe
Key accounting impacts of the Exposure Draft
Measurement model
The accounting changes set out in the recently published Exposure Draft will fundamentally change
the presentation and measurement of insurance contracts and are a significant departure from
Phase I and current local GAAPs
The new rules introduce a single measurement model that focuses on:
Measurement
►
a current assessment of the amount, timing and uncertainty of future cash flows
►
a ‘building block’ approach to measuring insurance liabilities
The ‘building block’ approach generates information about the changes in the
insurance liability and its performance during the period
Premium
Residual
margin
Discounting
Expected
future cash
flows
Risk
adjustment
Insurance
contract liabilities
Present value of fulfilment cash flows
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Deferred income
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Short duration
contracts
Unallocated
premium reserve
for pre-claims
liability
View from Western Europe
Measurement model
►
Discount rate
►
►
►
►
Most prefer a rate equivalent to Solvency II but additional
guidance needed on illiquidity premium
Concerned about volatility in earnings
Growing support for “locked-in” rate
Risk Adjustment
►
►
►
Provides useful information
There should be no restrictions on calculation method and no
requirement for disclosure of confidence level
Diversification should be permitted at a higher level
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View from Western Europe
Measurement model (continued)
►
Residual margin
►
►
►
Should not be locked-in
Should be used as a “absorber”
Modified approach for Short-Duration contracts
►
►
►
Generally support an alternative approach
Needs further simplification
Should not be mandatory
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Key accounting impacts of the Exposure Draft
Other key proposals
Unbundling
►
Unbundling is obligatory under certain conditions
►
The ED provides specific examples of applicability e.g. Unit Linked
►
Margin based approach will require new KPIs such as change in risk margin,
release of residual margin and differences between actual and expected cash
flows
►
Roll forward of liabilities - qualitative and quantitative disclosure of amount,
frequency and uncertainty of cashflows (with particular attention to reconciliation
between opening and closing balances) and assumptions used in measurement
►
Contracts in force prior to the date of transition are treated separately
Presentation
Disclosures
Transition
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View from Western Europe
Other key proposals
►
Unbundling
►
►
►
More guidance needed on “closely related” and principles
Strong disagreement from UK, France and Netherlands –
contracts should be valued as a whole
Presentation
►
►
Prefer traditional premiums and claims presentation
Would support margin approach as a disclosure only
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View from Western Europe
Other key proposals (continued)
►
Disclosures
►
►
Proposals lead to increase in volume and need a rethink
Transition
►
►
Generally disagree with no residual margin on transition
Alternative approaches are being investigated
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Implementation considerations
Main impacts for insurers
The overall view
The impact on business processes and systems will be significant, requiring careful consideration
and comprehensive implementation programmes. The main impacts can be analyzed against the
following areas:
INSURANCE CONTRACT MEASUREMENT
INSURANCE CONTRACT MEASUREMENT
Models must be updated and upgraded to introduce flexibility
e.g.
Completeness, depth and granularity of data e.g.
► Rules for portfolio definition and availability of models for
► SpecificINSURANCE
information CONTRACT
at inception MEASUREMENT
and information on
Governance
buildingIIblock
contract►boundaries
Focus on training to develop
skills in depth.
Retain Solvency
projectapproach.
expertise. Under the ED a portfolios can be
INSURANCE
CONTRACT
MEASUREMENT
defined as an individual contract, cohort or portfolios of
► Information to update portfolios and assumptions at
►
Adoption of new procedures and assumptions, design of specific
similar risks
reporting
dates
INSURANCE
CONTRACT PRESENTATION
ANDalignment
DISCLOSURES
controls and
with Solvency II
Systems
INSURANCE CONTRACT MEASUREMENT
► Differences in discount rates, cash flows and risk margins
► Information
on
policyholder
behaviour
to
measure
►
Allocation of activities and assessment of resources.
►
Governance frameworks and IFRS specific policies towith
ensure
valuation
are
Solvency
II assumptions
options ►and
guarantees
Data
Processes
and
Business
Education
and awareness INSURANCE
training
to explain
the changes
and the new KPIs
CONTRACT
PRESENTATION
AND DISCLOSURES
consistently applied and auditable. Increased focus on data reconciliation and control
► Differences in cashflows between Phase II and Solvency II
► Cashflows and assumptions by portfolio
and
cohort
►
Theby
content
and structure
of data captured from business units to
Modelling
► Stochastic
models
to model
behaviour
within portfolio
support Group statutory
and regulatory
reporting
willpolicyholder
change
INSURANCE CONTRACT PRESENTATION AND DISCLOSURES
dynamically
major changes to group financial
► Data to support analysis and disclosures significantly and require
Transparent end to end audit trail
for primary financial
statements
and disclosures with robust
consolidation
and reporting
systems
controls over financial reporting. Management information and KPIs which make performance
INSURANCE CONTRACT PRESENTATION AND
INSURANCE CONTRACT
transparentPRESENTATION AND
DISCLOSURES
DISCLOSURES
►
Changes to the primary financial statements and disclosures
►
Investment in data warehousing, data quality, control and
will impact the general ledger and chart of accounts at group
management to provide increased granularity to support
and business unit level
additional KPIs and disclosures
►
People and Organisation
The impetus to understand and address Phase II is made all the more urgent as many insurers are
currently investing significantly in upgrading systems and processes to implement Solvency II.
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Main impacts for insurers
Focus on systems, applications and modelling
SOURCE SYSTEMS
Policy Admin Systems
Life
Non Life
MAIN IMPACTS
Asset Data
Other Systems
Investment
Management
Systems
Commissions
Reinsurance
Claims
Pricing
Underwriting
….
Cost allocations
External data /
third party data
providers
11
1
22
1
2
Data Warehouse
33
2
3
Actuarial Systems
DeterministicModels
Stochastic models
Economic Scenario
Generator
Other Valuation tools
44
3
4
Accounting / Reporting Systems
General Ledger and
Consolidation
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Reporting Tools
Presentation title
55
4
Granular
data to
modelling
of homogeneous
Models
capable
ofsupport
projecting
cashflows
at portfolio level
portfolios
andwithin
withinportfolio,
portfolioincluding
by inception
date and
and
by cohort
stochastic
duration where required
modelling
Historical amortization of residual margin per cohort
Avaialbility
and appropriate
non-marketcash
data flows
at thefor
Models
able of
to market
distinguish
Update chart of accounts and identify potential
appropriate
level to update assumptions
use
in projections
interfaces with systems in order to manage new data
Auditability of historical cashflow projections regarding
technical, operational and financial assumptions
Enrichment
product consolidation
records for compliance
with new
Update
groupoffinancial
and reporting
Determination of residual margin and its amortization
principles
contract
boundary,
unbundling)
systems
to(e.g.
support
changes
to the content
and structure
Ensure
governance
rules used
to build homogeneous
of
data captured
fromonbusiness
units
portfolios
Claims data for homogeneous risks, particularly in
Manage changes in assumptions between Solvency II
situationstools
where
claims
outsourced
to third
Reporting
and
data handling
marts to is
support
analysis
and
and IFRS 4
parties
reconciliation of results and preparation of disclosures
Structured management of information needed for
disclosures
Cost allocations to provide outputs at portfolio level.
Models able to recalculate liabilities for different
Allocation
rules
updated
to exclude during
non-incremental
Solution
todepending
support
double
the transition
cashflows
on thereporting
boundary
acquisition costs and overheads from renewal costs
period
Main impacts for insurers
Broader business implications
Product design
and pricing
Changes to product features due to changes in profit signatures
KPIs and
performance
measurement
Internal and external KPIs / Management Information will need to change to
clearly communicate the levers available to manage and control business
performance
External
stakeholder
management
Clear and transparent external communications that help external
stakeholders navigate their way through the changes to regulatory and
statutory reporting
Business
planning and
forecasting
Business planning and forecasting models will need to be brought into line
with the new external reporting basis
Investment
appraisal
Models for evaluating potential investments and acquisitions will need
updating to align to the new measurements basis
Executive
incentive
schemes
The earnings based component of executive incentive compensation
schemes will also need to be redesigned for the new environment
Distribution
Allowable acquisition costs and hence residual margin will vary depending
on the distribution model and related cost structure
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Managing the project
Next steps
Working back from adoption in 2013/2014 and comparatives and opening balance sheet for 2012
/2013, Insurers need to initiate their programmes now. Next steps should include:
Business
effort
Assess broader
impacts and
implications for
underlying
processes, systems
and data
Spread awareness
and identify
synergies with inflight projects
Plan and mobilise
IFRS programme
Evaluate the
financial impact
on the business
Provide feedback to the
IASB
Due date: 30 November
Timing
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Project planning
There is a window of opportunity to understand potential synergies with Solvency II and to adapt or
leverage existing programmes to manage the change in the most cost effective manner
Synergies with other
projects
Identify the potential for alignment between existing Solvency II programmes and
IFRS 4 Phase II requirements and exploit the systems and organizational
synergies of these parallel projects to save costs
Project implications
Assess how IFRS 4 Phase II would affect reported numbers along with the
impact on systems and operations, including resource levels, required skill-sets
and finance function organization
Finance and Business
functions
Identify, as early as possible, the major impacts across the Finance and Business
functions, and understand the key challenges
Industrialize
processes
Evaluate whether investing in data management, modeling and reporting
systems to automate through a common process the production of local
regulatory, Solvency II and IFRS 4 Phase II data and reports is likely to be lower
risk and more cost efficient than tactical approaches and workarounds
People
Assess the resources required including any skills and capability gaps and put in
place training and recruitment programs at an early stage
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IFRS 4 Phase II Gap Analysis and Roadmap
Main areas
Deliverables
Purpose
Steps
Outline project approach
Accounting Gap
Assessment
Assess the Exposure Draft
requirements vs. current
local GAAP to ensure the
accounting gaps reflect the
organisation, its products
and markets
Diagnostic
Identify material gaps and
the capability which will need
to be developed to deliver
the requirements of the
Exposure Draft
Gap Analysis
Further analysis and
validation of the gaps from
an end-to-end process view,
to group the underlying
issues into logical
workstreams and to extend
the analysis to include
broader business impacts
Validated gap analysis and
definition of key activities
required to deliver the
various changes
Roadmap
Prioritize conversion
activities and set an
implementation roadmap
including project structure,
milestones, deliverables,
resources & dependencies
on existing programmes
Overall implementation plan
highlighting synergies with
other programmes and
resourcing
Accounting, reporting and
disclosure impacts
Capability gaps analysed
between data, processes,
actuarial modeling and
systems issues
Accounting
Data
Business / Governance
Project structure and dependencies
on other programmes
Financial reporting
Modeling
Information Technology /
Actuarial Models
Project plan and key milestones
Actuarial
Processes
General Ledger and Consolidation
End-to-end process owners
Tax
Finance systems
People
Project costs & resources
Synergies with Solvency II / IFRS 9
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