Transcript Canadian Institute of Actuaries L’Institut canadien des
Canadian Institute of Actuaries L’Institut canadien des actuaires
2008 Annual Meeting ● Assemblée annuelle 2008 Québec
Does IASB matter for Group Insurance?
Annual General Meeting IP 36 June 19, 2008 David Congram
IFRS – Moving Towards a Global Standard
Fixed deadlines for IFRS implementation Convergence plans US-GAAP - Convergence intended No intent to converge with IFRS
Agenda • Primary attributes of IFRS • Timetables • Phase I • Phase II • Implications • Meeting the deadline
Primary Attributes of IFRS
• Insurance to be subject to the same general principles as other financial services firms • Principles-based approach with additional guidance • Consistency of treatment between insurance, investment management and banking products • Proposal outlined in Phase II – Single measurement model for Life and non-life – Prospective valuation – Present Value of all future cash flows – Paradigm of Current exit value - transfer value
Publicly Accountable Enterprises Canadian Owned Foreign Owned • Life • P&C • Reinsurers • Credit Union/Cooper atives • Non Profit Member owned • Government Owned Insurers IFRS - AcSB IFRS – AcSB IFRS – SME DRAC PSAB - GAAP IFRS – IASB IFRS – EU US – GAAP IFRS - AUST OSFI has designated that Federally Regulated Financial Institutions as PAE’s
AcSB’s, CSA and OSFI External Requirements Qualitative disclosures of differences (‘08 annual report) Quantify effects of changeover to IFRS (‘09 annual report) Prepare comparative figures under IFRS
2008
OSFI progress report
2009
OSFI progress report OSFI progress report
2010
OSFI progress report
2011
OSFI progress report
AcSB’s progress review Data capture for Comparatives in 2011 March 2011 first interim reporting quarter end with disclosures
International Insurance Project Time table
IASB IASC Insurance Project Steering Committee Advisory Committee Insurance Working Group Start Issues Paper DSOP Phase I ED 5 IFRS 4 Phase II Phase II 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Split of Project Discussion Paper ED X Discussion With FASB Application
Understanding IFRS 1
• Mandatory guidance for first time preparers • First financial statement of unreserved compliance with IFRS • Apply IFRS at the reporting date retrospectively • Date of transition is first balance sheet • Recognize and de-recognize • Mandatory and optional exceptions from retrospective application.
IFRS Phase I --> Phase II
Assets IAS 39 for Invested Assets Liabilities All
Insurance Contracts
and Investment Contracts with Discretionary Participation Features Other
Investment Contracts
and All Service Contracts IFRS 4 Phase II 2013?
IAS 39 and some aspects in IAS 32 and IAS 18
Where does Group Insurance Fit?
Insured Business Pooling ASO
Review IAA Classification Paper - Highlights Significant insurance risk Yes Insurance Split Host from Embedded Derivative and Deposit Host IFRS 4 Measurement Yes Create financial assets or liabilities?
No Yes Contains Discretionary Participation Feature?
Split Embedded Derivative Separate Deposit Component No No IAS 18 Service Contract Measurement Service Element Contains service elements?
Financial Instrument IAS 39 Financial Instrument Measurement
PRIMARY PROVISIONS OF IFRS 4 • Applies to Insurance Contracts—must have “significant insurance risk” • Insurance contracts accounted under local GAAP, with certain restrictions (generally deferral and matching) • Embedded derivatives at fair value (similar to FAS 133 treatment) • Liability adequacy test • Insurance contract liabilities may be adjusted for changes in interest rates
IAS 32 & 39 APPLY TO MOST ASSETS AND INVESTMENT CONTRACTS • Most other contracts held by insurance companies are investment contracts (do not meet definition of insurance) • Held as amortized cost if considered “held to maturity” otherwise at fair value (with demand deposit floor)
SERVICE CONTRACTS • Generally, contracts that are neither insurance contracts or investment contracts are service contracts – Claim service contracts (ASOs) – Self insurance of first layer of group coverage • Service component of an investment contract is to be separated • Covered by IAS 18
In Phase 1
ASO will likely be measured under Service Contracts Insurance Contract measurement through IFRS 4 will remain on the existing accounting model
IAA Insurance Actuarial Practice Guidelines
• • • • • • • IASP 2 Actuarial Practice IASP 3 Classification of Contracts IASP 4 Measurement IASP 5 Current Estimates IASP 6 Liability Adequacy Testing IASP 7 Discretionary Participation Features IASP 8 Changes in Accounting Policies Introduced July 25, 2005 • • IASP 9 Accounting for Reinsurance Contracts IASP 10 Embedded Derivatives and Derivatives Introduced June 11, 2007
IFRS – Implementation 2010/11
• Assets – S 3855 re – designation allowed under IFRS 1 • Investment Contracts – Amortized Cost – Fair Value • Service Contracts – Percentage of completion • Insurance Contracts – Adjusted segments for CALM • Tax implications Conclusion Impact will depend on company’s position and mix of business
Earnings Phase II
• The “3 building blocks”
1.
Current unbiased probability-weighted estimates of future cash flows (ie an expected value approach) 2.
Current market discount rates that adjust the estimated future cash flows for the time value of money 3.
• •
An explicit unbiased estimate of the margin that market participants require for Bearing risk (a risk margin); and Providing other services (a service margin)
Unearned premiums • Instead of recognizing premiums over the term of the policy: – All premiums and acquisition costs recognized immediately - no unearned premium liability – Actuarial liabilities will include estimated future claims and other cash flows for the remaining policy period • As most policies operate on a 30 day billing period limited implications
Future premiums
Cash flows used in measuring insurance liabilities should include future premiums subject to one of the following conditions being met 1. The policyholder must pay the premiums to retain a right to guaranteed insurability 2. The insurer can compel the policyholder to pay the premiums 3. Including the premiums and the resulting policyholder benefits will increase the measurement of the liability Group contracts typically based on one year renewable terms With competitive rates initial deficits and acquisition costs will not be recoverable from future premiums in the accounting model
Impact on Capital?
• Mismatch risk • Use of risk free interest rate • Credit risk • Total Balance Sheet
Impact on Products
• Product Classification • Closer focus on options • Embedded derivatives • Deposit Components • Longer for profits to be recognized • Market indicators • Lack of deep and liquid market
Planning phase
Meeting the Deadline
Implementation phase Pilot phase
2008
Recognition Classification Disclosure design Accounting policy development Controls
2009
Programming and Testing Assumption Development Chart of Account changes Exceptions Exemptions
2010
Parallel Runs Management Reporting User Education