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Discussion Paper
Preliminary Views on Insurance Contracts
Sabine Wuiame
*connectedthinking
PwC
Agenda
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History of the IASB Insurance Project
Summary of the Discussion Paper
History of the IASB Insurance Project
History of the IASB Insurance Project
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Start of
insurance
project
December:
Issue Paper
/DSOP
Project
split in
two phases
March:
May:
IFRS4
D.P.
ED?
IFRS?
• IASC starts insurance project in 1997
• “Issue Paper” published in 1999 – followed by issuance of a “Draft
Statement Of Principles”
• Not feasible to complete a project on insurance contracts before 2005.
• Phase I = IFRS4 = Wide variety of accounting practices
• DP issued on 3rd May 2007
-
Comment period : 16 November
Will be used to develop Exposure Draft (? End 2008/2009)
Final Standard should be published in +/- End 2009/2010?
Effective transition date more than one year later (Jan. 2011?)
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Principles of Phase I – IFRS4
• Contract classification and measurement:
- Insurance contracts and investment contracts with dpf : IFRS4
- Investment contracts with no dpf: IAS39
• Phase I of the insurance project (IFRS4) is an interim phase
- Continuation of local accounting policies with amendments:
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•
•
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Elimination of equalisation reserves
Liability adequacy test
Reinsurance impairment test
Change in accounting policies permitted:
- Aimed at eliminating accounting mismatch
- Shadow accounting
- Use of current interest rates
- Extensive disclosure requirements
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Convergence with other projects
• Convergence project with US GAAP
• Convergence with other IASB projects
-
Revenue recognition
Fair value measurement
Financial instruments
IAS37
Framework
Definitions of liability and equity
Financial statements presentation
• Convergence with Solvency II
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Summary of the Discussion Paper
Summary of the Discussion Paper
Published in May 2007
7 Chapters:
• 1-Scope
• 2-Recognition and Derecognition
• 3-Measurement - core issues
• 4-Policyholder behaviour, customer relationship and
acquisition costs
• 5-Measurement- other issues
• 6-Policyholder participation
• 7-Changes in insurance liabilities
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Summary of the Discussion Paper
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Scope

Measurement
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Policyholder Participation

Changes in insurance liabilities
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Summary of the Discussion Paper

Scope

Measurement

Policyholder Participation

Changes in insurance liabilities
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Scope
Scope
• Definition of an insurance contract in IFRS4:
- “contract under which one party (the insurer) accepts
significant insurance risk from another party (the
policyholder) by agreeing to compensate the
policyholder if a specified uncertain future event (the
insured event) adversely affects the policyholder”
• Insurance liability
= insurer’s obligations under an insurance contract
• Insurance asset
= insurer’s rights under an insurance contract
• Applies to all types of contracts (life, non life,
accepted reinsurance)
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Summary of the Discussion Paper

Scope

Measurement

Policyholder Participation

Changes in insurance liabilities
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Measurement
Measurement
• Concept of “current exit value”
• Based on building blocks
Service
Margin
Risk
Margin
Best
estimate
of future
cashflows
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Discount
Rate
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Measurement
Best estimate of future cash-flows (1)
•No detailed guidance
•Explicit
•Consistent with observable market prices
• If observable: direct inputs without adjustments
• Not observable :
• All available data, external and internal
• Should not contradict market data
•Include – in an unbiased way- information about amount, timing
and uncertainty of all cash flows
• Full range of possible outcomes and their probabilities
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Measurement
Best estimate of future cash-flows (2)
•Current
• >< “locked-in” assumptions
•Exclude entity-specific cash-flows
• Economic characteristics of the liability
• Do not capture CF arising from synergy with other assets and
liabilities
• Do not capture CF that are specific to the insurer and would not
arise for other market participants with the same obligations
• Portfolio specific vs entity specific
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Measurement
Discount rate
• Applies to all types of contracts
• Including non life
• Should not reflect the characteristics of the assets
• Consistent with observable current market prices for cash flows
whose characteristics match those of the insurance liability
•No detailed guidance
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Measurement
Risk margin (1)
• Effects of uncertainty
• Liability with fixed cash flows vs liability with uncertain cash flows
•“Explicit and unbiased measurement of the compensation that
entities demand for bearing risk”
• NOT a shock absorber
• Captures all risks associated with liability
• List of compliant actuarial methods
• Should not reflect the benefits of diversification between
portfolios and negative correlation between portfolios
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Measurement
Risk margin (2)
• Calibrating the risk margin per unit of risk
• Two approaches:
• Implementation A : calibrates at inception directly to actual premium
charged (less relevant acquisition costs)
- Need to define acquisition cost, liability adequacy test
• Implementation B: use actual premium only as reasonableness
check
- Profit at inception
• Majority of Board Members in favor of implementation B
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Measurement
Service margin
• Insurer might provide other services as well
• Should be included if market participants require such a margin
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Measurement
Future premiums
• Future premiums (+ related benefits) included if any of the
following criteria is met:
a)Policyholder must pay premium to retain guaranteed insurability
b)The insurer can compel the policyholder to pay the premium
c)Including the premiums and the resulting policyholder benefits will
increase the measurement of the liability
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Measurement
Acquisition costs
• Should be recognized as an expense
• Not as the cost of an asset
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Measurement
Assets backing insurance contracts
• Phase I: accounting mismatches
• Existing options to avoid accounting mismatches
• Assets at fair value through P&L
• Fair value model for investment property
• These are not required
• Shadow accounting
• Shadow accounting no longer relevant for non-participating
insurance liabilities
• For participating business
- Could be considered if assets classified as “available for sale”
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Measurement
Reinsurance assets
• No offset
• Current exit value
• Risk of default (or disputes) of the reinsurer should be
considered based on the expected loss model
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Measurement
Unbundling
•Preliminary view based on interdependence :
• If components so interdependent that can be measured only on an
arbitrary basis, Phase II should apply to the whole contract
• If components not interdependent, Phase II applies to insurance
component and IAS39 applies to the deposit component
• If components interdependent but can be measured on basis that is
not arbitrary, then insurance component = measurement of whole
contract under Phase II less IAS39 measurement of deposit
component
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Measurement
Other
• Current exit value should reflect liability’s credit characteristics
• Unit of account does not affect the expected PV of future cash
flows
• No specific proposals for investment contracts
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Summary of the Discussion Paper

Scope
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Measurement
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Policyholder Participation
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Changes in insurance liabilities
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Policyholder Participation
Participating contracts
• Discretion (with constraints) over amount or timing of
distribution to policyholders
• Definition of DPF is not discussed
• Is such right creating a liability?
• Include in each scenario policyholder dividends that satisfy a
legal or constructive obligation at the reporting date
• Applies to participating insurance and investment contracts
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Summary of the Discussion Paper

Scope

Measurement

Policyholder Participation

Changes in insurance liabilities
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Changes in insurance liabilities
Changes in Insurance Liabilities
• Are insurance premiums revenue or deposits?
• No preliminary view yet
• No preliminary view yet on separate presentation of specified
components of the changes in insurance liabilities:
• Income or expense at inception of new contracts
• Cash flows
• Expected changes
• Changes in circumstances
• Policyholder participation
• Income or expense from reinsurance held
• Effects of business combinations and changes in foreign exchange
rates
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Changes in Insurance Liabilities
• Profit or loss should include all changes in the carrying amount
of insurance liabilities
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Questions?