2008 Annual Meeting ● Assemblée annuelle 2008

Québec

2008 Annual Meeting ● Assemblée annuelle 2008

Québec

Canadian Institute

of Actuaries

Canadian Institute

of Actuaries

L’Institut canadien desactuaires

L’Institut canadien desactuaires

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

• Primary attributes of IFRS

• Timetables

• Phase I

• Phase II

• Implications

• Meeting the deadline

Agenda

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

• Life

• P&C

• Reinsurers

• Credit Union/Cooperatives

• Non Profit Member owned

• Government Owned Insurers

Canadian Owned Foreign Owned

IFRS - AcSB

IFRS – IASB

IFRS – EU

US – GAAP

IFRS - AUST

PSAB - GAAP

IFRS – AcSBIFRS – SMEDRAC

OSFI has designated that Federally Regulated Financial Institutions as PAE’s

AcSB’s, CSA and OSFI External Requirements

2009 2010 20112008

AcSB’s progress review

Qualitative disclosures of

differences (‘08 annual report)

Quantify effects of changeover to IFRS (‘09 annual

report)

Prepare comparative figures under

IFRS

March 2011first interim

reporting quarter end

with disclosures

Data capture for

Comparatives in 2011

OSFI progress

report

OSFI progress

report

OSFI progress

report

OSFI progress

report

OSFI progress

report

International Insurance Project Time table

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

IASC

IssuesPaper DSOP ED 5 IFRS 4

DiscussionPaper

ED X

Start

Insurance Project Steering

Committee

Phase I

Splitof Project

IASB

AdvisoryCommittee

Phase II

InsuranceWorking Group

DiscussionWith FASB

2013

Phase II

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 IIIFRS Phase I --> Phase II

Assets Liabilities

IAS 39 for Invested Assets

IFRS 4 IAS 39 and some

aspects in IAS 32 and

IAS 18Phase II2013?

All Insurance Contracts and Investment Contracts with Discretionary

Participation Features

Other Investment Contracts and All

Service Contracts

Where does Group Insurance Fit?

Insured Business

Pooling

ASO

Review IAA Classification Paper - Highlights

Significant

insurance risk

Insurance

Contains service elements?

Contains Discretionary Participation

Feature?

IAS 18Service Contract

Measurement

Create financial assets or liabilities?

Split Embedded Derivative

No

Yes

Separate Deposit Component

Yes NoService Element

Financial Instrument

IAS 39Financial Instrument

Measurement

Yes No

IFRS 4 Measurement

Split Host from Embedded Derivative

and Deposit

Host

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

Introduced July 25, 2005• IASP 9 Accounting for Reinsurance Contracts

• IASP 10 Embedded Derivatives and Derivatives

Introduced June 11, 2007

• 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

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 willnot 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

Meeting the Deadline

Planning phaseImplementation

phasePilot phase

Management Reporting

Classification

Accounting policy development

Programming and Testing

Chart of Accountchanges

Disclosure design

AssumptionDevelopment

2008 2009 2010

Recognition

Edu

catio

n

Controls

ExceptionsExemptions

Parallel Runs

User Education

Thank you