Insurance ContractsJeong-Hyeok, Park

Research Fellow

September 29, 2010

Agenda-D-2

Contents

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1.Background

2.Working Group

3.Discussion Issues

Contents

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Working Group

Background

Discussion Issues

Background

2004 ~ 2007 2011

Project history

2010

We are here

11• Issued in 2004

• Aimed at making only limited improvements

DP Preliminary Views on Insurance Contract

(Phase ll)• Issued in 2007

ED ‘ Insurance Contracts’

(Phase ll)

IFRS ‘ Insurance Contracts’

(Phase l)

• Issued in July 2010, comment due November 30, 2010

• Final standard : expected for Q2 2011

Joint Project with FASB • Since 2008

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11 22 3344

2008 2009

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Background continued

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Project Objective

Improve financial reporting for Insur-

ance contracts

Making it easier for users to under-

stand

Enhance compara-bility and trans-

parency

Contents

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Discussion Issues

Working Group

Background

Working Group

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Purpose• To assist the AOSSG in preparing improved proposals to the

IASB regarding the ED ‘Insurance Contracts’

Lead countryLead country • Korea

Co-lead countryCo-lead country • China

MembersMembers

• Australia, Hong Kong, In-donesia, Japan, Malaysia, Nepal, Thailand

Working Group continued

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Chronology of Working Process

• September 03, 2010:

WG members’ preliminary views on ED

• September 14, 2010 :

Circulate draft of AOSSG WG’s preliminary views on questions in IASB’s ED

• September 16, 2010:

All AOSSG members’ comments on AOSSG WG’s preliminary views

• September 29, 2010:

1st AOSSG meeting

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September

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Contents

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Working Group

Discussion Issues

Summary

Key Issues to be discussed

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Issue 1. Two Margin approach vs Single Margin Approach

Issue 2. Discount Rate

Issue 3. Acquisition Costs

Issue 4.

Issue 5. Transition

Presentation

Issue 1. Two Margin approach vs Single Margin Approach

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premium

cash outflows

cash outflows

riskadjustment

residualmargin composite

margin

Two Margin Approach = Best Estimate of Liability + RA + RM

Single Margin Approach = Best Estimate of Liability + CM

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2

1 2

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Issue 1. Two Margin approach vs Single Margin Approach

Two Margin Approach Single Margin Approach

• Convey useful informa-tion about the amount of insurance risks

• Reduce the amount of RM for arbitrary release patterns

• Easier Application to practice

• Reduce possibility of a loss at the point of the first measurement

• Reduce fluctuation of gains or losses in sub-sequent measurement

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cash outflows

• Which model do you prefer? Two Margin vs Single Margin.

(Opinion) Diverse views existing

• Do you agree with the definition of Risk Adjustment?

(Opinion) Diverse views existing, Some concern that definition of

RA is not appropriate for a description of insurance liability

• Do you agree with the measuring RA at a portfolio level?

(Opinion) Most agree./ Options should be given / Entity wide basis

WG Preliminary Views

Issue 1. Two Margin approach vs Single Margin Approach

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cash outflows

• Do you agree with no recognition of gain at inception?.

(Opinion) Most agree. / Gradual recognition of such gain

• Do you agree with estimating margin at the level of portfolio?

(Opinion) Diverse views existing.

• Do you agree with the method of releasing the margin ?

(Opinion) Diverse views / Remeasurement. / More guides

• Do you agree with the accretion of interest on the margin?

(Opinion) Pros and Cons exiting

WG Preliminary Views

Issue 1. Two Margin approach vs Single Margin Approach

Liabilities

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Issue 2. Discount Rate

• Reflecting characteristics of the insurance contract

• According to the dependence on the performance of specific assets

No ⇒ risk-free plus adjustment for illiquidity

Yes ⇒ consider performance of assets

How to determine discount rate?

NO Yes

Assets Liabilities

Risk-free rate

+

illiquidity

Liabilities

Assets Liabilities

performance of assets

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cash outflows

• Do you agree with the proposed discount rate?

(Opinion) Pros and Cons existing / Asset earned rate / Credit Spread should be reflected.

• Do you agree with considering the effects of liquidity?

(Opinion) Some concerns about how this might be done.

• Do you agree with concerns that discount rate misrepresent the economic substance?

(Opinion) Views are divergent.

WG Preliminary Views

Issue 2. Discount Rate

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Issue 3. Acquisition Costs

• incremental acquisition costs (on a contract level) are included in

the cash flows

• non-incremental acquisition costs are expensed

Measurement Level

Measurement Building Blocks

= Cash flows + Risk ad-justment

+ Residual margin

incremental ac-

quisition costs

non-incremental ac-

quisition costs

→ expensed

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WG Preliminary Views

Issue 3. Acquisition Costs

• Do you agree that the incremental acquisition costs should be included in the initial measurement?

(Opinion) Most agree. / The scope of acquisition costs

• Do you agree that non-incremental acquisition costs should be recognized as expenses when incurred?

(Opinion) All agree.

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Issue 4. Presentation (Summarized Margin Ap-proach)

Inception six months six months

1 Jan to 30 Jun to 31 Dec

Risk margin 21 26

Residual margin 2 2

Insurance margin 0 23 28

Experience adjustment   (10) (10)

Changes in estimates   (20) 0

Net gain at inception 0 0 0

Investment income 40 38

Interest on insurance liability (25) (23)

Net interest and investment 0 15 15

Profit 0 8 33

Examples

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WG Preliminary Views

Issue 4. Presentation (Summarized Margin Approach)

• Do you agree with the summarized margin presentation?

(Opinion) Most prefer premium approach(Traditional method)

Extended margin approach can be a choice.

• Do you agree with presenting all income and expense in

P&L?

(Opinion) Diverse views existing.

OCI presentation needs to be considered.

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Issue 5. Transition`

existinginsurance liabilities

cash flows

intangible assets

deferredacquisition costs

Risk adjustment

Previous GAAP Transition IFRS 4Phase II

Difference toretained earnings

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WG Preliminary Views

Issue 5. Transition

• Do you agree with the proposed transition requirements?

(Opinion) Diverse views existing.

(Modified) Retrospective / Prospective Application

No recognition of residual margin at the transition date

may have some problems

* Alternative - Residual Margin = Max [(A) – (B), 0] (A) Existing provision on the date of transition (Assuming that LAT was passed) (B) PV of fulfillment cash flows

Thank you !!

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