Introduction to IFRS 17

• IFRS 17 Benefits and Implementation Challenges

• 18th October 2019

Contents Slide

1. Introduction to IFRS 17 3

2. Objective of IFRS17 5

3. Definitions and Terminologies 10

4. Overview of IFRS 17 Measurement Model 13

5. Measurement on Initial Recognition 17

6. Transition 21

7. Impact of IFRS 17 26

8. Presentations and Disclosures 28

9. Challenges of IFRS 17 33

10. Conclusion 37

11. Any Questions 39

INTRODUCTION & SCOPE OF IFRS17

1. Introduction 1. IASB - International Accounting Standards Board: Private-sector body that develops and approves

International Financial Reporting Standards (IFRS)

2. IFRS – International Financial Reporting Standards

3. TRG– Transition Resource Group - Provides a public forum for stakeholders to follow the discussion of questions raised on implementation.

4. EFRAG – European Financial Reporting Advisory Group - Advises the European Commission on the endorsement of IFRS for use in Europe.

List of Reporting Standards and International Accounting Standards

Number Title Originally issued Effective Fully withdrawn preceded by

IFRS 1 First-time Adoption of International Financial Reporting Standards 2003 January 1, 2004IFRS 2 Share-based Payment 2004 January 1, 2005IFRS 3 Business Combinations 2004 April 1, 2004 IAS22IFRS 4 Insurance Contracts 2004 January 1, 2005 January 1, 2022IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 2004 January 1, 2005 IAS35IFRS 6 Exploration for and Evaluation of Mineral Resources 2004 January 1, 2006IFRS 7 Financial Instruments: Disclosures 2005 January 1, 2007 IAS30IFRS 8 Operating Segments 2006 January 1, 2009 IAS14IFRS 9 Financial Instruments 2009 (updated 2014) January 1, 2018 IAS39IFRS 10 Consolidated Financial Statements 2011 January 1, 2013IFRS 11 Joint Arrangements 2011 January 1, 2013 IAS31IFRS 12 Disclosure of Interests in Other Entities 2011 January 1, 2013 IAS31IFRS 13 Fair Value Measurement 2011 January 1, 2013IFRS 14 Regulatory Deferral Accounts 2014 January 1, 2016IFRS 15 Revenue from Contracts with Customers 2014 January 1, 2018 IAS18IFRS 16 Leases 2016 January 1, 2019 IAS17IFRS 17 Insurance contracts 2017 January 1, 2022 IFRS4

1. Introduction • IFRS 17 Insurance Contracts establishes principles for the recognition, measurement,

presentation and disclosure of insurance contracts issued.

• It also requires similar principles to be applied to reinsurance contracts held and investment contracts with discretionary participation features issued.

• The objective is to ensure that entities provide relevant information in a way that faithfully represents those contracts.

• This information gives a basis for users of financial statements to assess the effect that contracts within the scope of IFRS 17 have on the financial position, financial performance and cash flows of an entity

• IFRS 17 supersedes IFRS 4 Insurance Contracts.

• The previous IFRS Standard on insurance contracts, IFRS 4, was an interim standard that allowed entities to use a wide variety of accounting practices for insurance contracts, reflecting national accounting requirements and variations of those requirements

1. Scope of IFRS17 • IFRS 17 standard covers the following:

a) insurance contracts, including reinsurance contracts, it

issues;

b) reinsurance contracts it holds; and

c) investment contracts with discretionary participation features it issues, provided the entity also issues insurance contracts.

• All references in IFRS 17 to insurance contracts also apply to

reinsurance contracts held

OBJECTIVES OF IFRS 17

Benefits of IFRS17

• Global comparability for the first time

• Relevant and updated measurement of liabilities

• Financial risks and economic mismatches revealed

• Source of earnings approach to performance

• Value of new business integrated with the accounting

• Enhanced disclosure and greater transparency

• Intuitive accounting that will be more understandable

Classification: Confidential

DEFINITIONS AND TERMINOLOGIES

Initial Recognition of Insurance Contracts (para 32) • On initial recognition, an entity shall measure a group of insurance contracts as the

total of:

a) the fulfilment cash flows, which comprise: i. estimates of future cash flows (paragraphs 33–35);

ii. an adjustment to reflect the time value of money and the financial risks

related to the future cash flows, to the extent that the financial risks are not included in the estimates of the future cash flows (paragraph 36); and

iii. a risk adjustment for non-financial risk (paragraph 37).

b) the contractual service margin

• Fulfilment cash flows = Best Estimate Liabilities (items i & ii above) + Risk Adjustment (item 3)

• Contractual Service Margin (CSM) is the unearned profit that will be recognise as it provides services in the future

Clearing up some Terminology

• Fulfilment cash flows (FCF) = Best Estimate Liabilities (BEL) + Risk Adjustment (RA)

• Liability for Remaining Coverage (LRC) = FCF + CSM

• Insurance Contract Liabilities (ICL) = LRC + LIC where

• LIC = Liability for incurred claims

• Insurance Contract Liabilities (ICL) = BEL+ CSM + LIC

• The unearned profit (CSM) forms part of liabilities under IFRS17

• The amount of the contractual service margin for a group of insurance contracts recognised in profit or loss in each period reflects the services provided under the group of insurance contracts in that period.

• The amount is determined by identifying the coverage units in the group

OVERVIEW OF IFRS 17 MEASUREMENT MODEL

Overview of the proposed model

• The building block approach includes the General Model (GM) and the Variable Fee Approach (VFA)

Overview of the proposed model

• Used for insurance contracts with no direct participation

General Model (GM)

Variable Fee Approach (VFA)

Premium Allocation Approach (PAA)

• Used for certain types of participating contracts

• Option for contracts with coverage period of one year or less

Building Block Approach (BBA)

Overview of Building Block Approach

Liability for Remaining Coverage (LRC)

MEASUREMENT ON INITIAL RECOGNITION

Measurement on initial recognition

Illustrative Example • Example of calculating initial CSM for an annuity with premium of N500,000.

• No negative CSM is allowed. If at initial recognition, the contract is onerous, it is recognised in the P&L immediately

• The CSM is roll forward from year to year.

Time (years)Lumpsum (Inflow)

Annuity Payments (Outflows)

Expenses (Outflows) Total Outflows

Discounted Cashflows

Best Estimate Liabilities

RA (assume 5% of BEL) FCF CSM

0 500,000 431,070 21,554 452,624 47,376 1 41,667 5,000 46,667 42,424 388,646 19,432 408,078 2 41,667 5,000 46,667 38,567 350,079 17,504 367,583 3 41,667 5,000 46,667 35,061 315,017 15,751 330,768 4 41,667 5,000 46,667 31,874 283,143 14,157 297,301 5 41,667 5,000 46,667 28,976 254,167 12,708 266,875 6 41,667 5,000 46,667 26,342 227,825 11,391 239,216 7 41,667 5,000 46,667 23,947 203,878 10,194 214,071 8 41,667 5,000 46,667 21,770 182,107 9,105 191,213 9 41,667 5,000 46,667 19,791 162,316 8,116 170,432

10 41,667 5,000 46,667 17,992 144,324 7,216 151,540 11 41,667 5,000 46,667 16,356 127,968 6,398 134,366 12 41,667 5,000 46,667 14,869 113,098 5,655 118,753 13 41,667 5,000 46,667 13,518 99,580 4,979 104,559 14 41,667 5,000 46,667 12,289 87,292 4,365 91,656 15 41,667 5,000 46,667 11,172 76,120 3,806 79,926 16 41,667 5,000 46,667 10,156 65,964 3,298 69,262 17 41,667 5,000 46,667 9,233 56,731 2,837 59,568 18 41,667 5,000 46,667 8,393 48,338 2,417 50,755 19 41,667 5,000 46,667 7,630 40,707 2,035 42,743 20 41,667 5,000 46,667 6,937 33,771 1,689 35,459 21 41,667 5,000 46,667 6,306 27,465 1,373 28,838 22 41,667 5,000 46,667 5,733 21,732 1,087 22,818 23 41,667 5,000 46,667 5,212 16,520 826 17,346 24 41,667 5,000 46,667 4,738 11,782 589 12,371 25 41,667 5,000 46,667 4,307 7,475 374 7,849 26 41,667 5,000 46,667 3,916 3,560 178 3,738 27 41,667 5,000 46,667 3,560 - - -

Assumptions • Annuitant expected to leave for 27 years

before death

• Net interest return of 10% (discount rate)

• Risk adjustment is 5% of BEL

• Assumes experience = actual

• Assumed no liabilities LIC

Results • CSM = 47,376

• Using a coverage unit of 27 years, the

amount that will be recognised in the profit or loss account at the end of the year is N47,376/27=N1,755

• CSM release = N1,755

• Insurance Contract Liabilities at the end of the year is = 452,624 +47,376 – 1755 ICR = N498,249

Measurement on initial recognition

TRANSITION

Transition Approach • IFRS 17 should be applied retrospectively (Full Retrospective Approach – FRA) at the transition

date except it is impractical. FRA means • identifying, recognising and measuring each group of insurance contracts as if IFRS 17 had always

applied; • derecognise any existing balances that would not exist had IFRS 17 always applied; and • recognise any resulting net difference in equity.

Estimating CSM on transition – Key requirements

1. Timelines

2018 2019 2022 2021 2020 2017

IFRS 17 Regulation Approved

May 18

IFRS 17 Comparative

date

IFRS 17 Go Live Date

• Project set up • Requirements gathering

and initial impact assessment

• Begin to gather additional data required for transition

• Methodology discussions and decisions

• Detailed impact analysis

• System and process design

• Start system builds

• Finish systems builds

• Complete end user testing

• Implementation of systems and processes

• Transition approach ready

• IFRS4 and IFRS 17 parallel run

• Stakeholder awareness of result

Applying IFRS 17 for the first time

IMPACT OF IFRS 17

What does IFRS 17 mean to the business?

PRESENTATIONS AND DISCLOSURES

Statement of comprehensive income – IFRS 4 vs. IFRS 17

Breakdown of Insurance service result IFRS17

Insurance revenueExpected claims+ Expected other insurance service expenses+ RA Allocation+ CSM allocation+ Recovery of insurance acquisition cash flows

Insurance service expenses

Incurred claims+ Incurred Fulfilment expenses+ Amortisation of insurance acquisition cash flows+ changes in BEL related to LIC+ changes in RA related to LIC+ Loss Component: systematic allocation+ Loss Component: losses and reversal of losses

Net expenses from reinsurance contracts

(Expected recovery for claims and other insurance service expenses + RA allocation+ CSM allocation)-(Amounts recoverable for claims and other expenses incurred+ changes in BEL related to LIC+ changes in RA related to LIC+ Changes to reinsurance BEL that do not adjust the CSM+ Changes to reinsurance RA that do not adjust the CSM)

Insurance service result -

IFRS 17 – How will the balance sheet change

Measuring Insurance Obligations - LRC

CHALLENGES OF IFRS 17

Challenges of IFRS 17

• Lots of work required to be ready • Data Gathering • Impact assessment • Methodology discussion • Level of aggregation (annual grouping) • Systems and process design • Systems build • End user testing • Implementation of systems and processes • Transition approach • Parallel run • Stakeholders awareness of results

• Lack of skilled knowledge on IFRS 17

• Implementation cost

• Short timeline

Ongoing training

One off cost for preparers • Based on the two EFRAG case studies, the total one-off costs reported by

respondents were €2.29 billion, • €1.5 billion for EFRAG’s extensive case study (11 respondents, average of

€136 million per insurer corresponding to 0.35% of Gross Written Premiums) and

• €0.79 billion for EFRAG’s simplified case study (32 respondents, average of €24 million per insurer corresponding to 0.30% of Gross Written Premiums).

• One-off implementation costs for individual respondents from EFRAG’s

extensive case study ranged from €6 to €317 million

• EFRAG’s simplified case study was less than €180 million.

Implementation cost survey by EFRAG

Conclusion

One off cost for preparers

• IFRS 17 is important – affects emergence of reported profit and therefore affects discussions with shareholders, investment analysts and rating agencies

• High degree of disclosure

• Material data-gathering and systems implications

• Start preparing now!!

Any Questions

Contact: info@becodaconsulting.com