slideshare - ifrs 17 insurance contracts 17 kronthaler.pdf · —financial guarantee contracts...

IFRS 17 Insurance

Contracts

SIAS, Salzburg, 5th and 6th of April, 2018Dr. Johann Kronthaler

Timeline of IFRS 17 in the context of other standards

2017 2018 2019 2020 2021

Publication of IFRS 17

Start IFRS 15

Start IFRS 16

Compara-tives IFRS

17

Start IFRS 17

Deferral option: Start IFRS 9 for insurance

companies

IFRS 17 is effective for annual periods beginning on or after 1 January 2021.Earlier application is permitted.

Qualitative and quantitative disclosure information in accordance with IFRS 9 has to be published as at 31.12.2018 when applying the deferral approach of IFRS 9.!

The main documents of IFRS 17IFRS 17 Standard Basis for Conclusions Illustrative Examples

116 pages 124 pages 82 pages

The content of IFRS 17Introduction

Scope

Objective

Level of aggregation of insurance contracts

Presentation in the statement of financial position

Modification and derecognition

Disclosure

Measurement

Recognition & presentation in the statement(s) of financial performance

Paragraphs

25-28

IN1 – IN8

3-13

1-2

14-24

78-79

72-77

93-132

29-71

80-92

Recognition

What’s the issue?

Analysts currently have to adjust insurance companies’ financial positions and performance to be able to compare them

IFRS 17 increases transparency about profitability and will add comparability

5

6

The changes could significantly affect insurers’…

Volatility of financial results and equity

Level of transparency about profit drivers

Equity levels

The magnitude of the accounting

change for life and non-life insurers will

be different

Profitability patterns

7

A new, comprehensive accounting model

IFRS 17’s general measurement model(GMM) is based on a fulfilment objective and uses current assumptions

It introduces a single, revenue recognition principle to reflect services provided

And is modified for certain contracts

8

There are many discussions going on with respect to IFRS 17. It may happen that the conclusions of such discussions is different to what is presented here.

Disclaimer

Number of open questions

10

Scope of IFRS 17Insurance contracts

— Insurance contracts, including reinsurance contracts, issued—Reinsurance contracts held

Investment contracts with discretionary profit participation features (DPFs) issued (if issued by „insurance company“)

Optional:

—Financial guarantee contracts issued, if already accounted for as insurance contracts (otherwise: IFRS 9)

—Fixed fee service contracts issued, if…they are calculated without risk assessment about an individual

customer…they are most likely fulfilled by providing services rather than cash

payments…the insurance risk arises primarily from the customer‘s use of

services

11

What is an insurance contract ?Characteristics

— Transfer of significant insurance risk— Uncertain future event, that adversely affects the

policyholder

There has to be a scenario of commercial substance, in which the issuer has a possibility of a loss

Significance of the insurance risk is to be evaluated on a present value basis

Separating components

Embedded derivatives Investment components Promise to transfer non-insurance services

— Amounts that the insurance company has to repay to the policy-holder even if an insured event does not occur

— Only if distinct (i.e.. not highly interrelated with insurance component

— Apply IFRS 9

— Assessment after separation of other components

— Apply IFRS 15

Identifying separate components

Some components may be within the scope of another Standard

— Apply IFRS 9

12

„Measurement“ – the core principles

General Measurement Model (GMM)

Premium Allocation Approach (PAA)

Variable Fee Approach (VFA)

— Measurement model that is applicable in general

— Optional, simplified approach, similar to current accounting principles

— Applicable for short term contracts (one year or less)

— Modification of the GMM with respect to the realization of revenue

— Mandatory to contracts with "direct participation features“

Three types of measurement depending on the type of contract

The general measurement model

Initial recognitionKey components

Fulfilment cash flows

Risk-adjusted present value of future cash flows – e.g. premiums, claims

Contractual service margin (CSM)

Represents unearned profit –results in no gain on initial recognition

1

3

2

4

Future cash flows

0

In-flows

Out-flows

1

Discounting2

Risk adjustment3

CSM4

Initial Recognition at the earliest of the following:

— Beginning of the coverage period— Due date of the first payment from the policyholder— As soon as a group of contracts becomes onerous

Net cash outflows result in no CSM – a loss is recognized immediately

15

Cash flows to be considered

Cash flows are within the boundary of an insurance contract if they arise from substantive rights and obligations that exist during the reporting period in which the entity

— can compel the policyholder to pay the premiums or in which

— the entity has a substantive obligation to provide the policyholder with services

IFRS 17.34

A substantive obligation to provide services ends when the entity has the practical ability to reassess the risks of the particular policyholder and, as a result, can set a price or level of benefits that fully reflects those risks

IFRS 17.34

Cash Flows to be considered: all future cash flows within the boundary of each contractin the group

IFRS 17.33

Expected future cash flows

— Insurance acquisition cash flows attributable to the portfolio— Claim handling costs— Policy administration and maintenance costs, including recurring commissions — Fixed & variable overheads directly attributable to fulfilling the insurance contract— Other costs specifically chargeable to the policyholder

An expected value has to be determined (as opposed to a „most-likely“ or a „more-likely-than-not“ approach)

Premiums

— Payments to a policyholder— Payments to a policyholder that vary depending on returns on underlying items— Payments to a policyholder resulting from embedded derivatives (i.e.. options and

guarantees)

Payments

Costs

— Transaction-based taxes— Potential cash inflows from recoveries

Others

All cash flows within the contract boundary, that are directly attributable to fulfilling the contract, have to be taken into account, and no other cash flows

17

Expected future cash flows

— Costs that can not be directly attributed to the portfolio (i.e.. product development or training costs)

— Abnormal amounts of wasted labour or other resources used to fulfil the contracts

Investment returns

— Cash flows arising from reinsurance contracts held— Cash flows arising outside the contract boundaries

Cash flows

Costs

— Income tax payments

Others

Cash flows not to be included:

18

Discount ratesThe discount rates shall be consistent with the characteristics of the insurance contracts (i.e.. timing, currency, liquidity)

Yield curve of a financial instrument 5,25%

Risk premium for expected counterparty default (1%)

Risk premium for unexpected counterparty default (0,9%)

Illiquid risk-free discount rate

Liquidity adjustment (0,5%)

Risk-free liquid yield curve (3%)

Bottom-up approach: 3,5%

Top-down approach: 3,35%

Top-down or bottom-up approach

In theory both approaches should give the same result

19

Company specific, making the entity indifferent between

— Fulfilling a liability that has a range of possible outcomes arising from non-financial risk; and

— Fulfilling a liability that will generate fixed cash flows with the same expected present value

The risk adjustment shall cover the uncertainty about the cash flows arising from non-financial risks

Fulfilment of insurance contract Fixed liability

50% 50%

90 cash outflow

110 cash outflow

100%

100 cash outflow

Expected value: 100 Fixed liability: 100

Risk adjustment

20

Determination of the risk adjustmentRisk adjustmentCharacteristics of the underlying risk

— Low frequency and high severity, i.e.. natural catastrophes— Contracts with long duration— Wide probability distribution— Little knowledge about trends or current estimates

— High frequency and low severity— Contracts with short duration— Narrow probability distribution— Knowledge about trends or current estimates

Low

erH

igh

er

21

22

Subsequent measurement – Composition

Liability for remaining coverage (LRC)

Fulfilment cash flows related to future services, plus

CSM (unearned profit) remaining

+ Liability for incurred claims (LIC)

Fulfilment cash flows for claims incurred,

but not yet paid

Total liability of a group of insurance contracts

Subsequent measurement of the CSMFor insurance contracts without direct participation features,

IFRS 17.44

CSM at the reporting

date

CSM at the beginning of the period

Effect of any new contracts added to the group

Interest accreted on the carrying amount of the CSM

Changes in fulfilment cash flows relating to future service

Effect of any currency exchange differences

Amount recognized as insurance revenue

For insurance contracts with direct participation features, where the Variable Fee Approach is applicable see IFRS 17.45

24

Subsequent measurement

Past and current services

Future services

Changes in current estimates

Adjust the CSM

CSMallocation

Fulfilment cash flows

CSM

Financial risk assumptionsEither

Or

Release of the CSMRelease of the Contractual Service Margin by identifying the coverage units for the group of insurance contracts resp. the transfer of investment services for investment contracts with DPFs:

Contract #1

Contract #2

Contract #3

Expe

cted

qua

ntity

of

cov

erag

e

Expected Coverage

Current Period

— Coverage units have to be defined

— Measurement of contracts with direct participation features differs depending on the significance of their inherent insurance risk

25

26

Recognizing insurance revenue

Insurance revenue is derived from the changes in the LRC for each reporting period, covering…

Expected insurance claims

and expensesRisk adjustment CSM allocation Acquisition cash

flows

These items represent a company’s consideration for providing services

Important remarks on presentation

— Insurance revenue and insurance service expenses presented in profit or loss shall exclude any investment components

— Effect of changes in the discount rate may be presented in P&L or OCI, if the company chooses the accounting policy set out in paragraph 88(b) or in paragraph 89(b) to avoid accounting mismatch

IFRS 17.85

IFRS 17.90

Example

Example – Initial recognition GMM

Fulfilment Cash Flows CSM LRC

Measurement of the Contractual Service Margin (CSM)

Initial recognition of a portfolio of property insurance contracts:

— Coverage period 3 years, interest rate 4%, combined ratio 80%— Expected premiums of 1,200 p.a.— Risk Adjustment 15% of the expected present value of future premiums

-3.600

2.880

-79

519

280 0

Premiums Claims &Costs

DiscountingAdjustment

RiskAdjustment

ContractualService Margin

Liability forRemainingCoverage

29

Example – Subsequent measurement

Calculation of the fulfilment cash flows:

CF Year 2

CF Year 3

Scenario after year one:

— Cash flows in Year 1 as expected— Assumptions for Years 2 and 3 remain unchanged

-1200

960

-37180

-1200960

-26173

-190

Cash Inflows Cash Outflows Disc. Adjustment Risk Adj. Fulfilment CashFlows

30


Calculation of the contractual service margin (CSM):

-280+0+11+0+0

3

Opening balance 280Effect of new contracts 0Interest (4%) 11Changes in the fulfilment cash flows 0Effect of currency exchange 0Allocation CSM -97Closing balance 194

31

Example – Subsequent measurementLiability for remaining coverage after Year 1: LRC results from summing up

the building blocks

-2.400 1.920

-63

353

194 4



Risk Adjustment ContractualService Margin


32

Example – Subsequent measurementReconciliation according to IFRS 17.101 for Year 1:

PV of cash flows Risk Adj. CSM LRC

Opening balance -799 519 280 0Change in liab. due to cash inflows 1.200 0 0 1.200Change in liab. due to cash outlows -960 0 0 -960Insurance finance income/expenses 16 0 11 27Changes related to future service 0 0 0 0Changes related to current service 0 -166 -97 -263Closing balance -543 353 194 4

33


Financial statement Year 1Cash 240Liability for remaining coverage 4Equity 236

Insurance revenue Year 1Expected payments 960Allocation risk adjustment 166Allocation CSM 97Total 1.223

P&L Year 1Insurance revenue 1.223Insurance service expenses -960Insurance finance income/expenses -27Insurance service expenses from loss component of LRC 0Profit / Loss 236

IFRS 17P&L Year 1Premiums 1.200Claims & Costs -960Acquisition costs 0Change in the liability -4Profit / Loss 236

Conventional

34

Example – Scenario A: Favourable changesScenario A at the end of Year 2:

— Actual expenses in Year 2: 600 instead of 960— Revised expectations for Year 3:

–Combined ratio of 70% instead of 80% (corresponding to expenses of 840)–Risk adjustment of 12% instead of 15% of the expected PV of future premiums

-1200

840

-32

144

-248

Cash Inflows Cash Outflows Disc. Adjustment Risk Adj. Fulfilment CashFlows

35

Opening balance 194Effect of new contracts 0Interest (4%) 8Changes in the fulfilment cash flows 151Effect of currency exchange 0Allocation CSM -177Closing balance 177

Measurement of the liability for remaining coverage:

Example – Scenario A

Old assumptions: New assumptions:

151

- 194+0+8+151+02

— Contractual Service Margin (CSM):

— Change in the fulfilment cash flows for Year 3:

Cash inflows -1.200Cash outflows 960Discounting adjustment -37Risk adjustment 180Fulfilment cash flows -97


36


Negative LRC because of the order of the adjustments to the CSM: 1. Addition of changes of the FFCF2. Allocation

Liability for remaining coverage after Year 1:

-1.200

840

-32

144

177

-72





37

Example – Scenario AReconciliation according to IFRS 17.101 for Year 2:


Opening balance -543 353 194 4Change in liab. due to cash inflows 1.200 0 0 1.200Change in liab. due to cash outlows -600 0 0 -600Insurance finance income/expenses 26 0 8 34Changes related to future service -115 -36 151 0Changes related to current service -360 -173 -177 -710Closing balance -392 144 177 -72

38


Financial statement Year 2Cash 840Liability for remaining coverage -72Equity 912


P&L Year 2Insurance revenue 1.310Insurance service expenses -600Insurance finance income/expenses -34Insurance service expenses from loss component of LRC 0Profit / Loss 676

IFRS 17P&L Year 2Premiums 1.200Claims & Costs -600Acquisition costs 0Change in the liability 76Profit / Loss 676

Conventional

39

Example – Scenario B: Unfavourable changesScenario B at the end of Year 2:

— Actual expenses in Year 2: 1.260 instead of 960— Revised expectations for Year 3:

–Combined ratio of 95% instead of 80% (corresponding to expenses of 1.140)–Risk adjustment of 20% instead of 15% of the expected PV of future premiums

-1200 1140

-44

240 136

Cash Inflows Cash Outflows Discount. Adj. Risk Adj. Fulfilment CashFlows

40

Opening balance 194Effect of new contracts 0Interest (4%) 8Changes in the fulfilment cash flows -202Effect of currency exchange 0Allocation CSM 0Closing balance 0

202 31

Example – Scenario B

Balance CSM Remainder

Loss Component Profit & Loss

Measurement of the liability for remaining coverage:

Old assumptions: New assumptions:

— Change in the fulfilment cash flows for Year 3:


Cash inflows -1.200Cash outflows 1.140Discounting adjustment -44Risk adjustment 240Fulfilment cash flows 136

233— Contractual Service Margin (CSM):

41

Example – Scenario BLiability for remaining coverage after Year 2:

-1.200 1.140

-44

240 0 136





42

Example – Scenario BReconciliation according to IFRS 17.101 for Year 2:


Opening balance -543 353 194 4Change in liab. due to cash inflows 1.200 0 0 1.200Change in liab. due to cash outlows -1.260 0 0 -1.260Insurance finance income/expenses 26 0 8 34Changes related to future service 173 60 -202 31Changes related to current service 300 -173 0 127Closing balance -104 240 0 136

43


Financial statement Year 2Cash 180Liability for remaining coverage 136Equity 44


P&L Year 2Insurance revenue 1.133Insurance service expenses -1.260Insurance finance income/expenses -34Insurance service expenses from loss component of LRC -31Profit / Loss -192

IFRS 17P&L Year 2Premiums 1.200Claims & Costs -1.260Acquisition costs 0Change in the liability -132Profit / Loss -192

Conventional

44

Example – Scenario BYear 3: Cash flows as expected

Reconciliation according to IFRS 17.101 for Year 2:


Opening balance -104 240 0 136Change in liab. due to cash inflows 1.200 0 0 1.200Change in liab. due to cash outlows -1.140 0 0 -1.140Insurance finance income/expenses 44 0 0 44Changes related to future service 0 0 0 0Changes related to current service 0 -240 0 -240Closing balance 0 0 0 0

45


Financial statement Year 3

Cash 240Liability for remaining coverage 0Equity 240

P&L Year 3

Premiums 1.200Claims & Costs -1.140Acquisition costs 0Change in the liability 136Profit / Loss 196

Conventional

46

Insurance revenue Year 3

Expected payments 1.116Allocation risk adjustment 232Allocation CSM 0Total 1.348

P&L Year 3

Insurance revenue 1.348Insurance service expenses -1.140Insurance finance income/expenses -44Insurance service expenses from loss component of LRC 32Profit / Loss 196

IFRS 17

Example – Comparison P&L (Scenario B)

Remarks:

— Under IFRS 17 interest expenses are allocated to insurance revenue. Therefore, the revenue exceeds the premiums received (this systematics has been confirmed explicitly by the IASB after consultation)

— In this example the interest expenses for the loss component are allocated to the insurance service expenses for the loss component, which leads to the difference in row three.

47

Year 1 Year 2 Year 3 Total Year 1 Year 2 Year 3 Total

Insurance revenue / premiums 1.223 1.133 1.348 3.704 1.200 1.200 1.200 3.600Insurance service expenses / claims & costs -960 -1.260 -1.140 -3.360 -960 -1.260 -1.140 -3.360Insurance finance expenses / interest expenses -27 -34 -44 -105 0 0 0 0Insurance service expenses from loss component 0 -31 32 1 0 0 0 0Profit / Loss 236 -192 196 240 240 -60 60 240

IFRS 17 Conventional

Level of Aggregation

Level of aggregation

IFRS 17 limits offsetting of onerous contracts against profitable ones

The CSM is determined for groups of insurance contracts

Insurance contracts with similar risks that are managed together (product line)

Portfolio

Insurance contracts, that are issued more than one year apart, shall not be included in the same group

Annual cohort

Portfolio shall be divided into a minimum of the following groups:— Onerous at inception— No significant possibility of becoming onerous— Remaining contracts

Group

PortfolioAnnual cohort

Group

Fulfilment Cash Flows can be calculated at a higher level of aggregation

49

Mutualisation

— Some insurance contracts affect the cash flows to policyholders of other contracts by requiring the policyholder to share with policyholders of other contracts the returns on the same specified pool of underlying items;

Situation IFRS 17.B67

The fulfilment cash flows of each group reflect the extent to which the contracts in the group cause the entity to be affected by expected cash flows, whether to policyholders in that group or to policyholders in another group.

Principle IFRS 17.B68

The fulfilment cash flows for a group:— include payments arising from the terms of existing contracts to policyholders of

contracts in other groups, regardless of whether those payments are expected to be made to current or future policyholders; and

— exclude payments to policyholders in the group that, applying have been included in the fulfilment cash flows of another group.

Consequence IFRS 17.B68

„Mutualisation has the consequence that annualization of the cohorts is not required for business fulfilling the criteria of mutualisation“

A well known discussion about mutualisation

This is still under discussion, however it is rather unlikely that annualization of cohorts is not obligatory

[…] the Board noted that the requirements specify the amounts to be reported, not the methodology to be used to arrive at those amounts. Therefore it may not be necessary for an entity to restrict groups in

this way to achieve the same accounting outcome in some circumstances.

IFRS 17.BC138

An interpretation often heard

Level of aggregation for disclosures

An entity shall aggregate or disaggregate information so that useful information is not obscured either by the inclusion of a large amount of insignificant detail or by the aggregation of items that have

different characteristics.

Level of aggregation IFRS 17.95

Disclosures do not necessarily have to mirror the groups of contracts

— type of contract (for example, major product lines)

— geographical area (for example, country or region)

— reportable segment, as defined in IFRS 8 Operating Segments

— Sales channel

Examples

Premium Allocation Approach

54

Premium allocation approach (PAA)

The PAA is an optional, simplified model for measuring the LRC

While unearned premium is a

familiar concept, the revenue recognition pattern could differ

Liability for remaining coverage (LRC)

PAA replaces the GMM for short-duration contracts

Liability for incurred claims (LIC)

May need to be discounted

Premium is recognized over time as revenue unless release of risk follows a different pattern

Total liability of a group of insurance contracts

+

When is the PAA applicable?

at most one year (short term)

always

more than one year

if the measurement produced by the PAA does not differ materially from the one produced by the General Measurement Model (GMM)

Length of the coverage period

met if no significant variability of the fulfilment cash flows is

expected before a claim is incurred

Coverage period is determined by contract boundariesMulti-year contracts can be short term contracts too, if for example the

insurance company has an annual right of cancellation, or an annual right to adjust the premiums/services to the risk

55

How to calculate applying the PAA

The premiums, if any, received at initial recognition

Initial recognition

minus any insurance acquisition cash flows at that date, unlessthe entity chooses to recognise the payments as an expenseapplying paragraph 59(a)

plus or minus any amount arising from the derecognition at that date of the asset or liability recognised for insurance acquisition cash flows applying

IFRS 17.55(a)

LRC on initial recognition

How to calculate applying the PAASubsequent measurement IFRS 17.55(b)

plus the premiums received in the period

minus insurance acquisition cash flows; unless the entity chooses to recognise the payments as an expense applying paragraph 59(a);

LRC at the end of the period

LRC on initial recognition

plus any amounts relating to the amortisation of insuranceacquisition cash flows recognised as an expense in the reportingperiod; (unless paragraph 59(a));

plus any adjustment to a financing component

minus the amount recognised as insurance revenue for coverageprovided in that period (see paragraph B126); and

minus any investment component paid or transferred to theliability for incurred claims

Initial recognition

Onerous contracts in the light of the PAA

— For contracts issued to which an entity applies the premium allocation approach, the entity shall assume no contracts in the portfolio are onerous at initial recognition, unless facts and circumstances indicate otherwise.

— An entity shall assess whether contracts that are not onerous at initial recognition have no significant possibility of becoming onerous subsequently by assessing the likelihood of changes in applicable facts and circumstances.

IFRS 17.18


If at any time during the coverage period, facts and circumstances indicate that a group of insurance contracts is onerous, an entity shall calculate the difference between:

a) the carrying amount of the liability for remaining coverage determined applying PAA; and

b) the fulfilment cash flows that relate to remaining coverage of the group applying GMM.

To the extent that the fulfilment cash flows described in (b) exceed the carrying amount described in (a), the entity shall recognise a loss in profit or loss and increase the liability for remaining coverage

IFRS 17.57 & .58

Example (1/3)

PAA is applicable as duration less than one year

Facts and circumstances do not indicate that the group of contracts is onerous

Options are exercised as follows :

— The entity chooses to recognise the insurance acquisition cash flows as an expense when it incurs the relevant costs (IFRS 17.59 (a))

— No discount effects of the LIC

Further assumption: No investment component

1.7.20X1 31.12.20X1 30.6.20X2 31.8.20X2Issue date 1.7.Duration (months) 10Expected premiums (paid immediately) 1.220Attributable acquisition costs (paid and expensed immediately) 20LIC - Best Estimate 600LIC - RM 36LIC - Best Estimate 400LIC - RM 24Claims payments 1.070

Illustrative Example 10 (IFRS 17.IE113-IE123)

Liabilities 31.12.20X1 30.6.20X2 31.12.20X2Liability for remaining coverage (LRC) 488 0 0Liability for incurred claims (LIC) 636 1.060 0Total 1.124 1.060 0

Example (2/3)


LRC 31.12.20X1 30.6.20X2 31.12.20X2LRC at the beginning of the period 0 488 0Premiums received 1.220 0 0Acquisition costs 0 0 0Amortization of acquisition costs 0 0 0Insurance Revenue -732 -488 0LRC at the end of the period 488 0 0

−6

101.220

600 + 36 636+400 + 24

Initial recognition

Premiums are paid directly after initial recognition LRC at initial recognition is 0

Example (3/3)Balance sheet

31.12.20X1 30.6.20X2 31.12.20X2Cash 1.200 1.200 130Liabilities 1.124 1.060 0Equity 76 140 130

Profit and LossInsurance Service Expenses 31.12.20X1 30.6.20X2 31.12.20X2Claims 636 424 10Acquisition costs 20 0 0Total 656 424 10

1.070− 600 + 400− (36 + 24)

P&L 31.12.20X1 30.6.20X2 31.12.20X2Insurance Revenue 732 488 0Insurance Service Expenses -656 -424 -10Profit / Loss 76 64 -10

Variable Fee Approach

Variable fee approach (VFA)The approach considers the variable fee associated with direct participating contracts

Obligation to policyholder =

Obligation to pay fair value of

underlying items - Variable fee

Recognised immediately

Adjusts the CSMSubsequent measurement –Accounting for changes

—The application of the VFA is mandatory—The VFA reduces the volatility of net results—The general principal of the building blocks still holds—The main difference arises in the subsequent measurement

of the CSM

63

When is the VFA applicable?Insurance contracts with direct participation features:— „the contractual terms specify that the policyholder participates in a share of a clearly

identified pool of underlying items— the entity expects to pay to the policyholder an amount equal to a substantial share of the

fair value returns on the underlying items; and— the entity expects a substantial proportion of any change in the amounts to be paid to the

policyholder to vary with the change in fair value of the underlying items”

The criteria have to be analysed carefully!

Criteria have to be analysed at inception (no changes afterwards!)

VFA is not applicable to reinsurance contracts!

Examples, that could meet this definition:— Traditional life insurance contracts— Unit-linked life insurance contracts— Long-term health insurance contracts

64

Remarks

A share referred to in the definition does not preclude the existence of the entity’s discretion to vary the amounts paid to the policyholder.

However, the link to the underlying items must be enforceable

IFRS 17.B105

An entity shall interpret the term ‘substantial’ in both paragraphs in the context of being contracts under which the entity provides investment-related services and is compensated for the services by a fee that is determined by reference to the underlying items

IFRS 17.B107(a)

An entity shall assess the variability in the amounts in paragraphs: (i) over the duration of the group of insurance contracts; and(ii) on a present value probability-weighted average basis, not a best or worst outcome basis (see paragraphs B37–B38).

IFRS 17.B107(b)

Measurement

[…] insurance contracts with direct participation features are contracts under which the entity’s obligation to the policyholder is the net of:(a) the obligation to pay the policyholder an amount equal to the fair value of the underlying items;

and(b) a variable fee (see paragraphs B110–B118) that the entity will deduct from (a) in exchange for the

future service provided by the insurance contract, comprising:(i) the entity’s share of the fair value of the underlying items; less(ii) fulfilment cash flows that do not vary based on the returns on underlying items.

IFRS 17.B104

The following guideline might be of importance:

It seems that the following order of measurement shall be applied:

!1

2

Fair Value of the Underlying Items is allocated to the policyholder

The variable fee is deducted afterwards

Measurement ctd.

Variable FeeEntity’s share of the

fair value of the Underlying Items

fulfilment cash flows that do not vary based on the

returns onUnderlying Items

Variable FeeLiability towards policyholder

FV of Underlying Items

Measurement ctd.

Liability to PH

FV of Underlying

Items

Entity’s share of the fair

value of the Underlying

Items

fulfilment cash flows that do not

vary based on the returns on

Underlying Items

Comparison subsequent measurement

CSM at the end of the period CSM at the end of the period



Entity’s share of the change in the fair value of the underlying items

Changes in fulfilment cash flows relating to future service (B101 –

B118)


Amount recognised as insurance revenue

Variable Fee ApproachGeneral Measurement Model

IFRS 17.44 IFRS 17.45



Interest accreted on the carrying amount of the CSM

Changes in fulfilment cash flows relating to future service (B96 –

B100)


Amount recognised as insurance revenue

Subsequent measurement of CSM

If the CSM is not sufficient, a loss component is recognized

Measurement of CSM such thatvariability of the variable fee is accounted for

IFRS 17.B110 – B113

Source: KPMG first impressions on IFRS 17

Similarities between GMM and VFAInitial Recognition Measurement of the CSM as excess of the Inflows over the risk-adjusted

outflows

Principles of VFAPrinciples of GMM


CSM is adjusted for changes in estimates of service components relating to future service

Changes in the estimates of non-

financial assumptions

Part of the service:

— relating to future service adjusts CSM— relating to current and previous periods P&L

Changes in the assumptions regarding

future participation policy

Regarded as non-financial assumptions treated as such

Variable Fee Approach and General Measurement Model are based on the same principles

Differences between GMM and VFA

Changes of estimates in financial assumptions

Recognized in P&L or OCI Adjusts CSM

Principles of VFAPrinciples of GMM

Discounting rate for adapting the CSM

Discounting rate at initial recognition Implicitly, and therefore current

The adjustments to the CSM based on the changes in the variable fee do not have to be determined separately!

Simplification

The major difference arise in subsequently measuring the CSM

Illustrative Example 9— An entity issues 100 contracts that meet the criteria for insurance contracts with direct

participation features. The coverage period is three years— A single premium of CU150— Max of CU170, or the account balance, if the insured person dies— Value of the account balance at the end of the coverage period if the insured person survives

Assumption: The entity sells assets to collect annual charges and pay claims. Hence, the assets that the entity holds equal the underlying items

Account balance at the beginning of the period

Premiums received

Change of the FV of the Underlying Items

an annual charge of 2% of the account at BoY plus change in FV

the value of the remaining account balance in case of death or survival

Account balance at the end of the period

Illustrative Example 9 ctd.

Remark: — Some values cannot be recalculated (e.g. TVFOG)

— FV of the assets will increase by 10% a year— Risk Adjustment of CU25 — Release of RA by CU12 / 8 / 5 from year 1 to 3— one insured person will die at the end of each year and claims will be settled

immediately (no LIC)

Assumptions at initial recognition

— FV of assets increase by 10% in year 1— FV of assets increase by 8% in year 2— FV of assets increase by 10% in year 3— All other assumptions occur as expected

Actual

Illustrative Example 9 – Initial recognitionExpected development of the Underlying Items:

Account balance per contract Year 1 Year 2 Year 3

Account balance at BoP 0 162 174

Cash inflows: Premiums 150 0 0

Change FV of Underlying Items 15 16 17

Annual Charge (2%) -3 -4 -4

Account balance EoP 162 174 188

Death benefits:

Year 1 Year 2 Year 3

From PH‘s account 162 174 188

Difference to guaranteed amount 8 0 0

Claims paid 170 174 188

Illustrative Example 9 – Initial recognitionSituation in total

PV of future cash inflows -15.000 = - 100 * 150

PV of future cash outflows 14.180 incl. TVFOG for guaranteed death benefit

Risk Adjustment 25

Fulfilment Cash Flows -795

CSM 795

LRC 0

IE 9 – Subsequent measurement

Reconciliation according to IFRS 17.101:

Fulfilment cash flows at BoP 0

Effects new contracts added to the group -795

Change in fair value 1.403

Current service: Release of Risk Adjustment -12

Cash inflows and outflows 14.830

Fulfilment Cash Flows 15.426

Subsequent measurement in year 1:

= 15.413 – (14.180 – 170)

PV of future cash inflows 0

PV of future cash outflows 15.413 incl. TVFOG

Risk Adjustment 13


IE 9 – Subsequent measurement

CSM

CSM at BoP 0

Effects of new contracts added to the group 795

Change in variable fee 97 = 1.500 – 1.403

Release CSM -300 = (0 + 795 + 97) * 100/(100+99+98)

CSM EoP 592

Change in variable fee


CSM 592

LRC year 1 16.018

LRC year 1

— Adjustment of the CSM due to the change in the variable fee is calculated in total (according to simplification IFRS 17.B114)

IE 9 – Development of the balance sheetInitial Recognition

Assets 0 795 CSM

SH Acc. 0 -795 Fulf. CF

Premium cash inflow, purchasing assets

Assets 15.000 795 CSM

SH Acc. 0 14.205 Fulf. CF

Increase FV of assets



Death benefit


SH Acc. -8 15.535 Fulf. CF

Accounting for entity‘s share of fair value



Release of CSM and Risk Adjustment



312 P&L

IE 9 – Development of the balance sheet



312 P&L

Assets 16.008 16.008 Liability

SH Acc. 322 322 P&L

TraditionalIFRS 17

Balance sheet end of year 1

vs.

Illustrative Example 9 – P&LCalculation of the insurance revenue

Year 1

Insurance Service Expenses 8

Release Risk Adjustment 12

Release CSM 300

Insurance Revenue 320

Year 1

Change LRC -16.018

Premiums 15.000

Insurance Finance Inc./Exp. 1.500

Payment Investment Component -162

Insurance Revenue 320P&L

IFRS 17 Year 1

Insurance Revenue 320

Insurance Service Expenses -8

Insurance Finance Inc./Exp. -1.500

Investment Income 1.500

Insurance Service Expenses from Loss Component of LRC

0

Profit / Loss 312

— As death benefit is the max of account balance and 170, it is in our case the sum of account balance of 162 and 8 guaranteed benefit

— Payment of account balance is to be seen as a repayment of an investment component

IFRS 17.B123IFRS 17.B124

The other years are calculated accordingly

Reinsurance

For reinsurance contracts held…The GMM and PAA still apply, with modifications

The reinsurance contract held is accounted for separately from the underlying direct contract

Reinsurance gain or loss is recognised as reinsurance services are received

Counterparty default risk of the reinsurance company has to be accounted for

83

Presentation and disclosure

Presentation

Investment components are excluded from insurance revenue and service expenses

Entities can choose to present the effect of changes in discount rates and other financial risks in profit or loss or OCI to reduce volatility

85

DisclosureInformation should be disclosed at a level of granularity that helps users assess the effects contracts have on…

Financial position

Financial performance

Cash flows

New disclosures relate to expected profitability and attributes of new business

86

Important new disclosuresAssets and Liabilities

recognised Significant judgements Nature and extent of risks

— Additional reconciliations in table format

— Input factors used for calculating the insurance revenue for the current period

— Effects of contracts initially recognised in the current period

— Analysis of the interest expenses

— Additional disclosures regarding the transition to IFRS 17

— Detailed information about methods and processes used for estimating the inputs

— Effect of changes in the methods and processes, as well as the reason for each change

— Confidence level used to determine the risk adjustment for non-financial risk

— Discount curves

— Sensitivities (insurance risk): quantitative infor-mation about the effects on P&L and own funds

— Comparison of actual claims with previous estimates of the claims

— Liquidity risk: Relation-ship between amounts that are payable on demand and the carrying amount of the related group of contracts

— Effect of regulatory framework

87

IFRS 17.98- .105

IFRS 17.106

IFRS 17.107

IFRS 17.110 - .113

IFRS 17.114 -.116

IFRS 17.117 - .118

IFRS 17.117 - .118

IFRS 17.119

IFRS 17.128 - .129

IFRS 17.130

IFRS 17.132

IFRS 17.126

IFRS 17.120

Some more remarksLevel of aggregation is not defined by the standard in more detail

Examples of level of aggregation by the standard:— type of contract (for example, major product lines);— geographical area (for example, country or region); or— reportable segment, as defined in IFRS 8 Operating Segments

IFRS 17.96

Separate reconciliations shall be disclosed for insurance contracts issued and reinsurance contracts held.

IFRS 17.98

An entity shall for each reconciliation, present the net carrying amounts at the beginning and at the end of the period, disaggregated into a total for groups of contracts that are assets and a total for groups of contracts that are liabilities

IFRS 17.99(b)

Transition

Full retrospective approach is required…

… but expedients can be used

Modified retrospective approach, if possible

Fair value approach

Yes

No

Either

Is it impracticable to use a full retrospective approach?

Or

Full retrospective approach

A company can apply different approaches for different groups

90

What is the meaning of „impractical“?

What the application of the full retrospective approach

would mean…

To fully apply the retrospective approach & the subsequent measurement of the CSM all assumptions for the respective reporting day have to be determined retrospectively

Practicability is at least questionable

CSM

-40

40

0

i.e. 31.12.2013

FFCF

FFCF

CSM

01.01.2020

190

30

160

110

CSM

60

i.e. 31.12.2017

50

FFCF

Modified retrospective approach

When using the modified retrospective approach the CSM at initial recognition can be estimated and subsequently be updated on the first day of application using simplified methods.

There will be deviations with overwhelming probability!

-40

z.B. 31.12.2013

0

40

FFCF

CSM

10

01.01.2020

170

160

CSM

FFCFCSM

FFCF60

110

z.B. 31.12.2017

50

Fair value approach as a further simplification

— How can the fair value and the FFCF differ?(compare the FV definition under Solvency II)

Obvious point for discussion

Using the fair value approach, the CSM results

as the residual from the fair value and the

current fulfilment cash flows.

40

200

160

Fair Value FFCF CSM

Analysts will take a very close look at the reported figures

In particular the methods used for calculating the risk adjustment are not specified!

Fulfilment cash flows Discounting Risk

adjustment CSM LRC

Since all the building blocks strongly depend on estimates, the question of the margin arises inevitably.

Potential accountingchanges for insurers

Other things to think about

Accounting mismatches may occur but accounting policy choices and transition provisions could reduce them

More consistency and transparency for options and guarantees

96

97

As in Solvency II the actuary will be an integral part of future accounting processes.

Tasks under IFRS 17 where an actuary might be necessary:

— Generation of cash flows, including setting of assumptions

— Validation of CSM movement

— Validation of insurance revenue

— Etc.

The role of the actuary under IFRS 17

Though the main tasks are not too much different from today, the actuary will be involved much more into standardized accounting processes

Do not forget to have a closer look at the literature

IFRS 17 Standard Basis for Conclusions Illustrative Examples

116 pages 124 pages 82 pages

99

And there is many more literature to come…

KPMG first impressions:

Available online:https://home.kpmg.com/uk/en/home/insights/2017/07/ifrsnotes-first-impressions-ifrs-17-insurance-contracts.html

IFRS 17 – Versicherungsverträge (Herausgeber: Kronthaler/Smrekar/Weinberger)

Questions?

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