2008 general meeting assemblée générale 2008 toronto, ontario 2008 general meeting assemblée...
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2008 General MeetingAssemblée générale 2008
Toronto, Ontario
2008 General MeetingAssemblée générale 2008
Toronto, Ontario
Canadian Institute
of Actuaries
Canadian Institute
of Actuaries
L’Institut canadien desactuaires
L’Institut canadien desactuaires
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Agenda
• Contract Classification
• A few odds and ends
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• Contract classification defines the accounting treatment.– i.e. How the liability will be measured on the balance sheet
• Financial Instruments – IAS 39– Amortized Cost or Fair Value
• Insurance Contracts – IFRS 4– Existing accounting measurement
• Discretionary Participation Financial Instruments– Existing accounting measurement
Contract classification
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• The most significant impacts expected– Financial Instruments (Investment contracts)
– Unbundling of contracts (embedded derivatives)
Contract classification
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IFRS• Measurement
• Current C GAAP - insurance enterprise level• IFRS 4 - at the contract level• Requires contracts to be classified
– Insurance contracts (IFRS 4)
– Financial Instruments (IAS 39 – IAS 32)
– Service Contracts (IAS 18)
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Definition of an insurance contract• A 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.
IFRS 4 Appendix A
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• Insurance risk is risk, other than financial risk, transferred from the holder of a contract to the issuers
• Financial risk is the risk of a possible future change in one or more of a specified interest rate, financial instrument price, … or other variable– provided in the case of a non-financial variable, that the
variable is not specific to a party to the contract.
• If both financial risk and significant insurance risk are present, contract is classified as insurance.
IFRS 4 Appendix A
Insurance Risk
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Significant Insurance Risk• pays significant additional benefits in any scenario
– even if the insured event is extremely unlikely
– even if the expected (i.e. probability-weighted) present value of contingent cash flows is a small proportion of the expected present value of all the remaining contractual cash flows
IFRS 4 Appendix B - B22-B28
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Significant Insurance Risk• If an insurance contract is unbundled into a
deposit component and an insurance component, the significance of insurance risk is assessed by reference to the insurance component.
• The significance of insurance risk transferred by an embedded derivative is assessed by reference to the embedded derivative.
• Not by reference to materiality in the financial statements
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Significant insurance risk• Additional benefits include
– Payments contingent on insurance risk• Term insurance
– timing risk• Whole life contract (payment known, timing unknown) has
additional benefits• Contract where death benefit is equivalent to maturity benefit (if
the maturity benefit is adjusted for time value of money) does not have additional benefits
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• IASB has (and will) not provide quantitative guidance
• Rules of thumb currently being adopted– Benefit paid on death exceeds benefits payable on survival
by more than x% – Plausible scenario exists under which the death benefit
exceeds the survival benefit by x% or more at any time during the policy term
– Benefit payable on survival exceeds the benefit payable on death by more than x%
Quantitative measures
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Significant Insurance Risk• Document your definition of significant
– This is your value for “x%”
– And the quantitative measures used
• Obtain concurrence of auditor• Apply consistently across all contracts
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Contract Classification• Tends to be a more complicated issue for Life and
Health Insurance – a number of products may have been created primarily
for investment purposes
• However, due to the somewhat liberal definitions in IFRS 4– most Life & Health Insurance contracts are expected to
meet the insurance contract threshold
– but an insurer still needs to conduct an analysis of it’s contracts!
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Contract Classification• Remember that the classification is at a contract
level and not at a product level.– Contracts entered into simultaneously with the same
policyholder count as one contract
• Classification is done as at the date of inception
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Contract Classification• Homogeneous blocks
– Contracts may be classified homogeneously on materiality grounds
– Relatively homogeneous book known to consist of contracts that all transfer insurance risk
– need not examine each contract
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Contract Classification• Depends on the facts and circumstances of
the contract terms• Document these and the rationale for the
conclusion reached– Particularly for complex products or where
judgement was required
• Obtain auditor concurrence
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Classification flowchart
Is there significantinsurance risk present
in the contract?
Is there adeposit component to the
contract? If so, is the deposit componentindependent of the insurance
cash flows?
Are any elements ofthe benefit driven by discretionary
participation
Insurancefeatures present
in contract
Classified as aninvestment contract
Deposit component
Yes
No
Insurance and depositcomponents of contract must, ifnot recognised, be unbundled
and valued separately
Yes
No
Insurancecomponent
Product is an InvestmentContract without discretionary
participation features
Product is anInsurance Contract
Product is an InvestmentContract with discretionary
participation featuresYes
No
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Life Insurance
Individual Insurance
Annuities
Group Insurance
Term Par Universal Life
Variable Universal
Life
Life Contingent Payout
Annuities
Fixed Payout Annuity
Fully Insured
Plan
Experience Rated Refund
Administrative Services Only
Insurance Not InsuranceBifurcation or TBD?
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Individual Insurance• Term Insurance• Whole Life• T 100• CI• DI• LTC• Riders
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Individual Insurance• UL
• VUL
• VL
• Index Linked
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Group L&H• Health• LTD• Life• Affinity• ASO• ERR• Hold Harmless agreements
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Payout Annuities• Life
• Settlement
• Structured Settlement
• Fixed
• Index Linked
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Seg Funds / VA• Group
• Individual
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Seg Funds / VA• GMDB• GMMB• GMDB + GMMB• GMWB
– Fixed– Life
• GMDB + GMWB
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Seg Funds / VA• Normally a return of a % of premium on a unit-
linked contract would classify the contract as insurance. – IFRS requires only a single scenario for the contract to
be insurance.
• A situation where this may be questioned is if the fund is cash or bonds (depending on duration)
• Need to determine if there really is a chance that the death benefit would become significant.
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Seg Funds / VA• GMDB combined with GMMB
– Paragraph B27 • additional benefits can be the requirement to pay
benefits earlier
• if the insured event occurs earlier and
• the payment is not adjusted for the time value of money
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An aside• Seg funds are on balance sheet – one line for the
assets and one for the liabilities • Treasury shares
– where the segregated funds hold shares of the insurance company
– these will probably have to be eliminated from the asset side as treasury shares, but kept on the liability side
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Deferred Annuities• Individual
– Annuitization benefit on a guaranteed basis– No MV adjustment on death
• Group– Deposit Administration
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Reinsurance• Life & Health
• Financial
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Another aside• Deferred Tax
– CIA SOP– IAS 12
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Contract Classification• IBNR • Claims in the course of payment• Dividends / Premiums / Proceeds on Deposit• Advance Premiums
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Contract Classification• Facts and circumstances
• Document these and the rationale for the conclusion reached– Particularly for complex contracts or where
judgement was required
• Obtain auditor concurrence
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And another aside• If the contract is a financial instrument and
measured at amortized cost under IAS 39• Need to check for embedded derivatives
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Discretionary Participation Feature• A contractual right to receive, as a supplement to
guaranteed benefits, additional benefits:– (a) that are likely to be a significant portion of the total
contractual benefits;– (b) whose amount or timing is contractually at the
discretion of the issuer; and– (c) that are contractually based on:
• (i) the performance of a specified pool of contracts or a specified type of contract;
• (ii) realized and/or unrealized investment returns on a specified pool of assets held by the issuer; or
• (iii) the profit or loss of the company, fund or other entity that issues the contract.
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IAS 39• If a Financial Instrument has a discretionary
participation features (DPF)– The whole contract is valued using IFRS 4. – If the deposit element can be separated, then it may be
accounted for under IAS 39 - but this is at the choice of the insurance company
– There are requirements to check that the liability held is at least as big as that which would be held under IAS 39.