gm-prs-0209 - accounting change ppt v1 (final) 062813 overview o… · kpmg international standards...

1

Insurance contractsOverview of IASB and FASB’s proposals on insurance

28 June 2013

KPMG International Standards Group

Agenda

Presenters/Administrative1

Overview of proposals2

1. Background and overview

2. Scope

3. Separating non-insurance components

4. Recognition

5. Measurement models

6. Reinsurance

7. Business combinations and portfolio transfers

8. Presentation

9. Disclosures

2© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Business Impacts3

Q&A4

10.Transition

2

Presenters

Vice-Chair KPMG Global Insurance Contracts Topic Team

Darryl Briley

Partner US DPP

Jennifer Austin

Canadian Member -KPMG Global Insurance Contracts Topic Team

Neil Parkinson


Partner US DPP Topic Team

Canadian Insurance Sector Leader

Administrative

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3

Insurance contracts project milestones

IASB final standard ?

IASB Targeted

Re-Exposure

Draft Effective dates ?

IASB Exposure

Draft

atio

ns

rati

on

s

2010 2011 to 1Q 2013

dates ?

FASB Discussion

Paper

June 2013

FASB Exposure

Draft

late 2014 or early 2015?

Red

elib

era

2H 2013to 2014

FASB final standard ?

2016

Jan 2015

Prepare for transition

Jan 2017

2017

Jan 2018

2015

Join

t d

elib

e


The effective date of the final IFRS standard will be approximately three years after the standard is issued. The IASB staff currently estimate that the issuance date will be late 2014 to early 2015. The IASB has stated that it expects the earliest possible effective date to be for annual reporting periods beginning on or after 1 January 2017.

The FASB decided not to include a minimum time period between the issuance of the standard and the effective date in its ED, but rather to ask a question about the key drivers affecting the timing of implementation.

Jan 2015 IFRS 9

Effective date

Jan 2017 earliest

effective date

Jan 2018 Potential

effective date

Measurement proposals

■ Treatment of

Background and overviewMajor changes since the 2010 proposals

■ IASB Re-exposure will include full text of proposed standard

■ Limited questions to avoid re-opening of issues

■ IASB does not intend to revisit ■ Treatment of contractual service margin (unlocking-IASB only)

■ Treatment of participating contracts

Approach to transition

■ Retrospective application if practical

Presentation proposals

■ Presentation of premiums, claims and expenses in profit & loss

FASB will have a full exposure draft

FASB intends to undertake fieldwork during the exposure period

■ IASB does not intend to revisit other aspects of proposed standard after re-exposure

■ IASB intends to undertake fieldwork during re-exposure


p

■ Estimate of margin on transition

p

■ Presentation of changes in discount rate in OCI

The comment period for the exposure drafts will end

25 October 2013.

4

Areas with significant changes Areas with significant clarifications

■ Scope of financial guarantees ■ Future cash flows

Background and overviewKey changes to 2010 proposals

■ Unbundling

■ Recognition

■ Contract boundaries

■ Acquisition costs

■ Premium-allocation approach (PAA)

■ Contractual service margin(IASB)/single margin(FASB)

■ Participating contracts

■ Discount rate

■ Risk adjustment

■ Investment contracts with a discretionary participation feature (DPF)

■ Presentation of statement of financial position

■ Premium-allocation approach (PAA)

■ Disclosures


■ Reinsurance

■ Use of OCI

■ Presentation of statement of comprehensive income

■ Transition

Background and overviewKey IASB and FASB differences

Scope - Investment contracts with DPF

Scope - Financial guarantee insurance (including mortgage)

Building block approach (BBA) 3 vs 4 building blocksBuilding block approach (BBA) 3 vs. 4 building blocks

Definition of a portfolio, unit of account for releasing margins

Acquisition costs – successful vs. unsuccessful

Mechanics for contract cash flows that vary with underlying items

Unlocking the residual margin vs. Locked – in single margin


Premium allocation approach – permit vs. require

Reinsurance approach BBA vs. PAA– permit vs. require

Transition- practical expedients and re-designation of financial assets

5

Scope

In Scope Out of Scope

Contracts that an entity issues that transfer significant insurance risk, including:

Contracts that an entity issues that do not transfer significant insurance risk, including:

Financial Instruments issued by insurersContaining DPFs #

Financial Guarantee Contracts*

th t tlth t tl

Financial Instruments

Without DPFsService Contracts

Contracts specifically

excluded, e.g. certain fixed fee

service contracts

Financial Guarantee Contracts*

t tlt tl


*The FASB has decided on specific exceptions to the inclusion of financial guarantee contracts in the insurance contracts standard. #IASB only

…that are currently accounted for as insurance contracts#

…that are currently accounted for as insurance contracts#

…not currently accounted for as insurance contracts#

…not currently accounted for as insurance contracts#

Scope exceptions

■ Product warranties issued directly by a manufacturer, dealer or retailer;

■ Residual value guarantees provided by a manufacturer, dealer or retailer, as well as lessee’s residual value guarantee embedded in a finance lease;

The proposals would apply to all insurance contracts except:

value guarantee embedded in a finance lease;

■ Employers’ assets and liabilities under employee benefit plans and retirement benefit obligations reported by defined benefit retirement plans;

■ Contractual rights or contractual obligations that are contingent on future use of, or right to use, a non-financial item;

■ Contingent consideration payable or receivable in a business combination;

■ Direct insurance contracts that an entity holds, i.e. direct insurance contracts in which an entity is the policyholder. Does not apply to a reinsurance contract that an insurer holds;

■ Fixed-fee service contracts that have as their primary purpose the provision of services and meet


p y p p pcertain criteria's below;

Contracts are not priced based on an assessment of risk with individual customer

Contracts typically compensate customers by providing a service rather than cash

The type of risk transferred are primarily related the use (or frequency) of services

6

Distinct goods

and services

Embedded

Separating non-insurance components

■ The separation of certain components from an insurance contract (‘unbundling’) would be required. Unbundling prohibited

derivatives (not closely related)

Distinct investment

components

Non-distinct investment component

Insurance component

q g pif not required.

■ Guidance on closely related embedded derivatives, distinct investment components and distinct goods and services is provided


Measured under the insurance standard

Measured under the insurance standard, but excluded from the aggregate premium

Measured under the financial instrument standard

Measured under the revenue recognition standard

Recognition

■ An insurance contract would be recognized from the earliest of:

the beginning of the coverage period;

the date on which the first payment from the policyholder becomes due #; and

if applicable, the date on which facts and circumstances indicate that the portfolio of insurance

Onerous contract

considerationBound by terms of Coverage begins =

Recognize

pp pcontracts to which the contract belongs is onerous.

■ In the absence of a contractual due date, the first payment from the policyholder would be deemed to be due once it has been received.


1 January1 November

Bound by terms of contract

Coverage begins = premium due

# IASB only

7

Proposed measurement modelsThe building-block model

Four building blocks – IASB preference Three building blocks – FASB preference

Expected future cash flows

Explicit unbiased and probability-weighted estimates of future cash outflows less future cash inflowsExplicit, unbiased and probability-weighted estimates of future cash outflows less future cash inflows

Time value of money

Discounted using current rates to reflect the time value of money

Risk adjustment

To adjust for the effects of uncertainty about the amount and timing of future cash flows

Single margin

To remove any profit at inception. Released over coverage and claims handling period. Interest accreted on the single margin.

Contractual service margin

To remove any profit at inception. Released over coverage period. Interest accreted on the contractual


service margin.

An insurer would measure the present value of the fulfilment cash flows excluding the risk adjustment at the portfolio level of aggregation for insurance contracts.

Proposed measurement modelsFundamentals

Level of measurement

No level of measurement prescribed for the risk adjustment.

IASB- unit of account used to determine the contractual service margin should be at portfolio l l U it f t d t l t ib d b t i t t ith th bj ti f

IASB - contracts that are subject to similar risks and priced similarly relative to the risk taken on and managed together as a single pool.

FASB - contracts that are subject to similar risks and priced similarly relative to the risk taken on and have a similar duration and similar expected patterns of release of the single margin.

Portfolio


level. Unit of account used to release not prescribed but consistent with the objective of release.

FASB- unit of account to determine and release the single margin is at portfolio level.

Margins

8

■ Be explicit (i.e. separate from estimates of discount rates that adjust for the time value of money and the risk adjustment)

Proposed measurement modelsBuilding block 1 – Cash flows

Estimates of cash flows would include all cash inflows and outflows related directly to the fulfilment of the portfolio of contracts the contract belongs to and would:

■ Reflect the perspective of the entity (market variables would be consistent with observable market prices)

■ Incorporate, in an unbiased way, all available information that relates to the cash flows of the contract

■ Be current and consistent with market prices, i.e. use of estimates of financial market variables such as interest rates

■ Include only cash flows arising from existing contracts within the contracts’ boundaries


Estimates of cash flows would be updated each reporting period and measured at a portfolio level of aggregation for insurance contracts.

Insurance liability under the building –block approach and the onerous contract liability under premium allocation approach reflects estimates of cash flows at the reporting date.

Proposed measurement modelsBuilding block 1 – Acquisition costs

Acquisition costs to be included in the initial measurement of a portfolio of insurance contracts should be all the direct costs that the insurer will incur in acquiring the contracts in the portfolio.

Acquisition costs incurred before a contract’s coverage period begins should be

Measurement would exclude indirect costs including:

■ rent and occupancy

■ software dedicated to contract acquisition

■ equipment maintenance and depreciation

■ agent and sales staff recruiting and training

■ administration

■ advertising

■ utilities

■ other general overhead

g grecognized as part of the insurance contracts liability for the portfolio of contracts.


FASB only - limited to those costs related to successful acquisition efforts

IASB only - no distinction between successful and unsuccessful efforts (all

direct costs included)

FASB lines up with current U.S. GAAP other than eliminating direct response advertising and the transition expedient in ASU 2010-26

9

Example bottom-up and top-down approach

Either a top-down or a

Financial instrument yield of 5.25% (based on actual assets held or a reference portfolio)

Proposed measurement modelsBuilding block 2 – Time value of money

Either a top down or a bottom-up approach may be used to determine an appropriate discount rate.

■ In theory, both approaches should result in the same discount rate, however in practice, differences are expected.

■ The top-down approach may result in a higher rate, as illustrated.

Market risk premium expected losses (1%)

Market risk premium for unexpected losses (.5%)

Difference between top-down and bottom up approach (.25%)

Liquidity premium (.5%)

Risk-free rate 3%

Top-down approach:

3.75%

Bottom-up approach:

3.50%


Risk free rate 3%

■ No specific method prescribed.

■ Regardless of the approach used, the discount rate should be consistent with the characteristics of the insurance contract liability, e.g. timing, currency and liquidity.

Proposed measurement modelsBuilding block 2 – Use of OCI to present changes in discount rates

Present in OCI Present in profit or loss

Cumulative OCI

Difference between liability discounted at the current rate and the liability discounted at the (locked-in) rate at Interest expense at ‘locked-in’ rateand the liability discounted at the (locked-in) rate at inception

Current period OCI

Equals interest expense at current rate less interest expense at ‘locked-in’ rate

Changes in interest sensitive cash flow assumptions (e.g. minimum interest guarantees and lapse rates)(a)

Interest expense at locked-in rate

Note: (a)Unless offset against an unlocked contractual service margin

Key attributes


■ The use of OCI to present the effect of discount rate changes would be required (rather than permitted)

■ No loss recognition test

■ To recognise the effect of changes in cash flow assumptions in profit or loss using the ‘locked-in’ rate

10

Amortized Cost FV-OCI FV-Profit or Loss

Business model assessment

Proposed measurement modelsBuilding block 2 – interaction with the financial instruments proposals

Held and managed within a business model whose objective is to hold assets to collect contractual cash flows

Held within a business model whose objective is both to hold the assets to collect contractual cash flows and to sell the assets

Residual category (i.e., all other assets and includes assets that do not meet the SPPI test as well as those that are held for sale)


Proposed measurement modelsBuilding block 3 – Risk adjustment (IASB only)

■ If there are techniques that could represent faithfully the risk inherent in the insurance obligations, then the inclusion of an explicit risk adjustment would provide relevant information to users. Under the IASB’s approach, the measurement of an insurance contract should contain an explicit risk adjustment.

■ IASB has not prescribed a unit of account for measurement of the risk adjustment.

Risk Adjustment: “The compensation the insurer requires for bearing the uncertainty about the amount and timing of the cash flows that arise as the entity fulfils the insurance contract”

■ If there are techniques that could represent faithfully the risk inherent in the insurance obligations, then the inclusion of an explicit risk adjustment would provide relevant information to users. Under the IASB’s approach, the measurement of an insurance contract should contain an explicit risk adjustment.

■ IASB has not prescribed a unit of account for measurement of the risk adjustment.

■ The IASB would not limit the range of available techniques and related inputs to the risk adjustment.

■ However, if a technique other than confidence level is used, that technique and the equivalent confidence level % is to be disclosed.

■ Re-measured each reporting period and changes are recognized in profit or loss.


p g p g g p

■ Replicating asset approach based on the fair value of the replicating asset may be appropriate.

■ Level of measurement is not prescribed as long as measurement meets objective.

11

Contractual service margin (IASB) Single margin (FASB)

Proposed measurement modelsBuilding block 4 – Contractual service margin (IASB only)

■ Arises when the present value of the fulfilment cash flows * is less than zero (i.e. remove day-one gains)

■ Prospectively adjusted for changes in the estimates of cash flows relating to future coverage or other future services; cannot become negative in subsequent measurement (unlocking)

■ Systematic release over coverage period based on the pattern of transfer of services provided

■ The single margin would not be re-measured subsequently (no unlocking)

■ Recognises profit as the entity satisfies its performance obligation to the policyholder (i.e. released from exposure to risk as evidenced by a reduction in the variability of cash outflows)

■ Separate presentation in statement of financial

■ If the present value of fulfilment cash flows is positive, recognise a loss in profit or loss at inception


■ Classified as part of the insurance liability

■ Interest accretion using discount rate at inception

■ Separate presentation in statement of financial position

■ Interest accretion using discount rate at inception

* defined as the expected present value of the future cash outflows less cash inflows plus risk adjustment

Contracts that specify a link to underlying items that the entity is required to hold

Proposed measurement modelsThe mirroring exception

The measurement for these contracts can be illustrated as follows:

Cash flows vary directly with underlying items

Cash flows vary indirectlywith underlying items

Cash flows do not vary with underlying items

Measurement:mirrors underlying items, i.e.

Amortized cost, FVTPL, FVOCI

Measurement:risk-adjusted expected present value of cash flows

Contracts that do not specify a link to underlying items that an entity is required to hold (i.e. universal life, index-linked products or other types of contracts in which the participation features are discretionary) would be measured under the


p yp p p y)building-block approach.

FASB: The mirroring exception would not apply to situations in which 1) the policyholder’s participation is determined on a basis other than that used to measure the underlying item in the GAAP F/S and does not reflect a timing difference or 2) cash flows for which the entity has the discretion on the amounts relating to the policyholder participation. Additionally, when an entity expects changes to the crediting rates, reset rates in a manner that recognises changes in estimated interest crediting and related ultimate cash flows on a level-yield basis over the life of the contract.

12

■ Simplified measurement approach for some short-duration contracts and similar approach to current practices for non-life contracts.

■ Consistent with revenue recognition proposals.

■ Intended to be proxy for building blocks and permitted (IASB only), if:

Proposed measurement modelsThe premium-allocation approach

Liability for incurred claims

measured under the

BBA

Onerous contract liability

measured under BBA, if

applicableBBAPAA

All three components

measured under one

the coverage period at initial recognition is one year or less; or

Produces measurements that are a reasonable approximation to those of the BBA – i.e. at inception, the entity expects no significant variability in the fulfilment cash flows.


Liability for the remaining coverage,

measured by reference to

unearned premium

under one approach

FASB: PAA would be required, if the insurance contract is one year or less; or it is unlikely that there will be significant variability in the expected value of net cash flows required to fulfil a contract before a claim is incurred.

Initial premium

Onerous contract liability

Pre claims liability at inception

Directly attributable acquisition costs- -=


Initial measurement- Liability for remaining coverage

p

■ Similar in many ways to current practice for non-life contracts

■ Discounting required if there is a significant financing component using discount rate at inception

■ Directly attributable acquisition costs can be expensed if coverage period is less than 1 year

■ Released on a systematic basis representing the transfer of services

■ Onerous contract test when facts and circumstances indicate it might be onerous


Interest accretion

Change in onerous

contract liability

Previous carrying amount

Premium received in

period+

+ Revenue recognized for

coverage

--

Subsequent measurement- Liability for remaining coverage

13


Fulfilment cash flows

Liability for claims incurred under the PAA is measured at the fulfilment cash flows

■ When a liability for incurred claims is discounted - use the discount rate at the inception of the contract to determine the amount of the claims and interest expense in profit and loss.

■ Discounting not needed if cash flows are expected to be paid or received in one year less

Unbiased probability-weighted current estimates of future cash

flows1 Discounted at current rates to reflect the time value of money 2


less

3 Risk adjustment (IASB only)

Evaluate the applicable approach in same manner as a direct contract

ReinsuranceReinsurance assumed

Eligibility Principle *

Contracts eligible if the PAA would produce measurements that are a

reasonable approximation of building-block approach.

Eligibility Criteria *

Apply the BBA rather than the PAA if at contract inception:

IASB -Permit FASB - Require

it is likely that there will be significant ariabilit in the


* A contract would qualify automatically under both approaches if coverage period is one year of less

significant variability in the expected value of net cash

flows required to fulfil a contract before a claim is

incurred.

14

Direct contract

Premium allocation approach (PAA)

Building block approach (BBA)

ReinsuranceReinsurance ceded

Reinsurance ceded Reinsurance cededFASB requires symmetrical approach

PAA


Reinsurance ceded (BBA)

PAA permitted if proxy for

BBA

IASB allows for either approach regardless of direct contract

Present value of fulfilment cash flows > Zero Present value of fulfilment cash flows < Zero

Input Measurement Input Measurement

Reinsurance premium paid (premium ceded to reinsurer – lump sum paid up-front)

(70)Reinsurance premium paid (premium ceded to reinsurer – lump sum paid up-front)

(100)

Measurement example for BBA at initial recognition

ReinsuranceReinsurance ceded example

p p p ) p p p )

Ceding commission received 7 Ceding commission received 7

Reinsurance recoverable cash inflows (after allowance for expected credit losses)

80Reinsurance recoverable cash inflows (after allowance for expected credit losses)

80

Discounting (15) Discounting (15)

Risk adjustment 10 Risk adjustment 10

Contractual service margin/liability (12)Expense at inception1; or

(Debit) contractual service margin/asset218


1. Loss at inception when the coverage period is for past events, i.e. retroactive reinsurance.

2. Reinsurance asset, such as prepaid premium, when the reinsurance contract is for future events.

FASB: No risk adjustment would be included; the remaining single margin on reinsurance contracts that provide coverage for future events would be recognized consistently with the margin on underlying contracts covered by the contract

15

Contracts acquired in a business combination or portfolio transfer would be recognized at the date of the business combination or portfolio transfer

Recognition

Business combinations and portfolio transfers

Consideration received > PVFC PVFC > consideration received

Recognize the difference as an

The consideration received for insurance contracts acquired would be treated as a pre-coverage cash flow.

An entity would determine the expected present value of the fulfillment cash flows and compare that amount with the consideration received for those contracts, after adjusting the consideration for any other assets and liabilities acquired in the same transaction

Measurement


Business combinations

Recognize the difference as contractual service margin

Recognize the difference as an adjustment to the initial measurement of a gain or goodwill #

Portfolio transfersRecognize the difference as contractual service margin

Recognize the difference as a loss

FASB: Difference would be recognized as a loss #

■ An entity would present separately:

portfolios of insurance contracts that are in an asset position; and

tf li f i t t th t i li bilit iti

PresentationStatement of financial position

portfolios of insurance contracts that are in a liability position

■ Reinsurance contract assets from insurance contract liabilities

■ General IAS 1 presentation requirements would apply

■ FASB proposals also include separate presentation of:

building-block and premium-allocation approaches

further disaggregation of insurance contract assets and liabilities


ab es

separate presentation of any unconditional right to premiums

BBA - premium receivable and single margin (includes acquisition costs expected to be paid)

PAA - premium receivable and liability for remaining coverage

16

PresentationPresentation of the statement of profit or loss and OCI

zeroContractual service (or

Initial recognition:

Building block 1 Building block 2 Building block 3 # Building block 4

Expected cash outflows

Discounting Risk adjustment

service (or single) margin

Expected cashinflows

Presentation of changes in profit or loss and OCI (# IASB only):

Changes in cash flows unrelated to

Recognized in profit or loss if no contractual service margin

Release of margin: Unwind of locked-in discount rate:


Changes in cash flows related to past and current services:

profit or loss

Offset changes related to future

services #

gservices: profit or loss Changes in risk

adjustment:profit or loss #

gprofit or loss

in discount rate: profit or loss

Changes in discount rate:

OCI

Changes in cash flows related to future services: Offset against the margin * #


■ IAS 1 applies: presentation of revenue, claims incurred, interest based on locked-in discount rate

■ FASB requires disaggregation of PAA and BBA, ceded balances, and interest accretion

Present of profit or loss and OCI

Mirroring exception to presentation of changes

■ “Mirrored” cash flows align with underlying item

■ All changes in value of cash flows that vary indirectly with underlying items presented in profit or loss

■ Discount rate used to measure interest expense in profit or loss is updated when the entity expects


■ Discount rate used to measure interest expense in profit or loss is updated when the entity expects changes in returns on underlying items to affect the amount of cash flows to the policyholder. That rate is either at contract inception or when the rate is updated (IASB only)

■ When an entity expects changes to the crediting rates, reset in a manner that recognizes changes in estimated interest crediting and related ultimate cash flows on a level-yield basis over the life of the contract. (FASB only)

17


Earned premium presentation (an example)

Insurance contract revenue 475

Insurance contract revenue

■ Premiums are allocated to periods in proportion to the value of coverage (and other services) by reference to the

Claims and benefits incurred -320

Expenses incurred -60

Amortisation of acquisition costs -20

Changes in estimates of future cash flows(if not offset against the contractual service margin)

-10

Unwind of previous changes in estimates 5

Underwriting result (Gross margin) 70

Investment income 60

Interest on insurance liability -54

(and other services) by reference to the estimated pattern of expected claims and expenses.

■ Allocated premiums exclude the present value of the amounts to be paid to policyholders regardless of whether an insured event occurs(‘the investment component’)


y

Profit or loss 76

Other comprehensive income:

Change in insurance contract liability due to changes in discount rate

9

Fair value movements on FVOCI assets -10

Total comprehensive income 75


Expected cash flows Year 1 Year 2

Premiums received 420 400

Assumptions

■ Portfolio of 2-year contracts incepted at

Simplified example of insurance contract revenue presentation

Expected claims and benefits -200 -350

Fulfillment cash flows 220 50

Release of risk adjustment (IASB only) 32 30

Release of contractual service margin/single margin

23 19

Presentation Year 1 Year 2

Insurance contract revenue* 255 399

the beginning of period 1

■ Time value of money immaterial

■ No investment component, acquisition costs, expenses, changes in estimates or experience adjustments, losses on initial recognition

■ All claims and benefits paid immediately

■ Expected cash flows, risk adjustment and margin release pattern as presented in


Actual claims and benefits (amounts incurred)

-200 -350

Underwriting margin 55 49

margin release pattern as presented in table to the right

* Insurance contract revenue is the sum of expected claims and benefits, change in risk adjustment and release of contractual service margin/single margins

18

DisclosuresNew disclosures

Amounts recognized in financial statements

Significant judgements Nature and extent of risks

Additional disclosure requirements include:

Additional reconciliations as a result of the new measurement model in tabular format, including components of changes.

Reconciliation from premiums received to revenue.

Inputs used to determine revenue recognized in the period

More detailed disclosures of methods and processes for estimating inputs.

Effect of changes in the methods and inputs, including explanations for the reasons for changes.

Disclosure of confidence level to which the risk adjustment corresponds.

Quantitative information about effect on profit or loss and equity of contracts’ sensitivities to insurance risk.

Reconciliation of disclosures about claims development with the carrying amounts of the insurance liabilities .

For liquidity risk, the


Effect of the insurance contracts initially recognized in the period.

Additional transition disclosures.

Disclosure of the yield curve used to discount cash flows that do not depend on returns from underlying items.

amounts payable on demand, in a way that highlights the relationship between these amounts and the carrying amounts of the related contracts.

Retrospective application Limited ability to redesignatesome financial assets

■ Includes margin for in-force contracts at ■ Re-designations under the fair value

TransitionOverview

date of transition

■ Full retrospective application

■ Practical expedients provided for determination of contractual service/single margins and discount rate if retrospective application is impracticable

■ Additional guidance for determining

option permitted to eliminate or significantly reduce accounting mismatches

■ Election of OCI category for investments in certain equity instruments permitted

■ FASB proposals would allow financial assets that relate to insurance business to be re-designated under


■ Additional guidance for determining locked-in discount rate to adjust AOCI at date of inception and subsequent interest expense in profit or loss if cant be determined retrospectively

business to be re designated under the relevant financial instruments guidance in effect as if the insurer had adopted that guidance on transition.

Early adoption permitted (IASB only)

19

TransitionEstimating the contractual service margin at transition

Estimate what the margin would have been if the insurer had been able to apply the new standard retrospectively.

When retrospective application is impracticable, an insurer would estimate the contractual service margin by maximizing the use of objective data, i.e. an insurer would not calibrate the residual margin to the insurance liability as it was measured using previous GAAP. (IASB only)

What practical expedient would be used residual margin to the insurance liability as it was measured using previous GAAP. (IASB only)

An insurer would determine the contractual service margin on transition assuming all changes in estimates of cash flows between initial recognition and the beginning of the earliest period presented were known at initial recognition. (IASB only)

If no objective information to retrospectively adopt, estimate margin to zero (FASB only)

Practical expedient to determine the margin based on an insurer’s existing definition of a portfolio and allocate that margin to the “new portfolios” on transition (FASB only).

would be used to determine the contractual service/single margin?

The discount rate used is a key determinant of the margin established at transition and amounts would be recognized in OCI and the interest expense recorded in profit or loss


amounts would be recognized in OCI and the interest expense recorded in profit or loss.

Insurers may find it difficult to determine the discount rate in the retrospective period using either the top-down or bottom-up approaches.

Practical expedient when determining the discount rate would otherwise be impracticable for contracts written prior to transition.

What discount rate would be used?

Business impactsHow will the proposals affect your organization?

Operational performance

People and processesperformance

Product design and pricing and asset- liability management

processes

Data and systems


Possible volatility in equity and profit or loss

Capital management

20

Business impactsChanges to asset liability management

Increased volatility possible in profit or loss and equity

Impacts on asset-liability management and financial instruments accounting

Volatility may increase because current information and assumptions would be

Effective date of financial instrument proposals may precede effective dateinformation and assumptions would be

used in measuring insurance liabilities.

Applying the new financial instruments proposals may mitigate or increase volatility.

The degree of volatility would depend on how insurance liabilities and financial assets are measured under current and proposed requirements.

Discounting insurance liabilities would be a big change for many property and casualty insurers.

proposals may precede effective date of the insurance proposals.

Interaction with future financial instruments models may impact investment allocations and asset-liability management.

Entities would have limited ability to re-designate some financial assets on initial application.

Accounting mismatches may result if:

changes in conditions have offsetting effects on the economic


offsetting effects on the economic values of assets and liabilities; but

gains and losses are not recognized symmetrically.

Business impactsChanges to operating performance

Measurement and reporting of operational performance

Broad business impacts

Proposed measurement model changes how insurance liabilities are presented

May change decisions on product profile and features, or product pricing.

Growing businesses may see negative impacthow insurance liabilities are presented and consequently operating performance.

Presentation and disclosure proposals are expected to change the communication of performance because:

performance metrics would be less familiar;

multi-line business may be more complex to explain;

reporting processes may take longer;

GAAP b d t

Growing businesses may see negative impact on results if earnings patterns become more back-ended on long duration contracts.

More volatile products may become less desirable – e.g. long-duration insurance products with guarantees.

New reporting basis may have tax implications in some jurisdictions.

Capital management and interaction with regulatory capital requirements in some

jurisdictions

I d l tilit i t d it


non-GAAP measures may be used to explain financial performance; and

IFRS vs. US GAAP differences may need to be considered.

Increased volatility in reported equity may impact capital positions.

Insurers would need to incorporate accounting change into planning for solvency and regulatory reporting.

Analysts, investors and shareholders may need time to understand the new reporting.

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Business impactsPeople impacts

Significant impacts on people

■ Compensation arrangements and performance targets may be changed.

■ Additional resources may be needed to manage transition.

■ Actuarial and accounting resources will be in high demand.

■ IT resources will be needed to address changing actuarial valuations and systems developments.

■ Some resource gaps may be addressed by additional hiring, outsourcing to third parties,


internal training, and redeploying existing resources within the organization.

Next steps – Insurance Contracts

Accounting, tax and reporting

■ Perform a comprehensive review of insurance contracts to assess how they would be measured under the BBA or PAA.

■ Consider how best to communicate performance, due to less familiar performance metrics and presentation and duration of reporting processes.

■ Evaluate need to supplement disclosures and use non-GAAP measures.

■ Assess possible alignment with solvency and regulatory reporting.

■ Identify magnitude of any impact on regulatory capital requirements.

■ Assess impact on the taxation treatment of insurance contracts.

■ Identify sources contributing to volatility of financial results under new model


new model.

■ Assess interaction with application of financial instruments proposals and identify possible accounting mismatches.

■ Identify possible impacts arising from the revenue recognition proposals – e.g. for unbundling components of unit-linked contracts.

■ Assess impacts on separate entity reporting.

■ Update accounting and reporting manuals.

22


Systems and processes

■ Upgrade accounting systems to ensure that they can handle new requirements.

■ Upgrade actuarial modeling capabilities, and valuation and financial reporting systems.

■ Evaluate data collection needs and co-ordinate significant actuarial and finance involvement.

■ Identify processes affected by the proposals and establish processes for:

evaluating contract classification and unbundling requirements;

calculating insurance contract liabilities, including determining the discount rate, risk adjustment and contractual service margin; and


disclosures.

■ Evaluate changes needed to key internal controls over financial and regulatory reporting.

■ Consider the need to outsource processes.

■ Consider implementation of revised IT strategy.

■ Develop a transition plan for parallel runs and dual reporting.


Business

■ Review product profile and consider changes to product design and pricing.design and pricing.

■ Revisit investment allocations and asset-liability management.

■ Consider entering into reinsurance and outsourcing arrangements.

■ Assess impacts on key performance metrics.

■ Budget for necessary changes to people, processes and systems.

■ Assess impact on general business issues such as contractual terms, treasury practices, and risk management practices.


23


People and change

■ Determine staff needs – in particular, actuarial, IT and finance resources.finance resources.

■ Train finance and actuarial teams, as well as IT, underwriting, risk management and investor relations.

■ Evaluate impact on compensation arrangements and performance targets and measures.

■ Communicate changes for stakeholders to understand new metrics and performance results.

■ Assess how changes to processes may impact how work is performed – in particular, for actuaries and risk managers.


Questions ?


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