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IFRS 17 – why actuaries need to care

Life2017

21/22 June 2017

QE11 Conference Centre, London

© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.


They’ve only gone and done it …

1997 Kick-off

IASC starts Insurance Contracts project.

May 2017 Publication of IFRS 17 Insurance contracts

July 2013

Re-Exposure Draft Insurance Contracts

May 2002

IASB agreed to split insurance project into Phase 1 and Phase 2

Comparatives mean opening balance sheet

required as of 1 January 2020 (companies

reporting on calendar year basis)

Early adoption possible, provided that the

entity also applies IFRS 9 and IFRS 15 at

the same time

Adoption mandatory for annual periods beginning

on or after 1 January 2021

July 2010

Exposure Draft Insurance Contracts

May 2007

Discussion Paper: Preliminary views

March 2004

IFRS 4 Insurance contracts ‘Phase I’ completed and interim

Standard on insurance contracts issued

© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.2


Agenda

3© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

IFRS

What is it?

Why care now?

Worked examples

Summary


21/22 June 2017


What is it?


Current Balance Sheet Overview and where IFRS 17 fits in?


Financial

Instruments

Shareholder

Equity

Property

Intangible

Assets

IFRS 4 Insurance Contracts

--------------

IAS 39 Financial instruments:

Recognition and Measurement

IAS 18 Revenue

IAS 38 Intangible Assets

IAS 40 Investment Property

IAS 39 Financial instruments: Recognition

and Measurement

IAS 32: Financial Instruments: Presentation

IFRS 7 Financial Instruments: Disclosures

Assets Liabilities

Other IAS 12 Income Taxes

IAS 19 Employee Benefits

Debt

OtherIAS 37 Provision, Contingent

Liabilities and Contingent Assets

DACIAS 18 Revenue

IFRS 4 Insurance Contracts

IAS 37 Provision, Contingent Liabilities

and Contingent Assets

In 2014 standards finalised for:

IFRS 9 to replace IAS 39

IFRS 15 to replace IAS 18

In 2017 standards finalised for:

IFRS 17 to replace IFRS 4

4

“Insurance”

liabilities

“Investment”

liabilities

SummaryWorked examplesWhy care now?IFRS: What is it?


Why is it being introduced?

6

IFRS 4 was always intended to be replaced

It allowed a wide variety of approaches some of which were deemed to

not adequately reflect the underlying financial performance of

insurance contracts

Objectives for IFRS 17

Globally consistent approach Explicit risk measurement and

allowance for the time value of

guarantees and options

More useful and understandable

information for the users of financial

statements

Use of current estimates for all cash

flows and maximum use of observable

market data

Exclude distinct investment

components from insurance revenue

Insurance revenue recognised as

performance obligations fulfilled




IFRS 17 building block approach vs SII


Market-consistent value

of cash flows

Risk adjustment

Contractual service

margin

Total

Insurance

Contract

LiabilityFulfilment cash flows: Component

representing the risk-adjusted present

value of cash flows needed to fulfil the

contract

Value of expected future profit resulting

on zero Day profit

SII BEL

Risk Margin

IFRS 17 Solvency II

VIF forming part of Own

Funds

Map to

SII

Illustrative



Building block – measurement of fulfilment cash flows


Explicit

Unbiased

Entity perspective

Within contract boundary

Cash Flows

Reflect liquidity

characteristics of cash

flows

Consistent with observable

market prices

Exclude factors not

relevant to the cash flows

Time Value of Money

Compensation the insurer

requires for bearing

uncertainty

May reflect diversification

within and between

portfolios

Disclosure of confidence

level

Risk Adjustment

Market-

consistent

value of cash

flows

Risk

adjustment

CSM

Total

Insurance

Contract

Liability

Fulfilment cash flows are updated each reported period:

Actual vs expected cash flow variances for current period flow through to P&L

Changes in estimates of future cash flows related to future coverage adjusts CSM

ALM mismatches flow through to either the P&L or Other Comprehensive Income

Fulfilment cash flows



Building block discount rates – top down vs bottom up

9

Liquid risk-free

curve

Illiquidity premium

Gross yield on

reference portfolio

Allowance for

uncertainty

Elimination of credit risk and any other, not

relevant factors

Consistency with observable market prices of

financial instruments with consistent

characteristics as liabilities such as timing,

currency and liquidity

Bottom-up

Top-down

Expected defaultIFRS 17 discount

rate


Illustrative



Building block approach – contractual service margin

10

Effectively a balancing item that eliminates

day one gain

Cannot be negative except for reinsurance

Released as services are provided

Adjusted to reflect impact of changes in

best estimate assumptions in respect of

future service thereby reducing profit

variability

CSM discount rate “locked” at inception

except for directly participating business

Contractual Service Margin

Market-

consistent

value of

cash flows

Risk

adjustment

CSM

Total

Insurance

Contract

Liability

A modified “variable fee” approach applies for direct participation business




Grouping of contracts

Each portfolio is then divided into

three groups:

Contracts in a group must be no

more than a year apart

Contracts initially to be split into “portfolios”,

meaning contracts that are subject to similar

risks and managed together.


Contracts that are onerous at initial recognition

Contracts that at initial recognition have no significant

possibility of becoming onerous subsequently

The remaining contracts in the portfolio

11



IFRS 17 P&L


IFRS 4 IFRS 17

Premiums Insurance contract revenue

Investment income Incurred claims and expenses

Incurred claims and expenses Insurance service result

Change in insurance contract liabilities Investment income

Profit or loss Insurance finance expense

Net financial result

Profit or loss

Discount rate changes on insurance liability

(optional)

Total comprehensive income



Burdensome transitional requirements


Can a full

retrospective

approach be

applied?

Full retrospective approach

If possible

Modified retrospective approach

Fair value approach

If impractical

Choice of transition approach

decided at group of contract level



IFRS 17 will require new, slicker financial reporting processes and models

14

2021

Final IFRS 17

standard

2017 2018

IAS 39

And

IFRS 4

IFRS 9 or/and IAS 39

and

IFRS 4

IFRS 9

and

IFRS17

IFRS 17

go-live

Dry

Run

Test

Results

2019 2020

Understand and agree

IFRS 17 methodology

Specify, develop and test models

Derive retrospective

figures including CSMs

Automation & process improvement

YE 19

figures




IFRS 17 – a lot to do and to think about


Implementation issues

Separation of investment components

Discount rates

Risk Adjustment approach

CSMs and increased granularity

New actuarial models and much

slicker processes

Retrospective application

Commercial issues

Greater earnings volatility

Communication to investors and

analysts

Differences between SII, IFRS 17, EEV

and other KPIs

Possible impact on distributable

earnings and dividends

Revisions to product strategy and

design?



21/22 June 2017


Why care now?


Implementing IFRS 17 requires a holistic approach …


PEOPLE

TECHNICAL

DECISIONS

TOOLS

PROCESSES

IFRS

+

+

+

Target operating model

Training

Board sponsorship

Software solutions

Process automation & governance

Actuarial models/ reserving

Data requirements

Impact analysis

Technical decisions

17



… with actuaries needing to take a major interest in implementation

18

Technical judgements and decisions will impact equity, profit emergence and implementation complexity

Requires new actuarial models – dealing with CSM retrospective assumptions, calculations and analysis

Further pressure on reporting processes, requiring new systems and people TOM




More than just accounting: Significant commercial impacts


The different equity and profit emergence and revised presentation requirements will

lead insurance companies to review or revise:

1

2

4

3

KPIs for internal and external use

Capital and risk management

Product strategy and pricing

Asset liability management

5 Investor engagement

19



Impact of IFRS 17 on KPIsThe cash/solvency/profit linkage has broken down


Metric Impact of IFRS 17

Profit Steadier emergence of IFRS profits for UK insurers

Transition impact and explanation

Distributable

cash

Key investor metric over short and medium term

IFRS17 distributable earnings constraints?

Value Mix of IFRS, EV & Solvency II Own Funds used

Use of IFRS equity as Value starting point?

CSM and EV VIF / NB margin reconciliation?

Capital Current focus on Solvency II

IFRS17 / SII alignment of assumptions and

methodology?

20



ALM – update framework


Solvency II ratio Solvency II balance sheet

IFRS Profits

Ratio

Time

100% SCR

Profit

Time

? IFRS Equity / Value

A L

A L

Update ALM framework and

governance to reflect:

KPI approach/Investor messaging

Projected and stress tested ALM-

related constraints and volatilities

Clear delegations

Critical factors may include:

IFRS distributable reserve or

earning constraints, dividend

payout ratio

P&L or OCI for market assumption

changes

SII/IFRS17 alignment – RA/RM,

discount rate, TMTP



Engaging with investors


Plan the investor communication – the earlier the better!

One of the

biggest

investor

communication

challenges

we have ever

seen

Book

Value

Market

based

approachIFRS 17

Revenue

excluding

deposits

22

Statement of Comprehensiv e Income

2021

Insurance contract revenue X

Insurance service expenses (X)

Insurance service result X

Investment income X

Insurance finance expense X

Net financial result X

Profit/Loss X

Discount rate changes on insurance

liability (optional)X

Total comprehensive income X



21/22 June 2017


Unit-linked, with-profit, and annuities

Example contracts


Unit-linked or With-profits – questions and issues

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Direct participation feature – treat as variable fee business

Separate ‘deposit’ element of premium. Treatment under IFRS 9

Unit-linked contract (if qualifies as insurance):

changes in future ‘variable fee’ (AMC) from economic assumption changes will impact CSM, smoothing the profit

With-profits contract:

include discretionary payments on best estimate basis

economic assumption changes impact CSM

treatment of guarantees

treatment for 100:0 and 90:10 funds – disclosure of estate and shareholder transfers



Annuity contract – questions and issues

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Modelling of IFRS 17 Discount rate

Top down or bottom up approach

Business group definition

Illiquidity of liabilities, underlying reference assets and

asset transition

Modelling of IFRS 17 Risk Adjustment

Choice of approach, disclose percentile

Offset by Day 1 CSM, but different behavior in later

years

In this example assumed SII approach with 2% COC

Behaviour and interpretation of CSM

Transition for in-force business



Non-profit annuity projectionsExample: Emerging profit/surplus Under IFRS4, IFRS17, SII (net of SCR)




Modelling with different IFRS17 discount rates – Illustrative

Spread (bps) over EIOPA RFR

ILP FS

0 50 100 150 200 250

IFRS 4 Solvency II

MA

Earned rateRFR


IFRS 4: 50% of spread

Solvency II with Matching Adjustment: Earned rate – fundamental spread



Modelling with different IFRS17 discount rates – Illustrative

ILP FS

0 50 100 150 200 250

IFRS 4 Solvency II

MA

Earned rateRFRPoint at which CSM = 0 at

time 0


Spread (bps) over EIOPA RFR

IFRS 4: 50% of spread

Solvency II with Matching Adjustment: Earned rate – fundamental spread



Sensitivity in assumptionsExample of the impact of the choice of discount rate

IFRS 17

discount rates:

All with respect

to the swaps

less credit risk

rate.




Annuity modelExample: Positive mortality experience variance (+10%) in year 4




Summary: Takeaways


Timescales are short

Implementation will be complex

Principles based

Communication and commercial impacts


ifrs 17 why actuaries need to care - willis towers watson · pdf fileifrs 17 –why...

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