New zealand society of actuaries financial services forum 27 november 2009
This presentation is the property of its rightful owner.
Sponsored Links
1 / 30

New Zealand Society of Actuaries Financial Services Forum 27 November 2009 PowerPoint PPT Presentation


  • 69 Views
  • Uploaded on
  • Presentation posted in: General

New Zealand Society of Actuaries Financial Services Forum 27 November 2009. IFRS: Insurance Accounting. Charles Hett November 2009. Audit. Tax. Consulting. Actuarial. Financial Advisory. Agenda. Recap the Insurance Project to date Key Features of the Phase II Framework

Download Presentation

New Zealand Society of Actuaries Financial Services Forum 27 November 2009

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


New zealand society of actuaries financial services forum 27 november 2009

New Zealand Society of Actuaries Financial Services Forum27 November 2009


Ifrs insurance accounting

IFRS: Insurance Accounting.

Charles Hett

November 2009

Audit. Tax. Consulting. Actuarial. Financial Advisory


Agenda

Agenda

Recap the Insurance Project to date

Key Features of the Phase II Framework

Issues and recent developments

What this means for NZ reporting

Implications and other

IFRS/Reporting factors


Recap the insurance project

Recap the Insurance Project.


Insurance accounting timeline

Insurance Accounting timeline

IFRS Phase II

Development

Thinking/Concern

IFRS

??

IFRS 4

Phase 1

Issues Paper

1999

Back to the Drawing Board

Discussion Paper

May’07

IASB

IFRS

NZ

1 Jan 07

Extended Consultation

DSOP Issued

1990s

July

2001

January

2005

2007

2008+


Ifrs 4 phase i

IFRS 4 Phase I

Temporary measure to continue until Phase II standard emerges

  • Intangible assets

Insurance & Participating Contracts – Local GAAP

Investment Contracts – IAS 39

Life insurance companies

Non-lifecompanies

Insurance Disclosures

NZ FRS 35

NZ FRS 34

Assumptions and risk objectives

Contract classification

Risk concentration

Central Estimate

OCR / IBNR

UPR, DAC

Risk Margin

Best Estimate

Planned Margins

(recover AC)

Analyses & Reconciliations

Sensitivities

Claims development

Liability Adequacy

NZ ~ Little methodology change, mostly level of disclosure

IFRS Insurance Accounting - November 2009


Development of phase ii

Development of Phase II.


The proposed model

The Proposed Model

  • 3 building blocks to measure insurance liabilities :

Explicit, unbiased, probability weighted and current estimates of the

contractual cash flows;

Current market discount rates that adjust the estimated cash flows for the

time value of money;

Margin:

Explicit -Bearing risk (a risk margin) and providing other services (a service margin)

Composite - Single margin(calibrate to premium)

IFRS Insurance Accounting - November 2009


Phase ii measurement three building blocks

Phase II – Measurement: Three Building Blocks

Estimates of future cash flows

Explicit and Current view (Balance Sheet date)Unbiased and Probability weighted

Considerations

Not necessarily most recent information

Availability of “market” data for insurance liabilities

As consistent as possible with observed market prices

“Market consistent” vs. “Entity specific”

Complexity of possible stochastic scenarios – Looks unlikely

IFRS Insurance Accounting - November 2009


Phase ii measurement three building blocks cont d

Phase II – Measurement: Three Building Blocks (cont’d)

  • Discounting

  • Observable market rates:

    • Timing

    • Currency

    • Liquidity

Considerations

Consistency with observable market rates

Availability of market rates for long term insurance liabilities

Does not reflect risk inherent in cash flows

Own insurer’s credit position in measuring liabilities – unlikely

Use of asset-based rates – only if directly linked to liabilities

Liquidity Premium (avoid annuity mismatching)

Further guidance – unlikely (Fair Value measurement: IAS39)

IFRS Insurance Accounting - November 2009


Phase ii measurement three building blocks cont d1

Phase II – Measurement: Three Building Blocks (cont’d)

  • Margins – Composite or Explicit

  • Composite: single margin calibrated to premium (essentially current MoS)

  • Risk Margin: Allow for variance and skew in underlying distribution(s)

  • (Uncertainty in projected cash flows)

  • Service Margin: The amount for servicing the contract

  • Considerations:

  • Risk Margin methods can have very different outcomes

    • Percentile Basis (~ NZ non-life margin: 75% confidence level)

    • Cost of Capital (~ Solvency II)

    • Economic Capital (~ Adverse Scenarios/MCEVs)

    • Not a shock absorber

  • Availability of “market participant” data on servicing

    • “Sub-contractor” profit margin or use “entity-specific” basis

  • Residual Margin: To ensure no Day 1 profits

IFRS Insurance Accounting - November 2009


Phase ii key issues

Phase IIKey Issues.


Other key issues

Other Key Issues

DAC and Revenue Recognition

Exit Price or Fulfilment Value : IAS 37

Margins

Future Premiums: Contract Boundary

½

Profit/Loss at Inception

Other Issues

IFRS Insurance Accounting - November 2009


Position at mid october 2009

IASB

Initial Measurement

Selling should not affect measurement

Day 1 revenue to cover acquisition costs

AcqCosts – direct and incremental

IAS 37 approach (draft)

IAS 37 influenced by Insurance Project

Consistency with other liabilities

No market info. => Entity based estimates

Explicit Margins

(Risk, Service, Residual)

Risk/Service Margin remeasured

Expense Initial Costs as incurred

No Profit/Loss at Inception

FASB

Initial Measurement

Contract liability based on consideration

Prohibit DAC (No Service at PoS)

Current Fulfilment (CFV)

Not inconsistent with IAS 37 (draft)

Composite Margin

Consistency with approach to Revenue

Expense Initial Costs as incurred

No Profit/Loss at Inception

Position at Mid-October 2009


Proposed models mid october 2009

Proposed Models – Mid October 2009

IFRS Insurance Accounting - November 2009


Proposed models mid october 20091

Proposed Models – Mid October 2009

IFRS Insurance Accounting - November 2009


Proposed models mid october 20092

Proposed Models – Mid October 2009

IFRS Insurance Accounting - November 2009


Recent developments

Recent Developments.


Late october 2009 unwelcome convergence

Late October 2009Unwelcome Convergence!

  • Revenue recognition is paramount

  • Acquisition Costs expensed as incurred

  • IASB agreed margins calibrate to full contract premium (after PoS)

  • FASB agreed explicit margin for Risk (Uncertainty)

  • Revisiting Policyholder Accounting

    • Insurance Policies held by Customers (as assets) – reconsider, no decision


Proposed models before 28 october 2009

Proposed Models – Before 28 October 2009


Proposed models after 28 october 2009

Proposed Models – After 28 October 2009


Other issues yet to be discussed resolved

Other IssuesYet to be Discussed/Resolved

Policyholder Accounting

Policyholder Participation Rights

Credit Characteristics of insurance liabilities

Unbundling

UPR, Recognition, IAS 39

Disclosure


What this means

What This Means.


Timetable updated 18 nov next two years

Timetable (Updated 18 Nov)Next two years

  • Exposure Draft to be issued January April 2010

    • A joint IASB/FASB Exposure Draft

  • Comment period to May August 2010

  • Standard to be in place by June 2011

    • Substantial IASB membership changes July 2011

IASB/FASB appear to be allocating resource

to ensure this timetable can be met


Implications for new zealand

Implications for New Zealand

  • Many similarities to NZ MoS (composite margin)

  • Some differences:

    • Explicit assessment of Risk & Service margins

    • Residual Margin may not be remeasured

    • No income to cover acquisition costs (No DAC, -’ve PL)

  • No mention of Tax (anywhere) => Gross of Tax liabilities and margins

  • Reinsurance treated explicitly (as current)

  • Financial Advice at Point of Sale a service?


Business implications for the insurance industry

Business Implications for the Insurance Industry

Need to review impacts on:

IFRS

Phase II

Systems, data,

models & processes

External reporting, disclosures

and financial communication

Experience Monitoring

Assumption setting

Management reporting and

budgetting

Product pricing and design

Regulatory Reporting

Asset and Liability matching

Capital Management

Tax and Tax Planning

Value Creation

IFRS Insurance Accounting - November 2009


Three key areas to consider

Three key areas to consider

Valuation

Increased reliance on actuarial models

Analysis to derive explicit margins ~ risk margin

Assumption changes => not Re-spread ~ volatility

Yet more disclosure?

  • Product Development

    • Reporting incentives to structure products (contract boundaries)

    • Higher profit volatility

    • Use of Reinsurance

    • Impact of acquisition cost reporting loss on distribution costs

  • Risk Management

    • Risks and Controls for valuation models

    • Managing market risk to mitigate profit volatility

    • (closer link between risk management and reporting)

    • Risk Margins  Risk Management

  • IFRS 4 Phase II will likely be the chance to move more fully to a gross of tax profit reporting requirement (separate IAS 12 tax treatment)

  • Overall a more explicit risk based reporting requirement should lead to stronger links between reported profits, risk management, reinsurance and investment strategy and capital requirements


Contacts

Charles Hett

Head of Actuarial Services

+64 4 470 3866+64 21 616 [email protected]

Contacts

Margaret Cantwell

Manager - Actuarial Services

+64 4 470 3537+64 21 267 [email protected]

Klaas Stijnen

Manager - Actuarial Services

+64 4 470 3660+64 (0)21 273 [email protected]


New zealand society of actuaries financial services forum 27 november 2009

  • This presentation andthe accompanying handouts cover topics only in general terms and are intended to give a wide audience an outline understanding of certain issues relating to Phase II of the IASB insurance project, and therefore cannot be relied on to cover specific situations; applications of the principles set out will depend on the particular circumstances involved. Furthermore, responses given in the presentation to questions are based on only an outline understanding of the facts and circumstances of the cases and therefore do not form an appropriate substitute for considered specific advice tailored to your circumstances. We recommend that you obtain professional advice before acting or refraining from acting on any of its contents. We would be pleased to advise you on the application of the principles demonstrated at the seminar and other matters to your specific circumstances but in the absence of such specific advice cannot be responsible or liable.

Deloitte & Touche LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at Stonecutter Court, 1 Stonecutter Street, London EC4A 4TR, United Kingdom. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu ('DTT'), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other's acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT.

IFRS Insurance Accounting - November 2009


New zealand society of actuaries financial services forum 27 november 20091

New Zealand Society of Actuaries Financial Services Forum27 November 2009


  • Login