A.R.A.S. 3.1 valuation guidelines

1. A.R.A.S. 3.1 valuation guidelines Life Insurance Annual Statement Composition and Valuation Guidelines Life insurance companies

2. Table of Contents • Consolidation • Affiliates • ARAS work papers • File description and valuation • Admissibility Assets • Provision for doubtful collection • Technical provisions Life • Accident & Sickness provision

3. Table of Contents (cont’d) • External auditor’s role • External auditor’s opinion • External actuary’s role • Reconciliation sheet • Access to guidelines • Call for comments

4. Consolidation • Line-by-line consolidation of fully or partially owned (majority interest) insurance subsidiaries is not permitted • These should be reported as an asset (line 2.2) on the balance sheet and valued based on the equity method • Line-by-line consolidation is allowed for fully or partially owned (majority interest) subsidiaries not engaged in the insurance business

5. Affiliates • Affiliates are defined to be: • entities that are fully or partially owned by the company • entities that fully or partially own stocks of the company • entities on which the full or partial owners of the company have control • entities of which the majority of the supervisory and/ or managing directors also represent the majority of the supervisory and/ or managing directors of the company

6. Affiliates (cont’d) • The respective balances with affiliates should be reported on one of the following accounts, without netting: • Loans and other interest bearing receivables due from affiliates • Non-interest bearing receivables due from affiliates • Payable to affiliates • Except: • Balances with affiliated (re)insurance companies regarding reinsurance business • Balances with affiliated brokerage companies regarding sale of insurance policies

7. ARAS work papers • Work papers used to complete ARAS should be kept on site • These work papers include a reconciliation of accounts in the company’s general ledger/ trial balance to accounts in ARAS • Work papers should be kept at a minimum for Files 103, 105 and 110. • Work papers should be kept for a minimum of 2 years

8. File description and valuation • All Files in ARAS have been described • Detailed description of accounts in Files 103, 105 and 106 • Valuation guidelines provided for each account in File 103 • A Glossary of terms is provided

9. Admissibility of Assets • Admissibility requirements are imposed on the following balance sheet asset accounts: • Intangibles: non-admissible • International stocks: only investment grade admissible • International bonds: only investment grade admissible • International investment funds/ pools: only investment grade admissible • Local investments (stocks, bonds, funds): admissibility subject to impairment test

10. Admissibility of Assets (cont’d) • Admissibility requirements are imposed: • Mortgage loans: excess balance above 70% of current appraised market value is non-admissible • except excess ≤ amount secured by Guarantee Fund • Collateral loans: excess of outstanding balance above fair value of pledged assets is non-admissible • Interest and non-interest bearing due from affiliates: excess above applicable limits is non-admissible

11. Admissibility of Assets (cont’d) • Admissibility requirements are imposed : • Deposits at foreign banks: only deposits at banks rated investment grade are admissible • Reinsurance recoverable on paid claims: amounts non-admissible if the insurer may not receive them due to insolvency of reinsurer or disputes about amount of coverage • Company should report in File 102, line 1: • total balance of non-admitted assets that weren’t reported in the Statement, divided between the several asset classes

12. Provision for doubtful collection • Agents & Brokers Debit Balances: • not less than those receivables which are in excess of 90 days past due. • Uncollected premium/ term life & health insurance policies: • non-installment premium: not less than those receivables which are in excess of 90 days past due. • installment premium: which are not paid on the agreed installment date, the provision should not be less than those installments which are in excess of 90 days past due.

13. Technical provisions Life • Principles based approach • Generally accepted actuarial method • Based on prudent, reliable and consistently applied principles, including: • Probability weighted future contract CF • Discounting of CF at market interest rate • Up-to-date objective data and realistic assumptions • Current mortality & morbidity tables • All expenses that will be incurred in servicing insurance obligations

14. Technical provisions Life (cont’d) • Unamortized deferred acquisition cost: • equally amortized over the life of the policy to match the premium income stream, with a maximum of 10 years • Unamortized capitalized premium reduction: • fully amortized within 8 years as follows: • In the year that the reduction was granted and the 3 following years by 15% each year; • In the last 4 years by 10% each year.

15. Technical provisions Life (cont’d) • Ceded provisions • non-admissible if the insurer may not receive these amounts due to insolvency of reinsurer or disputes about amount of coverage

16. Technical provisions Life (cont’d) • Liability Adequacy Test (LAT) • Test done by company to determine whether the reported provisions at year-end are adequate • The minimum requirements are: • Test considers current estimates of all future contractual cash flows, and of related cash flows • Test is done on the level of portfolio of contracts that are subject to broadly similar risks and managed together as a single portfolio • If test shows that reported provision is less than the calculated LAT-amount, the entire deficiency should be recognized in the profit & loss account • Results of LAT should be submitted to CBCS

17. Accident & Sickness Provision • Calculation based on a non-actuarial approach is permitted • The actuarial approach is preferred when it involves periodic payments caused by long tail claims due to for example critical illnesses • Liability Adequacy Test (LAT)

18. External auditor’s role • Article 26, paragraph 2 of National Ordinance: • Provide auditor’s opinion on the Life Statement • Mark hard copy Life statement for identification purposes

19. External auditor’s role (cont’d) • The external auditor should be authorized by the company by a provision in the contract to: • Supply the CBCS with written information about the company reasonably considered necessary in order for the CBCS to comply with her duties. [when asked by CBCS] • Agree with the CBCS on the conditions or circumstances encountered during his duties which warrant informing the CBCS a.s.a.p. [voluntarily supplied to CBCS] • CBCS will send copy of received info to the company

20. External auditor’s opinion • The Statement is based on own accounting and reporting principles • Certification of the Statement should be based on the Life valuation guidelines! • ‘According to notes’ opinion • CBCS proposed a standard unqualified ‘according to notes’ opinion to be issued on the Statement

21. External actuary’s role • Issuance of opinion on • the value at year-end of all technical provisions • the fact that the comparison of mortality experience have been reproduced correctly • Signing of the hard copy files 117 and 125

22. Reconciliation sheet • Regards a reconciliation of the reported Total Assets, Total Equity and/ or Net Results in the Statement with corresponding values in the company’s own financial statement • To be submitted with the Statement if a difference exists • Not applicable to local branch offices which don’t issue own financial statement

23. Access to guidelines • Go to www.centralbank.an • ‘Click’ on the ‘Login’ icon on the ribbon • Username: autoflow • Password: CentralBank2 • ‘Click’ on link ‘Annual Reports Automated Statements (ARAS)’ • Access folder ‘ARAS 3.1’

24. Call for comments • 6 weeks available to submit comments starting today • Only via ARAS@centralbank.an • Proposal: • Onshore insurers: joint response via N.A.V.V. • Int’l insurers: joint response via C.I.A.C. • Non-affiliated insurers: separate response • External auditors: joint response via N.A.V.A. • External actuaries: separate response

25. Questions??