IAS Insurance Project: Lifeweb.tiscali.it/i_i_a/IAS_20nov03_Roma_dz.pdf · BANCASSURANCE IAS...

BANCASSURANCE

IAS Insurance Project: LifeRoma, 20 Novembre 2003

Assicurazioni Generali – Life Department – Dario Zuppi

IAS Insurance Project: Life

� IAS 39: Financial Instruments

� Phase I for a Life Insurance Contract

� Investment Contract w/o DPF: Liabilities at Amortised Cost

� Investment Contract w/o DPF: Liabilities at Fair value

Agenda Part One

1. Held for Trading

2. Held to Maturity

3. Loans & Receivables

4. Available for Sale

Definitions and ClassificationCategories of Financial Instruments - Assets

Fair Value - Changes in P&L

Amortised Cost

Fair Value - Changes only in BS

Amortised Cost

Measurement

Categories of Financial Instruments - Liabilities

1. Held for trading“An entity is permitted to measure any financial liability at fair value, with changes in fair value recognised in profit or loss, by designating it at initial recognition as held for trading.”

2. Other

Definitions and Classification

Measurement: Fair Value - Changes in P&L

Measurement: Amortised Cost

Agenda Part One

Phase 1 Phase 1 Phase 1 Phase 1 –––– Insurance ContractInsurance ContractInsurance ContractInsurance Contract---- Example Description -

� Product: 10-year annual premium Endowment with Profit Sharing equal to 80% of return on GESAV fund

� Asset: ZCB with maturity equal to maturity date of Endowment

Italian GAAP:Liability: Italian GAAP

Asset: Included in GESAV fund and classified “Durevole”

Phase 1:Liability: Italian GAAP (No unbundling/separation of components)

Asset: Available For Sale and Trading

Phase 1 Phase 1 Phase 1 Phase 1 –––– Insurance ContractInsurance ContractInsurance ContractInsurance Contract

- Actual Experience equal to Best Estimate -

� Interest rates (at issue):Risk Free Rate Corporate ZCB Rate

– Year 1 5% 5.6%– Year 2 5% 5.6%– Year 3 5% 5.6%– ... ... ...

� Italian GAAP vs Phase 1 with Assets classified AFSAvailable for Sale: Fair Value / Changes only in Balance Sheet

Balance SheetAssets Liabilities

Premiums 1.162 284 0 Profits Fund∆ Reserves -1.014 -730 ProfitInvest. Income 18 0 Rev.ReservePayments -12 1.014 PH LiabilityExp./Commissions -885 0 Def. PH Liab.

Net Profit -730 284 284

Profit & Loss AccountBalance SheetAssets Liabilities

Premiums 1.162 284 0 Profits Fund∆ Reserves -1.014 -730 ProfitInvest. Income 18Payments -12 1.014 PH LiabilityExp./Commissions -885

Net Profit -730 284 284

Profit & Loss Account

Italian Gaap

Premiums 1.153 1.409 -730 Profits Fund∆ Reserves -1.024 101 ProfitInvest. Income 78 0 Rev.ReservePayments -13 2.038 PH LiabilityExp./Commissions -93 0 Def. PH Liab.

Net Profit 101 1.409 1.409

Phase 1: AFS

Premiums 1.153 1.409 -730 Profits Fund∆ Reserves -1.024 101 ProfitInvest. Income 78Payments -13 2.038 PH LiabilityExp./Commissions -93

Net Profit 101 1.409 1.409

Assets classified Trading: same as classified AFS

- Changes in market interest rates -

� Change in market interest rates during year 2:– RFR (4.4%) and Corporate ZCB (5.0%) expected in all future years;

� Italian GAAP vs Phase 1 w Assets classified AFS

� Phase 1: Assets classified AFS vs Assets classified Trading

Premiums 1.153 1.409 -730 Profits Fund∆ Reserves -1.024 101 ProfitInvest. Income 78Payments -13 2.038 PH LiabilityExp./Commissions -93

Net Profit 101 1.409 1.409

Profit & Loss Account Balance SheetAssets Liabilities

Premiums 1.153 1.475 -730 Profits Fund∆ Reserves -1.024 101 ProfitInvest. Income 78 13 Rev.ReservePayments -13 2.038 PH LiabilityExp./Commissions -93 53 Def. PH Liab.

Net Profit 101 1.475 1.475

Premiums 1.153 1.475 -730 Profits Fund∆ Reserves -1.024 114 ProfitInvest. Income 144 0 Rev.ReservePayments -13 2.038 PH LiabilityExp./Commissions -93 53 Def. PH Liab.∆ Def PH Liability -53Net Profit 114 1.475 1.475

Italian Gaap Phase 1: AFS

Premiums 1.162 284 0 Profits Fund∆ Reserves -1.014 -730 ProfitInvest. Income 18Payments -12 1.014 PH LiabilityExp./Commissions -885

Net Profit -730 284 284

Premiums 1.162 284 0 Profits Fund∆ Reserves -1.014 -730 ProfitInvest. Income 18 0 Rev.ReservePayments -12 1.014 PH LiabilityExp./Commissions -885 0 Def. PH Liab.

Net Profit -730 284 284

Phase 1: Trading

Premiums 1.162 284 0 Profits Fund∆ Reserves -1.014 -730 ProfitInvest. Income 18 0 Rev.ReservePayments -12 1.014 PH LiabilityExp./Commissions -885 0 Def. PH Liab.∆ Def PH Liability 0Net Profit -730 284 284

� P&L and/or NAV Volatility

� HTM and Tainting Rule

� Deferred Policyholder Liability (and US-GAAP Shadow Accounting)

� Taxes imply UGL split into 3 components:– Revaluation Reserve– Deferred Policyholder Liability– Deferred Taxes

Agenda Part One

Amortised CostAmortised CostAmortised CostAmortised Cost---- Liability Measurement for Investment Contracts -

� AC based on Effective Interest Method to amortised difference between:– Initial Amount (Net Premium + some FEL – some AC);– Maturity amount;– Also allowing for expected prepayment pattern and write-downs.

� Effective Interest Rate, i.e. internal rate of return of expected cash flows (Initial Amount, expected prepayments, maturity amount).

� AC: initial amount capitalised at EIR less expected payments.

� AC: does not reflect changes in the interest rates but

� AC: takes into account surrender changes

Amortised Cost MethodEIR

CF ACw/o surrender/death

9.401 - - - - - - - - -

16.211-

9.401 9.928

10.484 11.071 11.691 12.345 13.037 13.767 14.538 15.352

EIR5,54%

CF ACw surrender/death

9.401 309- 317- 326- 335- 345- 355- 366- 379- 391-

12.031-

9.401 9.613 9.828

10.046 10.268 10.491 10.717 10.945 11.172 11.400

Amortised Cost MethodEIR

CF ACw surrender/death

9.401 309- 317- 326- 335- 345- 355- 366- 379- 391-

12.031-

9.401 9.613 9.828

10.046 10.268 10.491 10.717 10.945 11.172 11.400

EIR5,93%

9.103 309- 317- 326- 335- 345- 355- 366- 379- 391-

12.031-

9.103 9.334 9.570 9.812

10.059 10.310 10.567 10.827 11.091 11.358

298 279 258 235 209 181 151 117 81 42 0

CF ACw surrender/death/expenses Expenses Deferral

SameforFront End Load

� Product: 10-year ZCB Contract - with maturity equal to net single premium capitalised at guaranteed rate (5.6%) and penalty in case of surrender

� Asset: ZCB (5.6%), maturity equal to maturity date of investment contract

� Italian GAAP (individual accounts on which taxes are based):– Liability: Italian GAAP (incl. management reserve)– Asset: classified “Durevole”

� Phase 1 (consolidated accounts while taxes on individual):– Liability: Amortised Cost – Asset: Available For Sale

Phase 1 Phase 1 Phase 1 Phase 1 –––– Investment ContractInvestment ContractInvestment ContractInvestment Contract---- Example Description -

Assumption:FEL = Acquisition Cost

Italian Mgt Reserve is Acceptable

Investment ContractInvestment ContractInvestment ContractInvestment Contract

- Actual Experience equal to Best Estimate -

� Interest rates (at issue):

Risk Free Rate Corporate ZCB Rate– Year 1 5% 5.6%– Year 2 5% 5.6%– Year 3 5% 5.6%– ... ... ...

� Italian GAAP vs Liabilities at Amortised Cost and Assets classified as Available for Sale

Italian Gaap Assets AFS / Liabilities AC

Acq. Load Profit 0 9.898 0 Profits FundMGT. Load Profit 20 17 ProfitSurrender Profit 6 0 Rev.ReserveTech. Interest -526 9.881 PH LiabilityTech. Invest. Inc. 526 0 Def. TaxOther Invest. Inc. 0Taxes -9Net Profit 17 9.898 9.898

Profit & Loss AccountBalance SheetAssets Liabilities

Premiums 10.000 9.898 0 Profits Fund∆ Reserves -9.881 17 ProfitInvest. Income 543Payments -309 9.881 PH LiabilityAcq.Exp./Comm. -298Mgt Expenses -29Taxes -9Net Profit 17 9.898 9.898

Premiums 0 10.098 17 Profits Fund∆ Reserves -184 17 ProfitInvest. Income 554Payments -317 10.065 PH LiabilityAcq.Exp./Comm. 0Mgt Expenses -28Taxes -9Net Profit 17 10.098 10.098

� Changes in market interest rates: same considerations as in the case of Life Insurance contract in Phase 1.

� Changes in Surrenders: Italian GAAP different from Amortised Cost...

Phase 1 Phase 1 Phase 1 Phase 1 –––– Investment ContractInvestment ContractInvestment ContractInvestment Contract---- Final Remarks -

9.401 309- 317- 229- 239- 249- 259- 272- 285- 299-

13.197-

Amortised Cost Method

w Surr/Deathw surrender/death/expenses/load

EIR5,54%

9.401 309- 317- 326- 335- 345- 355- 366- 379- 391-

12.031-

9.401 9.613 9.828

10.046 10.268 10.491 10.717 10.945 11.172 11.400

EIR5,54%

Impairment9.401 9.613

10.047 10.374 10.710 11.054 11.407 11.766 12.132 12.505

w. change in expected Surr. patternw surrender/death/expenses/load

� AC: takes into account surrender changes

Agenda Part One

Fair Value Accounting

� Present Value of projected cash flows

� Possibly stochastic, market consistent valuation of options and guarantees

� Assumptions: Economic (market) and Non-Economic (Entity-specific)– Discount Rate: derived from current yield curve

� Explicit margin in cash flows for insurance and expense risk– Explicit Risk Margins: Market Value Margin

� IAS hierarchy for determining fair value– Market value (MV)– MV of similar instruments– Discounted future cash flows

Fair value measurement

Applies to most insurance contracts

Main Implications for Reserving

Asset and liability approach

t Stat EV FV1 (1.816) 2.537 2.5372 579 107 533 790 101 1044 404 89 45 501 86 256 602 80 507 708 71 778 815 59 1069 923 43 13710 1.030 24 170

Profit Signature

Release of risk margin

Acquisitionexpenses

Immediate profit recognition

Comparison of Italian (‘Stat’), embedded value (‘EV’),and fair value (‘FV’) accounting

Board amendment

� No gain at inception unless “market evidence”

Investment ContractInvestment ContractInvestment ContractInvestment Contract- Liabilities = Fair Value -

� Deterministic Approach because no asymmetrical liability outcome

� Hence Fair Value equal to PV of future Cash Flows, where– Fees at mkt level, hence zero initial profit recognition (implied mgt exp

assumption: best estimate * 150%);– Surrender: according to best estimate;– Discount rate: current rate according to Insurer’s creditworthiness

(5.6% expected in all future years)

Assets Trading / Liabilities AC Assets Trading / Liabilities FV

Investment ContractInvestment ContractInvestment ContractInvestment Contract

� Change in market interest rates during year 1:– RFR (4.4%) / Corporate ZCB (5.0%) / Liability Discount Rate (5.0%)

� Change in market interest rates during year 2:– RFR (5%) / Corporate ZCB (5.6%) / Liability Discount Rate (5.6%)

� AC and Assets classified Trading vs Fair Value and Assets Trading

Assets Trading / Liabilities AC AssetsTrading / Liabilities FV

Balance Sheet Balance SheetAssets Liabilities Assets Liabilities

Acq. Load Profit 0 10.431 0 Profits Fund Acq. Load Profit 0 10.431 0 Profits FundMGT. Load Profit 36 367 Profit MGT. Load Profit 26 102 ProfitSurrender Profit 6 0 Rev.Reserve Surrender Profit 53 0 Rev.ReserveTech. Interest -526 9.881 PH Liability Tech. Interest -971 10.289 PH LiabilityTech. Invest. Inc. 1.049 183 Def. Tax Tech. Invest. Inc. 1.049 40 Def. TaxOther Invest. Inc. 0 Other Invest. Inc. 0Taxes -198 Taxes -55Net Profit 367 10.431 10.431 Net Profit 102 10.431 10.431

Balance Sheet Balance SheetAssets Liabilities Assets Liabilities

Acq. Load Profit 0 10.110 367 Profits Fund Acq. Load Profit 0 10.110 102 Profits FundMGT. Load Profit 4 -322 Profit MGT. Load Profit 9 -33 ProfitSurrender Profit 6 0 Rev.Reserve Surrender Profit 1 0 Rev.ReserveTech. Interest -538 10.065 PH Liability Tech. Interest -94 10.029 PH LiabilityTech. Invest. Inc. 32 0 Def. Tax Tech. Invest. Inc. 32 13 Def. TaxOther Invest. Inc. 0 Other Invest. Inc. 0Taxes 173 Taxes 18Net Profit -322 10.110 10.110 Net Profit -33 10.110 10.110

Profit & Loss Account Profit & Loss Account

Mismatching

CF123456789

AssetCF

123456789

Liability5,60% 5,60%

-100,00,00,00,00,00,00,00,00,0

100,0-5,0-5,0-5,0-5,0-5,0-5,0-5,0-5,0

-111,8

5,0% 5,0%

Mkt Val Mkt Val-105,9 104,45,9 4,4

Acq. Load Profit 0 10.750 0 Profits FundMGT. Load Profit 19 13 ProfitSurrender Profit 0 0 Rev.ReserveTech. Interest -1.049 10.735 PH LiabilityTech. Invest. Inc. 1.049 3 Def. TaxOther Invest. Inc. 0Taxes -7Net Profit 13 10.750 10.750

Acq. Load Profit 10.431 0 Profits FundMGT. Load Profit 26 102 ProfitSurrender Profit 53 0 Rev.ReserveTech. Interest -971 10.289 PH LiabilityTech. Invest. Inc. 1.049 40 Def. TaxOther Invest. Inc. 0Taxes -55Net Profit 102 10.431 10.431

Acq. Load Profit 10.110 102 Profits FundMGT. Load Profit 9 -33 ProfitSurrender Profit 1 0 Rev.ReserveTech. Interest -94 10.029 PH LiabilityTech. Invest. Inc. 32 13 Def. TaxOther Invest. Inc. 0Taxes 18Net Profit -33 10.110 10.110

Assets Trading / Liabilities FV Assets Trading / Liabilities FV

Without Surrender / Death

IAS Insurance Project: Lifeweb.tiscali.it/i_i_a/IAS_20nov03_Roma_dz.pdf · BANCASSURANCE IAS...

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