Future of insurance reporting: preparing for the complexities of IFRS 17, Andreas Schröder

13 October 2016

Future of insurance reporting

Disclaimer: The new insurance contract standard IFRS 17 is expected to be published in March 2017, the content of this

presentation relate to the current status of the discussions and its interpretation by the presenter.

It does not represent an official WTW opinion.

Preparing for the complexities of IFRS 17

Andreas Schröder

Financial and Insurance Reporting - Where are we now ?

© 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 2

of domestic listed companies (listed by the Federation of

European and Asian Stock Exchanges at 31.12.2015)

report required IFRS figures80%

Listed companies that use IFRS Standards globally

of domestic listed companies (listed by World Federation of

Exchanges at 31.12.2015) report required IFRS figures.

(42% apply local standards from China, India, Japan & US)49%

of the largest

insurance groups in the

world report under IFRS12 of 20

Current IFRS insurance Accounting – IFRS 4 “Phase I” for

insurance contracts as a placeholder with many shortcomings


Most relevant IFRS in

the insurance context

Content

IFRS 4

Insurance Contracts

IFRS 4 (Phase 1) makes limited improvements to

already existing accounting policies in respect of

measurement of insurance contracts. Disclosures

related to insurance contracts

IAS 39 Financial

Instruments: Recognition

and Measurement

Recognition criteria for financial instruments.

Classification of financial instruments and assigns

them to different valuation models

IAS 32 Financial

Instruments: Presentation

Prescribes principles how to present financial

instruments and for offsetting financial assets and

financial liabilities

IFRS 7 Financial

Instruments: Disclosures

Requires disclosures on significance of financial

instruments on an entity’s financial position and nature

and extent of risks arising from financial instruments

IAS 40 Investment

Property

Accounting treatment for investment property and

related disclosure

IAS 18

Revenue

Practical guidance on revenue recognition.

Identifies circumstances under revenue will be

recognised

IFRS 3 Business

combinations

Prescribes the financial reporting by an entity when it

undertakes a business combination (bringing together

of separate entities or businesses into one reporting

entity)

IFRS 9

IFRS 15

IFRS 17

little comparability between

insurance companies around

the world

usage of old or outdated

assumptions does not

provide useful financial

information

diversity and a lack of

transparency about profit

recognition patterns from

insurance contracts

IFRS 4 Phase 1 allows to apply

existing (local) accounting standards

Embedded Value has become a less important metric for the

Investment Community


0

20

40

60

80

100

120

Analyst Fair Values for the Life Segment of a European Composite

FV EV

0%

10%

20%

30%

40%

IFRS book value Tangible bookvalue

Embedded value IFRS earnings Dividend yield Free cash flowyield

Which valuation approach will gain the most in popularity over the coming 12m?

Dec-09 May-10 Sep-10 May-11 Oct-11 Jun-12 Sep-12 Dec-12

FCF has replaced EV as a valuation tool amongst investors

Source: BofA Merrill Lynch Global Research and other analyst research.

European life insurance companies

no longer trade at a premium to EV . . .

Analyst fair values typically lie below EV

0.60x

1.00x

1.40x

1.80x

2.20x

2.60x

3.00x

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Pri

ce

/ E

nte

rpri

se

Va

lue

35%

47% 50% 52%59%

74%79%

86% 86%90%

96%100%103%

108%

117%122%

0%

20%

40%

60%

80%

100%

120%

140%

Delta

Llo

yd

. . . and many currently trade at a meaningful discount

Sto

reb

ran

d

AE

GO

N

Sw

iss L

ife

Ge

ne

rali

Ag

ea

s

AX

A

Se

cto

r A

ve

rag

e

Aviv

a

NN

Gro

up

Old

Mu

tua

l

Pru

de

ntia

l

Sta

nd

ard

Life

Alli

an

z

L&

G

ZIG

Metrics that matter more for Investors - Financial reports adapt


Impact on IFRS results

One-off impact on book value less

important

Any impact on on-going earnings

is more important

Especially if it impacts expectations

about the dividend

Impact on solvency ratio


about the dividend

Impact on volatility of capital


about the dividend

Source: MuRe & Allianz analyst conferences 2016


The IFRS insurance contracts standard

due process is finalizing in March

Mid 2004

IFRS 4 Insurance contracts ‘Phase I’

completed and interim Standard on

insurance contracts issued

1997 Kick-off IASC starts the Insurance Contracts

project. An Issues Paper was published

in November 1999 (DSOPs).

March 2017 Expected publication of IFRS 17

Insurance contracts

July 2013 Re-Exposure Draft Insurance Contracts

July 2010 Exposure Draft Insurance Contracts

May 2007 Discussion Paper: Preliminary views

May 2002 IASB agreed to split the insurance

project into a Phase 1 and Phase 2

IFRS 17

https://www.towerswatson.com/en-CZ/Services/Services/international-financial-reporting-standards-17?webSyncID=9be33c45-d4db-cd32-acc6-3a85061301bc&sessionGUID=c8db4e13-1dc7-8772-3ddb-48d2ac497a19

The new insurance standard IFRS 17 is expected for March 2017


Final

insurance

contracts

standard

IT

platform

2016 2017

Start of actuarial

specifications and the

implementation

2018

Implementation

modification and

testing, assess impact

of IFRS 9 strategy

2019

Dry run 2017/8

IFRS 17 and publish

2018 IFRS 9 results

2020/2021

SII goes

Live

IFRS 9

Effective

IAS 39

and

IFRS 4

Option 1: Apply Overlay approach for IFRS P&L and

designated assets relating to insurance contracts

IFRS 9

and

IFRS 4

IFRS 9 +

new insurance

standard IFRS 17

Option 2: Apply Deferral approach of an IFRS 9 application but

only for entities where issuing insurance contracts is

predominant for the reporting entity – Option ceases 2021

IFRS 17

EffectiveDry

Run

Full

BS needed

Discussion of potential cooperation

and joint „IFRS-PoC“

2.Tests

YE171.Tests

YE16

Implementation

2020/2021 IFRS P&L and BS

according to full IFRS 9 and new

insurance contract standard IFRS 17

Timetable, implementation activities and IFRS 9 implementation options


Whereas SII Coverage ratios for groups may become resilient - the

IFRS 17 / IFRS 9 introduction will impose new challenges !


Manage Budgets Manage increasing P&L Volatility

2012 2013

14 Mio. USD

50 Mio

Min.

Max.

25 Mio

Expected average

costs for IFRS 17 / 9

implementation have

increased within one

year up to more than

300%

The future

IFRS 17 P&L

will be unique, different

to the current IFRS 4

‘cost basis’ view, but

also different to SII

IFRS operating

profit & payout

ratios to be

challenged by

increased volatility

Efficiency GainStrategic Impact

Guaranteed Business Continuity

Implications on Processes

Free up staff

Synergies with SII

BAU - Centralize -

Automatize

Products mix, loading

structure disclosures /

approval

Strategic Asset

Allocation/Hedging

Finance/IT structure

IFRS 17 addresses the shortcoming of IFRS 4 Phase 1


1.) Measurement approach on

Current assumptions

2.) Contractual Service margin (“CSM”)

calculated in t=0 to ensure no gain at

inception represents the profit for the

future services to be provided and should

be released accordingly

IFRS 17 versus Solvency II - Key differences


IFRS 17 Solvency II

Scope Insurance contracts and Investment contracts

with DPF

All contracts regulated as insurance

issued by entity

CSM (day one gains) CSM eliminates day-one profit and defers over

coverage period

Day-one profit recognised

Acquisition costs Implicitly deferred via CSM Expense as incurred

Experience adjustments and

changes in assumptions

Unless negative, CSM unlocked for changes in

assumptions for future services

Recognised in period

Discount rates Determined by entity using top-down or

bottom-up approach

Prescribed risk-free rates plus

matching adjustment or volatility

adjustment

Risk margin Multiple approaches permitted subject to

disclosure of confidence level

Cost of capital approach

Unbundling investment

components

Investment contracts only unbundled if distinct;

however not included within revenue

No unbundling of investment or

service components

PAA Simplification for short-duration contracts for

pre-claims coverage

No distinction between long-duration

and short-duration contracts

Business combinations Additional recognition, measurement and

presentation requirements

No specific requirements

Disclosures Subject to minimum requirements, scope,

format and level of disaggregation required to

meet overall objectives at entity’s discretion

QRTs in prescribed format

IFRS 17 - Why is the effort bigger then for SII ?


The principle based reporting standard is coming with little guidance & field testing

3.) The “CSM” as an

unknown animal

Profit for

future

services

4.) Accounting

options for P&L

smoothing No methods prescribed to derive

discount curves or risk adjustment.

Accounting option to use OCI or not for

a systematic split of investment result

2.) Measurement

depends on the Cash-

flow characteristicDifferent approaches depending

on direct participation features

and asset cash dependency;

simplified approach

In-

creased

Com-

plexity

1.) Granularity of

measurementGrouping should ensure that

cash flows have similar sensitivity

to key risks and similar duration

and contracts have similar

expected profitability

The resulting P&L is particularly different – Reporting Performance

will significantly change


IFRS 4* New IFRS Standard Key changes

Premiums Insurance contract revenue Insurance contract revenue

excludes deposits

Revenue and expense are

recognised as earned or incurred

Insurance finance expense is

excluded from insurance service

result and is presented

(i) fully in P/L or

(ii) in P/L and OCI,

depending on accounting policy

Written premiums disclosed in the

notes

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

Source: IASB Staff

* Common presentation in the statement of

comprehensive income applying IFRS 4


Subsequent measurement and setting up the resulting

IFRS P&L will depend on contract type, accounting choices and become

extremely complex

1. Changes in CF estimates relating to future services adjust the CSM

2. All other expected cash flow changes go to P&L

3. Based on a cost or current view depending on accounting choice

4. If insurance investment expense is ‘cost view’, difference between

current and cost basis is presented in OCI

5. CSM unlocked for changes in the risk adjustment rel. to future services

6. Release for current and past services to P&L

Statement of Comprehensive Income

20XX

Insurance contract revenue X

Incurred claims and expense (X)

Insurance service result X

Investment income X

Insurance finance expense (X)

Net financial result X

Profit or Loss X

Discount rate changes on

insurance liability (optional) X

Total comprehensive income XX

Cash flows

Time value of

money

Risk adjustment

Contractual

service margin

1

2

3

4

5

Deterministic

cash-flows by Portfolio

Stochastic

cash-flows

You need controlled, stable

and robust deterministic

and stochastic cash-flow

projection models

6


Willis Towers Watson solutions for IFRS 17

Towers Watson generic target picture for future IFRS using Unify

Life Cashflows

P&C Cashflows

Third Party

Cash-flow Tools

Admin

P&C

Admin

Life

Assets

ESG

Re-

Insur

ETL

ETL

ETL

Third Party

Data

Warehouse

Prepare and Store

Group financial

systems

MCEV /

NBV

Financial

Reporting

IFRS

Accounts

Ge

ne

ral L

ed

ger

Co

ns

olid

atio

n

S2 / QRT /

Regulator

…

…

Life

P&C

ETL

ETL

ETL

Local OE

systems

Pricing

data

Actual

claims

Actual

costs

Actual

premium

Cession

data

Pricing

data

Actual

claims

Actual

costs

Actual

premiumCession

data

S2 / IFRS Results

Input

Data

Conclusions and Actions


New variant of economic valuation principles enters the arena

Measurement approach is based on current assumptions

Higher comparability: Profit pattern as services provided

IFRS 17 improves

the current Insurance

Reporting

Has no equivalent under SII

It combines an economic valuation with smoothing options

Will be complex to be set up and interpret

The IFRS 17 P&L

will be a “new & unknown”

To be able to manage required system-, business- and communication

challenges insurers should quickly get into the “project mode” for this

MEGA project as the future of insurance reporting starts in 2017


For further information please contact:

16

[email protected]

Andreas SchröderDirector

Risk and Financial Services

Habsburgerring 2

50674 Cologne

GermanyT: +49 221 8000 3460

M: +49 160 9090 3266

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sole and exclusive use for participants of the

Czech Insurance Conference 2016,

Willis Towers Watson Czech Republic.

Distribution or disclosure of, or quotation

from, or reference to this document to any

other party, is prohibited without the prior

written consent by Willis Towers Watson

(“WTW”, “we” or “us”.)

© 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

[email protected]

Roger GascoigneDirector

Risk Consulting and Software

Klimentská 1216/46

110 00 Praha 1

Czech RepublicT: +420 222 191 239

M:+420 602 313 408

https://www.willistowerswatson.com/en-CZ/insights/2016/11/czech-republic-insurance-conference-2016?utm_source=Outlook&utm_medium=email&utm_content=CZ-InsConf&utm_campaign=RFS-RCS

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