Upload
lukas
View
24
Download
1
Embed Size (px)
DESCRIPTION
III International Conference Insurance and Pension Funds Practical Implications of IFRS 4. An Actuarial Perspective Stefan Engeländer Lisboa, July, 7 th 2004. Agenda. International Actuarial Standards of Practice Contract Classification Unbundling Embedded Derivatives - PowerPoint PPT Presentation
Citation preview
An Actuarial Perspective
Stefan Engeländer Lisboa, July, 7th 2004
III International Conference Insurance and Pension Funds
Practical Implications of IFRS 4
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 2
Agenda
International Actuarial Standards of Practice Contract Classification Unbundling Embedded Derivatives Discretionary Participation Feature
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 3
Agenda
International Actuarial Standards of Practice Contract Classification Unbundling Embedded Derivatives Discretionary Participation Feature
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 4
IAA and IASB
Close cooperation of IASB and International Actuarial Association (IAA) in developing IFRS for insurance contracts
No intend of IASB to provide technical details in IFRSs Interpretation required since IFRS 4 often based on simplified
examples applicable only in very narrow circumstances
Hence, IASB staff clarified in IASB Observer Notes January 2004:
92. (d) Some argued that the Board (or IFRIC) should set up an interpretation panel to address questions that will arise in phase I. The staff notes that a sub-committee of the International Actuarial Association (IAA) has begun developing guidance for actuaries.
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 5
IAA and IASB
No official role of IAA in interpreting IFRSs No official role of actuaries in establishing accounting policies or
financial statements
But: IAA ensures a professional interpretation and comparable
application of IFRS 4 world-wide Actuaries to be involved in establishing accounting policies and
financial statements Consequence of responsibility of preparers rather than explicit rule
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 6
IAA Subcommittee
IAA established International Actuarial Standards Subcommittee to
propose International Actuarial Standard of Practice (IASP) regarding actuarial work under IFRSs
develop educational material accompanying such IASP support IAA member associations in implementing and applying
those IASP
Subcommittee established Drafting Team, preparing draft papers
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 7
IASP
The IASP is to be adopted by all member organizations either
by making it binding for members directly or by introducing an own standard, at least equivalent in binding force
and content
Classification of IASP in preparation:
Class 4 Practice Guideline
Examples of adequate behavior, merely educational,
any alternative, assumed to be suitable by the actuary, is allowed
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 8
Due Process
Drafting Team prepares currently exposure drafts to be exposed by the president of the IAA in due course
Comment period to Washington meeting in autumn After approval by Council, ballot vote of member organizations
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 9
Planned IASP
Actuarial Practiceregulation of actuarial behavior in agreeing, proceeding and reporting work
Contract Classificationinterpretation of definition of insurance contracts, investment and service contracts
Liability Adequacy Testminimal requirement, interpretation of IAS 37
Discretionary Participation Feature Embedded Derivatives Reinsurance Disclosure Measurement issues for investment contracts Changes in Accounting Policy
interpretation of guidance provided in IFRS 4
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 10
Agenda
International Actuarial Standards of Practice Contract Classification Unbundling Embedded Derivatives Discretionary Participation Feature
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 11
Insurance Characteristics
Classification of most contracts in mass business trivial
Main features causing trouble
What is significant insurance risk? Life insurance with large investment component and negligible
insurance coverage
What are the borders of one contract? Group contract or group of contracts? Sequence of contracts or one contract?
How to ensure that all contract features are adequately considered? Complex reinsurance constructions
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 12
Significant Insurance Risk
Events of commercial substance:
Normally clear, anything
where market participants are willing to pay for Premiums charged explicitly for that risk
where market participants take effort to avoid/reduce risk Effective risk examination at outset Taking (re-)insurance for protection
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 13
Significant Insurance Risk
Significant additional benefits: More difficult Significant
Rebuttable presumption: above 10 % significant Judgment required, but significance doubtful: 5 %- 10 % Up to prove of contrary unacceptable: below 5 %
Comparison value: Normally surrender value plus surrender charge at death date Surrender value or surrender charge might be artificial and
economically meaningless Theoretically: Comparison of value of contract from policyholders
view point in case of occurrence of insured event with the value in case of any other event of commercial substance.
If maximal difference is significant, there is a significant additional benefit
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 14
Borders of the contract
Major question in case of group policies: Is the group one contract? Is each risk covered in the group one contract, just grouped for
administrative purposes?
Important, if risk equalization effect in the group is so significant premium adjustment clauses apply
that insurance risk on group level is not significant
Terms of group agreement need to be investigated, whether each individual risk ort the entire group
comply with the definition of a contract in IAS 32.13
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 15
Significant insurance risk
Significant insurance risk
Life of the (insurance) contract
1
2
3
1. Term life insurance: Risk remains significant throughout the contract
2. Endowment policy – amount at risk in case of death reduces as value of investment component increases
3. Deferred annuity – no insurance risk during savings phase, insurance risk in annuity phase; overall insurance since opting for annuity is an event of commercial substance, except if annuity factor is bilaterally negotiated, enabling to determine prohibitive factors.
Significant insurance risk
Borders of the contract
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 16
Consideration of all Features
Traditional problem in reinsurance: How to ensure that all contractual
features are adequately considered and properly reflected?
Fantasy of reinsurance actuaries to style reinsurance treaties unlimited, hiding financing features – reinsurance no mass business
If a financing feature is fully hidden, unbundling is no threaten and it is not possible to measure the significance of the existing insurance risk properly
But: Reinsures should be able to link each financing agreement with at least significant insurance coverage
IFRS 4 less strict than US-GAAP
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 17
Agenda
International Actuarial Standards of Practice Contract Classification Unbundling Embedded Derivatives Discretionary Participation Feature
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 18
Unbundling
IFRS 4.10 prohibits unbundling of a deposit component if
not measurable separable, ie without consideration of the insurance component
and allows it in all other cases.
IFRS 4.10 requires unbundling of a deposit component if
it is allowed recognition of all rights and obligation under the deposit component
is not required by existing accounting policy
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 19
Unbundling
EU Directive 2002/83/EC (Life Insurance Directive) Article 20 1. A. (i):
As provisões técnicas de seguro de vida devem ser calculadas segundo um método actuarial prospectivo suficientemente prudente que tome em conta todas as obrigações futuras de acordo com as condições fixadas para cada contrato em curso, ...
In Europe, in applying the directive, all obligations considered Normally existing accounting policies require recognition of all
rights Relevant is recognition (ie consideration in actuarial formula),
disregarded of measurement Complex contract constructions might cause that rights or
obligations are not noticed, causing non-recognition but no unbundling
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 20
Agenda
International Actuarial Standards of Practice Contract Classification Unbundling Embedded Derivatives Discretionary Participation Feature
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 21
Derivatives and Embedded Derivatives
Embedded derivatives are not derivatives embedded in other contracts
Derivative: Stand-alone contract subject to IAS 39 (ie not subject to IFRS 4) with specific features as defined in IAS 39.9
especially reflecting concentrated market risk
Embedded derivatives (IAS 39.10): Component of another contract (need not to be stand-alone a
derivative, ie it can include insurance risk) Explicit clause modifying cash flows of contract payable otherwise Varying in response to market factors
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 22
Derivatives Embedded in Insurance Contracts
Derivative embedded in an insurance contract:
component of the contract (ie forming separated an economically reasonable contract which includes earnings and expenses)
stand-alone in compliance with the definition of a derivative (especially not containing significant insurance risk)
Needs to comply with all requirements in IAS 39.9 Value provable responses to changes of specified market factor Initial net investment lower than for alternative investment
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 23
Derivatives Embedded in Insurance Contracts
A derivative embedded in an insurance contract is subject to IAS 39 and to be separated if and only if IAS 39.11 determines that, except if exempted by IFRS 4.8
An embedded derivative, not qualified as a derivative embedded in the contract, is not subject to IAS 39, except if separated in cases allowed by IFRS 4 and the separated component is not in the scope of IFRS 4
Any embedded derivative subject to disclosure requirements of IFRS 4.39 (e) if not reported at fair value
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 24
Separation of Derivatives
Embedded derivative is no derivative and therefore never separated if Containing significant insurance risk (in relation to the component)
guaranteed insurability double trigger
No alternative investment with lower initial investment available Annuity option Other non-traded factors (eg claim indices)
Derivative embedded in an insurance contract is not separated if closely related not measured already at fair value not a traditional surrender option or something equivalent
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 25
Agenda
International Actuarial Standards of Practice Contract Classification Unbundling Embedded Derivatives Discretionary Participation Feature
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 26
Discretionary Participation Feature
Definition of DPF focused on UK situation: Contract grants insurer discretion to decide for the entire surplus
Continental European situation is deviating: Contract grants insurer discretion regarding timing of recognition of
surplus and allocation to individual policyholders Amount is a contractually fixed share of surplus Insurers have the ability to over-perform voluntarily obligations and
pay for competitive reasons amounts in addition to obligatory amount, but not granted by contract
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 27
Discretionary Participation Feature
Most relevant features of definition of DPF
Additional benefit is contractual right (no constructive obligation) Discretion is granted explicitly by contract Additional benefits based contractually on surplus
Consequences:
Universal-life interest no DPF, since additional benefit not based contractually on surplus
Voluntary payments no DPF, since discretion not granted explicitly by contract
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 28
Discretionary Participation Feature
Typical Continental European example Basis of participation statutory surplus Timing of realization or distibutability of investment gains at the
discretion of the insurer Policyholders’ share in surplus is a contractually fixed percentage Insurer may pay voluntarily additional amounts based on competitive
pressure
Application of DPF-Definition: Timing of realization or distributability qualifies as discretion Percentage share of policyholders in surplus qualifies as connection
to surplus
Contract contains DPF
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 29
Discretionary Participation Feature
DPF comprises those additional benefits paid under the contractual right not the entire additional benefit, if reflecting competitive pressure
rather than share in surplus
Voluntary payment in addition to legal share is not part of DPF, since is not paid based on a contractual right of policyholders the discretion to pay that amount is not granted by the contract and
not contractually based on surplus the amount is not determined based on surplus but on competitive
needs irrespective surplus (no incremental relation to surplus)
No need to report any amount paid voluntarily in future as liability before a legal or constructive obligation is established
© 2004 KPMG — Stefan Engeländer – III International Conference Insurance and Pension Funds — 30
Discretionary Participation Feature
Consequence:
Entire DPF is classified as liability, if the insurer classifies as liability any amount already legally allocated to policyholders the contractual percentage of any surplus
reported under statutory accounting but not ultimately allocated to policyholders since subject to future performance (policyholders have no right to get more, but might get less)
reported under IFRSs but not yet reported under statutory accounting
Future voluntary payments are not anticipated but expensed and to be reasoned to the owners when the legal binding decision is
made, there is – in difference to the situation in UK – no contractual constraint earlier