Formatted Document - International Actuarial Association€¦ · Web view1.3 Compliance Change the word ‘report’ by ‘relevant communication’ ... -Contracts specifically

KeyTopics dealt with on prior calls

Topics for discussion on current call

Topics tabled until a later call

Essential element that should appear in a “minimalist” ISAP

ISAP 4 ED paragraph Comment from ASC or others Appropriate practice – guidance points for the ISAP

Important educational points (to be considered in an IAN)/ TF Comments

Presentation page Keep as in prior ISAP Done1.1 Purpose Suggested wording change in the 3rd bullet. Wording revised.1.2 Scope The following roles were deleted but still

pertinent. They are covered by ISAP 1:- Assessment of the completeness,

integrity or accuracy of data needed to support IFRS X

- Determination or review of actuarial assumptions and estimates required for IFRS X under a fully operating control environment

1.3 Compliance Change the word ‘report’ by ‘relevant communication’ Similar changes should be made to ISAP 3.

1.4 Relationship with ISAP 1 and 1A

Changed opening sentence to align with ISAP 5 revised text.

1.5 Defined Terms Look for ways to identify IFRS termsASC would prefer similar colour and underscoring with definitions included in the glossary

We are proposing to use a different colour (green) and a double underscoring each time an IFRS term is used. There is no intention to provide an hyperlink as it would mean copying a significant portion of IFRS X.

2.1.1.Knowledge Requirements

Recognition that IFRSs is a defined term that includes IASs.Is the list exhaustive?

Done

Added ‘such as’Old 2.1.2 Process and Model Governance

Delete if ISAP 1A covers sufficiently the topic

Deleted while adding 2.5.4 on Validation

2.1.2. Materiality Suggested to delete paragraphs a and b and change a few words

What we had was identical to ISAP 3. We kept as in ISAP 3 as we saw no

ISAP TOPIC ANALYSIS Page 2



reason to be different.Changed ‘distinction between’ to ‘distinctions amongst’ to be more exact.Kept guidance from ‘the principal or reporting entity’ rather than ‘client’ to align to ISAP 3.Took out ‘if it is known’ regarding the reporting entity’s threshold of materiality as indeed it should be known to do proper work. ISAP 3 should be changed accordingly.




2.1.3. Proportionality Some suggested wording changes What we had was identical to ISAP 3, except for the examples. We kept with the ISAP 3 approach, and examples regarding Pensions were changes to examples specific to Insurance. Those examples have a useful role considering the many discussions generated on IFRS on proportionality.You suggested 2 wording changes to the ISAP3 text that we agreed with. These changes should extend to ISAP 3.We reworked example b as suggested to improve wording.No change since Cape Town,except taking out ‘all of which are’ in the example intro.

2.2. Identification… Issues with having procedures, i.e. focus on actions rather than principles.

Moving from actions to principles using ‘should be satisfied that there is proper identification…N.B. from before Cape Town: We have left the pointing to ISAP 1 for guidance in case of disagreement on appropriateness of policies. Even though ISAP 1 is to be understood by all, even members of ASC had forgotten about it, so we concluded that there was a need for pointing to ISAP1 in this specific case.We also noted that ISAP3 does use pointing out to ISAP1.

Text intended for IANs:-Identification of insurance contracts within the scope of IFRS X - The actuary should determine an appropriate policy for identifying and evaluating significant insurance risks within the scope of IFRS X. In doing so, the actuary should consider the potential benefits of the contract over the coverage period. -Contracts specifically or electively excluded from the scope of IFRS X - IFRS X specifically excludes certain types of contracts from its scope. The actuary should exercise care not to inadvertently apply IFRS X to such contracts. For some contracts, such as financial guarantees, the entity may elect to apply IFRS X. In such cases, the actuary should act in accordance with the reporting entity’s accounting policy. -Combinations of insurance contracts - The



Important educational points (to be considered in an IAN)/ TF Commentsactuary determine an appropriate process for identifying groups of contracts that are issued at or near the same time to a single policyholder or to related policyholders. The actuary should have a process to determine if a group (or subgroup) of these contracts exhibits one of the criteria that requires them to be treated in combination.TO BE CONTINUED NEXT




2.2. Identification… (continued)

CONTINUATION-Separating components of an insurance contracta. Embedded Derivatives – The actuary should determine an appropriate process for identifying embedded derivatives in insurance contracts and for determining if they should be separated. To measure the fair value of embedded derivatives that have been separated, the actuary should have a process for applying models and input controls that have been validated with available market values, if any, of similar instruments.b. Investment Components – The actuary should determine an appropriate process for identifying investment components in insurance contracts and for determining which, if any, they should be separated. in accordance with IFRS X.c. Service Components – The actuary should determine an appropriate process for separating the performance obligations to provide goods and services from the host insurance contract if it is distinct in accordance with IFRS X. For example, there are some agreements that combine an agreement to pay health claims on behalf of the employer combined with an insurance protection on large claims. In such agreements, the payment service is likely to be a distinct service. Other examples include investment management services and various types of other administrative services.

2.3 Recognition… Issues with having procedures, i.e. focus on actions rather than principles.

Moving from actions to principles using ‘should be satisfied that there is timely recognition…

Text intended for IANs:A modification may result in loss on recognition or in gain or loss on




Plus some wording cleaningSatisfied ourselves that Contract Boundary is the proper title for that paragraph.

derecognition.




2.4 Measurement approach

Comments on the need to be more specific about where notion are defined and why PAA users need to know about BBA

We added references to IFRS 17 and linked the BBA guidance knowledge to the conditions to apply PAA.

2.5.0 BBA Deletion of ‘some or all.. DoneAdd reference to new ISAP 1A after deleting initial wording which is now in ISAP 1 A.

2.5.1 Definition of Portfolio

Waiting to see IASB. See 2.4 in ISAP 7 on homogeneous groups

2.5.2 General approach for selecting assumptions

Clarify role of Principal and reporting entity vs actuaryb. Consider taking the first sentence outClarification of some language requested.

We have worked on clarifying the Role of the actuary.b. we have kept the first sentence in view of the current state of diverging practices.Clarification - done.

Text intended for IANs:On credibility:• The actuary should assess the relevance and credibility of experience studies and use credibility procedures to combine the information from an insurers’ own experience with the information from, for example, industry studies, if the credibility procedures would result in a more appropriate basis for assumptions. • The actuary should exercise professional judgment to decide how much weight should be placed upon evidence that is less credible such as experience relating to new products, or if the available evidence is obtained in a context different from what is expected to prevail in the future. • The actuary should evaluate the trade-off between credibility and pertinence in selecting the period of observation upon which to base assumptions. The experience is more pertinent if observed over the recent past; however, a short period of observation may not provide enough data to be credible. Credibility blending over time can be useful in this regard, but may need adjustment for established expected changes and trends.



Important educational points (to be considered in an IAN)/ TF CommentsOn anti-selection:Assess whether evidence supports the presence of any anti-selection, within the contract boundary, in the relevant portfolios, and if so, incorporate the effect of the expected future anti-selection into the relevant assumption. The actuary should also assess how reasonably foreseeable sources of anti-selection might affect future projected experience.




2.5.3Process for updating assumptions.

‘Generally should’ or simply ‘should’? Kept, slightly modified, ‘Generally should’ which provides an opening to improvement in the following paragraph and is consistent with ISAP 3 Text regarding changes was kept to align with ISAP3 2.6.7 with some wording modifications that could also be used for ISAP3.ASC should look at whether the text here should be covered by ISAP 1

2.5.4 Validation of assumption and models

Paragraph added. Check with ISAP 1 A

2.5.5 Mortality and Morbidity Assumption

Replace ‘at least the following factors’ by ‘relevant factors, such as:’

Done.Added text around External factors.

Text intended for IANs:Specific Considerations for Mortality and Morbidity Insurance – The actuary should consider factors relevant and appropriate for the purpose of the measurement, when deriving the mortality and morbidity assumptions. Examples of such factors include, but are not limited to:a. Characteristics of the insured such as: age; sex; occupation; health status; and whether group or individual coverage;b. Characteristics of the insurance purchased: such as the event insured (e.g. death, disability, critical illness, health, medical, longevity); size or volume indicators; contractual provisions; and potential for anti-selection;c. Internal practices: such as underwriting practices; distribution systems and other marketing practices; and administrative and claims settlement practices; andd. External factors: such as secular trends and seasonal variations; medical advances, environmental factors (e.g., changes in



Important educational points (to be considered in an IAN)/ TF Commentsgovernment offsets or health care programs; levels of unemployment); and interest rate scenarios and other economic factors (e.g., cost of living adjustments) and the impact that economic circumstances are likely to have on claims incidence and termination rates.




2.5.6 General Insurance Replace ‘at least the following factors’ by ‘relevant factors, such as:’

Done.Added text around External factors.

Text intended for IANs:Specific Considerations for General Insurance – The actuary should consider the factors relevant and appropriate for the purpose of the measurement, when assessing general insurance liabilities. Examples of such factors include, but are not limited to:a. Characteristics of the insurance purchased: such as the perils insured (fire, storm, flood, accident, illness) and exclusions therefrom; size or volume indicators (sum insured or value, premium paid, turnover, etc.); incidence, reporting and claim run-off patterns; premiums paid; excess limits and/or deductibles; and prospective and retrospective experience rating arrangements;b. Characteristics of the policyholder: such as industry; culture; and financial soundness, in the case of corporate policyholders;c. Characteristics of the subject of insurance: such as car model and year; type of building or business; or age and sex for individuals;d. Internal practices: such as underwriting practices; claims handling practices; including case estimation practices; and administrative practices;e. External factors: such as secular trends and seasonal variation; economic influences; and socio/politico/legal developments and trends; andf. The potential for large and/or infrequent claims.

2.5.7 Liabilities for Incurred Claims


Done. Text intended for IANs:Specific Considerations for Liabilities for



Important educational points (to be considered in an IAN)/ TF CommentsIncurred Claims – The actuary should consider the following factors in addition to the factors listed above in Mortality and Morbidity Insurance and General Insurance, when assessing liabilities for incurred claims:a. Past experience of incured claims, considering factors such as, number, size, nature and cause of claims and recoverables due under the contract;b. The extent to which past experience is representative of expected future experience and the appropriate adjustments, including claim inflation;c. Evolution of special contractual rights and obligations;d. Patterns of reporting delays and indicators of unreported claims; ande. Past patterns of under or over-estimation for case estimates.When the value of the claim is based on actual losses, the actuary should consider the impact of the relevant and appropriate forms of inflation on the value of those losses.




2.5.8 Market Variables Put more emphasis on approaches other than replicating portfolio in view of its limited application.

Text intended for IANs:Specific Considerations for Market Variables – Market variables include, amongst others:• Discount rates;• Asset prices;• Implied liquidity premiums;• Published indices; and• Currency exchange rates.In determining the estimates of market variables, the actuary should incorporate the relevant information, such as a replicating asset or a replicating portfolio of assets, and may rely on published information from reliable sources. A replicating portfolio is a portfolio of assets providing cash flows that exactly match the cash flows from the liability in all scenarios. Un-replicated liability risks should be taken into account outside the replicated portfolio, i.e. in the associated risk adjustment.

2.5.9 Options Further streamlining done. Text intended for IANs:Specific Considerations for Options – The actuary should review all contract types to determine whether or not there are any options, explicit or otherwise, within the portfolio. The actuary should then determine whether or not any of the identified options should be separated in accordance with IFRS X.If the actuary determines that an identified option should be considered as part of the original contract or as a separate contract, the actuary should determine how to value the option using stochastic or other techniques as appropriate.




2.5.10 Policyholder Behavior

Replace ‘at least the following factors’ by ‘relevant factors, such as:’ Clarify some wording

Done. Text intended for IANs:Specific Considerations for Policyholder Behaviour –The actuary should identify variables, observable in the market and/or in the relevant portfolio, that are materially interrelated with policyholder behavior and reflect such interrelations in the assumptions.In addition to the factors mentioned in the Mortality and Morbidity Insurance and General Insurance sections above, the actuary should consider the following factors, when deriving the expected assumptions for future policyholder behavior:a. Characteristics of the insurance purchased, such as relative advantages, to the counterparty, of exercising policyholder options such as: lapsation/withdrawal and persistency; sophistication of counter-party and intermediary; cliffs created by sudden increases in benefits, generating lower policyholder option exercise rate in the years immediately preceding the cliff and higher rates upon attainment of the cliff; and short-term large spikes in cancellation rates created by large increases in premium on exercising certain options such as extension of a term insurance policy;b. Changes in policyholder behavior over time;c. Relevant external factors, such as the competitive situation for the product; andd. The legal environment such as taxation upon withdrawal and any known changes in the legal environment.TO BE CONTINUED NEXT

2.5.10 policyholder CONTINUED




Behavior (Cont’d) Assumptions about policyholder behavior should not necessarily assume that the policyholder makes the best economic decision. The actuary should consider whether it is appropriate to ignore cancellations and alterations, for example if their impact is appropriately captured in the refund or adjustment premium, as is often the case for general insurance.

Old 2.5.11 Projecting Surrender Values

Deleted in its entirety. Text intended for IANs:Specific Considerations for Projecting Surrender Value – When projecting the surrender value or transfer value payable on withdrawal, the actuary should consider relevant factors such as:a. Market variables assumed in the projection; b. Any guaranteed surrender or transfer value scale; and c. Policyholder reasonable expectations implicit in the contract.

2.5.11 Maintenance Expenses


Done. Text intended for IANs:Specific Considerations for Maintenance Expenses – Maintenance expenses include policy maintenance expenses, claim management expenses, and some fixed overheads and variable overheads. When advising the reporting entity regarding the the selection or reasonableness of assumptions for maintenance expenses the actuary should:a. Consider future expenses associated with obligations arising from commitments the reporting entity has made on, or prior to, the measurement date;b. Consider the entity’s strategy for



Important educational points (to be considered in an IAN)/ TF Commentsdetermining the level of service provided to policyholders (and its approach to claim management, if applicable);c. Consider the entity’s efficiency in providing that level of service (and implementing its approach to claims management, if applicable);d. Adjust future expense cash flows with a relevant and appropriate expense inflation factor, reflecting the entity’s circumstances. The starting point will normally be market levels of price and wage inflation consistent with the market assumption with respect to future interest rates;e. Calibrate modelled costs to ensure that the costs included in the cash flows that are used to measure insurance contracts do not exceed or fall short of the costs incurred;TO BE CONTINUED




2.5.11Maintenance Expenses (cont’d)

CONTINUEDf. Assume such that the entity will maintain a reasonable level of new business. Therefore, the assumptions at the measurement date can normally be based on the current level. The actuary should project improvements in economies of scale beyond the valuation date only if there is clear and reliable evidence that such plans are likely to be met and that the entity has exhibited the ability to achieve such cost reductions in the past; andg. Give appropriate consideration to the terms of agreements, if any, between the reporting entity and other parties to provide services such as policy administration, claim management, or fund management, including the possibility of termination of the agreement.

2.5.12 Variable Benefits Look for guidance in the second paragraph Rephrased.2.5.13 Management Actions

Introduce’ such as:’Clarify some wording

Done.

2.5.14 Reinsurance Delete repeats of IFRS 17 Done Text intended for IANs:While applying the building blocks approach in a manner that is generally consistent with contracts directly written, the actuary should incorporate the modifications to the guidance for insurance contracts that apply to reinsurance held (reinsurance assumed or inward reinsurance); namely, -that the reinsurance contract is recognized when and as coverage is assumed (41a)-that the CSM, whether negative or positive is deferred and amortized over the coverage period (41c.i)-that the cost of the purchase of



Important educational points (to be considered in an IAN)/ TF Commentsreinsurance on prior events is an expense of the period of the purchase(41c.ii)-that the variable fee approach is not applied-that ceding commissions that are contingent on the occurrence of claims are part of cash flows on an expected basis(41b.i.)-that ceding commissions that are not contingent on claims are reductions in premium(41.b.ii)-that the cash flows should reflect the risk of nonperformance by thee reinsurer(41.b.iii)

The actuary should compile direct and reinsurance figures separately and document assumptions and considerations so that the presentation and disclosures can be made properly (55, 75-78, 89, 92). (




2.5.15 Foreign Exchange Look for repeat of IFRS 17 Done.

Added text where multiple currency under a single contract or portfolio. Cleaned up

2.5.17. Discounting Language may need to distinguish between entity decision vs actuary advising about the decision

Not specific to Discounting. Was addressed in 2.5 for all estimates

2.5.17 old a Is that paragraph needed, is it a repeat of IFRS

Moved to the stem.

2.5.17 a Take the disclosure issue out Done Adjustments in terms of timing, currency, liquidity, para 25 to address in IAN

2.5.17 b Suggestion to cut some of the wording to be more crisp

Done

2.5.17 c Look at the guidance provided. Done Rationale to keep: the current yield curve beyond the observable horizon is still very material to some insurance line and as such an approximation like continuation of current yield curve may not represent a reasonable prospective view. Similarly, the past may have been influenced by factors not likely to reproduce itself and may not be appropriate. Both extreme are nevertheless quite in use currently instead of a prospective view

2.5.17 d,e Suggested words to be changed Done plus one paragraph cut as redundant.

Text intended for IANs:-Credit risk premia should be determined using a methodology consistently over time. Depending on the chosen methodology (e.g., observed spreads in fixed-income markets, prices of credit derivatives, benchmarks, studies) adjustments of input data should be made for factors in that data that are “not relevant to determining the credit risk component”



Important educational points (to be considered in an IAN)/ TF Commentsin question. Examples are the liquidity of the underlying fixed-income security, credit derivative, credit index, or the subordination of referenced fixed-income instruments.-When using a replicating portfolio that replicates all cash flows, including passing through to policyholders any defaults on the replicating assets, the liability value amounts to the market value of the replicating assets. When replicating asset defaults are not passed on to policyholders, the implied credit instrument sold by the insurer to the issuer should be added to the market value of the replicating portfolio to arrive at the liability value.-Where an insurance contract depends on the returns on underlying items, the discount rate is to reflect these underlying items and the nature of the dependency.




2.5.18 Locked-in rates Questioned the reference to the use of professional judgment and the need for the closing sentence.

Rephrased the 2 paragraph and deleted the last sentence.

2.5.19 Acquisition expenses2.5.20 Risk Adjustment Is the list complete?

Requires compensation in a.Which report in i.ii

The main list is a minimum but some subset are simply example, therefore using such as…Kept requires compensation as consistent with IFRS 17Rephrased i.ii

Text intended for IANs:

d.Risks assessment: IFRS X states that the risk adjustment would generally be expected to have the following characteristics:Risks with low frequency and high severity should result in higher risk adjustments than risks with high frequency and low severity;For similar risks, contracts with a longer duration should result in higher risk adjustments than contracts with a shorter duration;Risks with a wide probability distribution should result in higher risk adjustments than risks with a narrower distribution;The less that is known about the current estimate and its trend, the higher the risk adjustment; andTo the extent that emerging experience reduces uncertainty, risk adjustments should decrease and vice versa.

2.5.21 CSM Stem missingSome text is more of an IAN nature

Provided a stem.Provided a revised text on Level of AggregationRemoved some text to be moved to an

Text intended for IANs:The actuary would take into consideration that a level release in expected value will produce increasing profit per coverage on a




IAN closed block and may therefore have limited usefulness for users of the IFRS financial statements.




2.5.22 Transfer and Combinations

One sentence looks prescriptive Kept the sentence as it is explanatory rather than prescriptive.

2.6 Simplified approach (PAA)

2.6.1 – Guidance ?Is it useful?

2.6.1 – Move to guidance languageKept the remaining info as we founded useful guidance.

Text intended for IANs:If the PAA is used, the actuary should ensure that the PAA is limited to contracts with a coverage period of one year or less or for which the PAA is a reasonable approximation to the BBA.When there is a change from PAA to BBA or vice-versa, the actuary should quantify the impact of the change as input for the entity’s disclosure of this change in accounting policy.

2.7 Presentation Should it be replaced by a reference to ISAP 1?

Replaced wording by guidance to the actuary to review presentation and raise concerns if the presentation is not correct or appropriate.Reference to ISAP 1 is addressed in 3.1

Text intended for IANs:Non-Adjusting Cash Flow Changes – The actuary should identify and quantify the effect of changes in cash flows that are not absorbed in the CSM. They comprise:a. Changes in estimates of incurred claims;b.. Timing changes in respect to investment components;c. Changes in investment linked cash flows that arise from changes in the underlying investments;d. In general, changes that do not relate to future services under the contract; and e. Changes not absorbed, because the CSM is limited to non-negative values.Other Comprehensive Income (OCI) for insurance contracts – For contracts that do not require the entity to hold underlying items and specify a link to returns on those underlying items, and if the entity has adopted the FVOCI approach the actuary should determine OCI as the difference between the fulfilment values, including risk



Important educational points (to be considered in an IAN)/ TF Commentsadjustment but not CSM, discounted at current and locked-in rates.Reconciliations –The actuary should reconcile the starting and ending amounts of insurance liabilities and assets on the basis of:• expected experience;• the difference between actual and expected experience; and• unless the PAA is used, assumption changes (grouped if appropriate), anddiscuss in the actuary’s report.




2.7 Presentation Interest Expense – For contracts that require the entity to hold underlying items and specify a link to returns on those underlying items, the actuary should:i. Recognise and present changes in estimates of those fulfilment cash flows that are expected to vary directly with returns on underlying items consistently with changes in estimates of the underlying items;ii. Recognise changes in fulfilment cash flows that are expected to vary indirectly with returns on underlying items in profit or loss; andiii. Recognise and present changes in other fulfilment cash flows as it does for other contracts.Otherwisea. If the entity has adopted the FVPL approach, the actuary should determine interest expense in two parts:i. Interest expense for the period, using the discount rates current at the start of the period; andii. The effect of the change to the rates current at the end of the period. Orb. If the entity has adopted the FVOCI approach, the actuary should determine interest expense for the period, using locked-in discount rates.

2.8 Transition The whole paragraph was reworded to. take into account significant revisions by IFRS and comments received.Significant amount of text was deleted with some limited text remaining.

3.1 Disclosures No comments 3.1 b expanded and references added.


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Formatted Document - International Actuarial Association€¦ · Web view1.3 Compliance Change the word ‘report’ by ‘relevant communication’ ... -Contracts specifically