IFRS 4 Implementation Issues Workshop - actuaries.org.hk · may cause the contract to be classified as insurance. This exemption also applies if meets the definition of DPF If a derivative

© Ernst & Young LLP. All Rights Reserved.

IFRS 4 Implementation Issues WorkshopJoint Regional Seminar on Financial Reporting, 22 -30 June 2006

Bruce Moore, FSA, Jonathan Zhao, FSA

2© Ernst & Young LLP. All Rights Reserved.

Product Classification

Embedded Derivatives

Insurance Contract Accounting

Investment Contract Liability Measurement

- IAS 39

- IAS 18

Liability Adequacy Testing

Disclosure Requirements

Agenda


Product Classification


Product Classification defines accounting treatment

Phase I

Investment contracts

Discretionary Participation Investment

contractsInsurance contracts

*Subject to certain modifications

ExistingAccounting*

ExistingAccounting*

ExistingAccounting*

ExistingAccounting* Amortised Cost

-or-Fair Value

Amortised Cost-or-

Fair Value

Product Classification- Why is it important?


Classification Flowchart

Is there significantinsurance risk present

in the contract?

Is there adeposit component to the

contract? If so, is the deposit componentindependent of the insurance

cash flows?

Are any elements ofthe benefit driven by discretionary

participation

Insurancefeatures present

in contract

Classified as aninvestment contract

Deposit component

Yes

No

Insurance and depositcomponents of contract must, ifnot recognised, be unbundled

and valued separately

Yes

No

Insurancecomponent

Product is an InvestmentContract without discretionary

participation features

Product is anInsurance Contract

Product is an InvestmentContract with discretionary

participation featuresYes

No


Insurance Risk


in the contract?



cash flows?


in contract

Yes

No Product is anInsurance Contract


participation


Deposit componentNo



YesInsurance

component





No


Definition of Insurance

“A contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.”


Financial risk is the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in thecase of a non-financial variable that the variable is not specific to a party to the contract.

Insurance risk is risk, other than financial risk, transferred from the holder of a contract to the issuers

If both financial risk and significant insurance risk are present, contract is classified as insurance.

Insurance versus Financial Risk


‘Significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance.’

Additional benefits must be for pre-existing risk and do not include:

Charges that would be made on cancellation or surrender

Loss of ability to charge policyholder for future services

Possible reinsurance recoveries (these are classified separately)

Significant Insurance Risk


Significant Insurance Risk

Additional benefits include timing risk

Whole life contract (payment known, timing unknown) has additional benefits

Contract where death benefit is equivalent to maturity benefit (i.e. maturity benefit adjusted for time value of money) does not haveadditional benefits

Classification on a contract by contract basis

Contracts entered into simultaneously with the same policyholder are counted as one contract

Products may be classified homogeneously on materiality grounds


No quantitative guidance given.

Rules of thumb currently being adopted for internal consistency

Benefit paid on death exceeds benefits payable on survival by more than x% (term assurance)

Plausible scenario exists under which the death benefit exceeds the survival benefit by x% or more at any time during the policy term (guaranteed minimum death benefit in unit-linked contract)

Benefit payable on survival exceeds the benefit payable on death by more than x% (Pure Endowment, life contingent annuity)

Quantitative Measures


Testing for SignificantInsurance Risk

Feature Significant

Significant additional benefits payable on insured event

Costly and feasible event in scenario of commercial substance even if it is extremely unlikely

Waiver on death of surrender charges

Loss of ability to charge for future services

Unfeasible event in any scenario

Contingent amount is insignificant in all scenarios of commercial substance


Term assurance

Life annuity in payment

Whole life contract

Mortgage endowment assurance

Pension pure endowment

Permanent health insurance

Pension endowment assurance return with interest

Yes

Yes

Yes

Yes

Yes

Yes

Probably

Quiz – Traditional products


Regular premium UL savings contract (101% DB)

Regular premium UL mortgage endowment

Single premium UL bond with return of premium

Single premium UWP Whole Life

Regular premium UWP Pension

Persistency bonuses

Contract with rider benefits

No

Yes

Yes

Yes

No

Possibly

Yes – assuming they are significant

Quiz – Unitised products


Once insurance, always insurance, but can go from investment to insurance

Investment may change to insurance through:Changes in regulation, law

Switch between funds, first fund has no insurance risk – second fund has insurance risk.

Previously underestimated risks in investment contracts

INVESTMENT INSURANCE

Change in level ofinsurance risk


SFAS 60, SFAS 97 Limited Payment, SFAS 120

SFAS 97 Universal Life

SFAS 91, SFAS 97 Investment

Insurance

Insurance

Insurance or Investment(depending on significance of insurance

risk)

US GAAP Classification IAS Classification

Comparison to US GAAP


Unbundling


in the contract?



cash flows?


participation


in contract


Deposit component

Yes

No



Yes

No

Insurancecomponent






No


When do you unbundle?

Unbundling is required when:

The insurer’s existing accounting policies do not require recognition of thedeposit component

The insurer can independently measure the deposit component from the insurance component

Unbundling is allowed when the insurer can independently measure the deposit component from the insurance component

Consistent treatment of unit-linked products where some contracts have rider benefits


Discretionary ParticipationFeatures (DPF)


in the contract?



cash flows?


participation


in contract


Deposit component

Yes

No



Yes

No

Insurancecomponent






No


Definition of DPF

Contractual right to additional payments as a supplement to guaranteed minimum payments

Likely to be a significant portion of the total contractual payments.

Amount or timing is contractually at the discretion of the issuer

Contractually based on

Performance of a specified pool of contracts or a specified type of contract

Realised and / or unrealised investment returns on a specified pool of assets held by the issuer

Profit or loss of the company, fund or other entity that issues the contract


Measurement of DiscretionaryParticipation Features

Investment contracts with discretionary participation features are measured under IFRS 4

Probably subject to IAS 39 in Phase II of the insurance contract project

Investment contracts without discretionary participation features are measured under IAS 39

Service elements may need to be separated and valued under IAS 18

All contracts subject to IAS 32 disclosures

Fair value disclosure will be an issue for contracts with discretionary participation features


Key learning points

Product classification will affect measurement basis, profit emergence and disclosures

Contracts with significant insurance risk will be insurance

Contracts without significant insurance risk will be investment

Contracts with discretionary participation features are exempt from IAS 39 during Phase I but not from IAS 32 disclosures

Contracts may need to be unbundled, with the deposit features valued under IAS 39


Embedded Derivatives


Measurement of embeddedderivatives

Certain embedded derivatives have to be separated from insurance contracts, investment contracts with DPF and investment contracts without DPF measured at amortised cost

If separated, measured under IAS 39:

Fair value

Changes in fair value through profit and loss

Similar to US GAAP requirements

Settled rather than net settled


Embedded derivativeflowchart


Value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (underlying).

No initial investment or initial investment is lower than required for another contracts that behaves similarly.

It is settled at a future date.

Definition of a derivative


Economic characteristics of derivative are similar to those of the host contract, the derivative is closely related

Mainly defined by use of examples

Unit-linked contract measured at fair value of underlying units

Interest rate floor or cap out of the money at issue, unless leveraged, is closely related

Surrender option is closely related if surrender value is similar to carrying value of liability

If so interrelated to insurance host contract that cannot be measured separately

Definition of closely related


Contract at fair value

If the whole contract is at fair value with movements in the fair value flowing through the income statement, there is no requirement to separate the contract as embedded derivative already measured

Unlikely to apply to insurance contracts as not at fair value

If embedded derivative is already at fair value, then no requirement to separate (e.g. structured products)


If a derivative meets the definition of an insurance contract then it does not need to be separated in Phase I. Examples include:

The presence of an embedded derivative with insurance risk may cause the contract to be classified as insurance.This exemption also applies if meets the definition of DPF

If a derivative meets the definition of an insurance contract then it does not need to be separated in Phase I. Examples include:

The presence of an embedded derivative with insurance risk may cause the contract to be classified as insurance.This exemption also applies if meets the definition of DPF

Occurs only on Insurance Event

Form of an insurance contract

Guaranteed minimum death benefit

Guaranteed minimum maturity value

Guaranteed annuity option

Meets definition of insurancecontract


Some surrender options do not require separation.

Surrender options in insurance contracts or contracts with discretionary participation features are exempt if:

Surrender value is a fixed amount

Surrender value is a fixed amount and an interest rate

Exemption does not apply if the surrender value is based on financial variable (equity prices or index)

Surrender option exemption


How many do we expect?

Most contracts contain significant numbers of guarantees and options

These tend to only be payable on insured events

Guaranteed minimum death benefits

Guaranteed minimum maturity values

Therefore very few do not meet the definition of insurance and are exempt from separation

Specific disclosures are therefore required


Key learning points

Guarantee must meet the definition of a derivative to be an embedded derivative.

If an embedded derivative is closely related to the host contract it does not need to be separated.

If the host contract is at fair value, there is no requirement to separate any embedded derivatives.

Some surrender values on insurance contracts, and embedded derivatives that meet the definition of insurance do not require be separation.


Insurance Contracts and Contracts with DPF – Accounting Treatment


Insurance contracts

During Phase I, existing accounting policies apply with certain modifications

Prohibited – certain accounting policies are prohibited as they do not meet the IFRS framework

Mandated – certain accounting policies must be implemented if they are notalready in the existing accounting policies

Allowed to continue, but not start – certain accounting policies that do not meet the IFRS framework can continue, but cannot be implemented.

Can be started – certain accounting policies can be introduced.

Existing accounting policies are those in the primary financial statements


Prohibited policies

The following accounting policies are prohibited

Setting up catastrophe provisions

Setting up claims equalisation provisions

Offsetting of reinsurance assets and direct liabilities


Mandated policies

The following accounting policies are mandated if they are not already present

Liability adequacy testing

Impairment of reinsurance assets


Liability adequacy test

Current liability adequacy test applies if

Test at each reporting date using current estimates of future cash flows (including guarantees and options)

If these are greater than current liability, liability is increased and deficiency flows through profit and loss

Otherwise Liability Adequacy Test under IAS 37

Fair value like calculations


Impairment of reinsurance assets

Reinsurance asset is reduced and reduction flows through income statement if it is impaired

Reinsurance asset is impaired if:

Objective evidence of an event after initial inception that the cedant may not receive all amounts due to it

The impact of the event can be reliably measured

Impairment may be reversed


Policies that may continue

The following accounting policies may continue but companies may not switch to these where they are not already applied

Using an undiscounted liability basis

Measuring future investment management fees at a value greater than the acquisition costs

Using non-uniform accounting policies for subsidiaries

Using excessive prudence in the valuation of liabilities


Phase I measurement concerns

Liabilities and backing assets may not move together

Liabilities are fixed or at amortised cost, but

Assets are AFS with unrealised gains/losses in equity

Assets are trading with changes in fair value in income

Therefore some policies were allowed to start


Policies that may be started

The following accounting policies can be started subject to certain restrictions

Use of current market discount rates

Use of shadow accounting

Use of asset based discount rates

Only if part of a comprehensive accounting policy which makes financial statements more relevant and reliable


Current market interest rates

Measure liabilities using current market interest rates

Current market interest rates

Can include investment spreads only if already included

Otherwise risk free rates

Can move to using current assumptions at the same time

Can be performed for any designated liabilities

All changes in liabilities must flow through income statement


Shadow accounting

Shadow accounting

Quantify impact of realising gains on liability and related assets

If unrealised gains flow through income statement additional amount must be held as liability

If unrealised gains flow through Equity additional amount canbe held as Equity


Asset based discount rates

Measure liabilities using discount rates based on asset returns

Only as part of move to a new accounting policy system which is more relevant and reliable

Rebuttable presumption that this will not be the case

Must be applied consistently to all insurance contracts


Insurance contracts with DPF

Distributable surplus must be classified as liability or equity

Disclosure of movement in statement of equity if any distributable surplus classified as equity

Distributable surplus classified as liability taken into account in liability adequacy test


Investment contracts with DPF

Like insurance contracts, continue existing accounting with additional modifications:

Premiums can still be recognised as revenue

If distributable surplus is classified as equityMinimum liability for investment contracts is IAS 39 liability for guaranteed benefits

If distributable surplus is all classified as liability, need to include this in the liability adequacy testing

Fair value disclosure under IAS 32 still applies

If impracticable – disclose this fact, nature of the risks and range in which the fair value is likely to sit


Business combinations -insurance phase I

Closed Book Basis

Intangible Asset Insurance

Liability(based on original

accounting policies)

Subsequently test for liability

adequacy

Net Fair Value


Business combinations -insurance phase I

Reserves on local basis

VIF = difference between local basis reserves and fair value at purchase date – can be presented as net liabilities

VIF amortised

Prior acquisitions – continue existing accounting policies

Recognise other intangibles acquired, such as a controlled sales force

Derecognise other not allowed, such as client lists


Key Learning Points

Catastrophe and equalisation reserves prohibited

Liabilities adequacy testing and impairment of reinsurance assets mandated

Gross presentation – reinsurance shown separately

Investment contracts with discretionary participation features temporarily under IFRS 4 – subject to disclosure requirements of IAS 32

Business Combinations allow separate presentation of intangible asset


IAS 39 Calculation Methodologies for Investment Contracts


Asset liability matching

Matching would reduce volatility of earnings

Matching through consistent measurement principles for assets and liabilities

Asset classification follows IAS 39

Fair Value through income statement – elective (subject to exposure draft)

Available for Sale: Fair value through equity – elective

Held to Maturity: amortised cost – restrictions

Loans and receivables: amortised cost – restrictions


No

+

Amortised Cost

Fair ValueEntire Contract

Method of

valuation

ContainsEmbeddedDerivatives

Yes

Host at Amortised Cost

Derivative at Fair Value

Amortised Cost

Liability measurement options


Fair value option in Europe

Exposure draft issued in response to Central European Bank worries

Fair value must be verifiable

Limit the use of fair value to:Contracts that contain embedded derivatives

Financial liabilities contractually linked to assets (unit-linked)

Financial liabilities whose exposure is substantially offset by changes in another financial instrument

Financial assets that are not loans or receivables


“Incremental”excludes allocated costs or overhead

“External”excludes salaries and

possibly employee commissions

“Directly Attributable”must be acquisition

related

More restrictive than most existing GAAP

Transaction costs


“Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction”

(IAS 32 paragraph 11)

Fair value definition


Active Market – quoted price

Bid price for asset

Offer price for liability

No Active Market – use valuation techniques

Reference to the current fair value of another instrument that is substantially the same

Valuation technique commonly used by market participants which has been shown to reliably price actual transactions

Makes maximum use of market inputs

Fair value considerations


Fair value limitations

Demand deposit floor

The minimum fair value liability is the amount payable on demand –surrender value

Limits liability to a minimum of zero

Calibration at issue

Best evidence of fair value at inception is the premium paid

Calibration required – ongoing calibration to new contracts

No gain or loss at issue – except for initial expenses

Grandfathering may be allowed


Fair value components

IAS 39 states the following components should be considered

Time value of money (basic or risk free)

Swap curve can be used for practical reasons – adjustment for risk must be made

Credit risk

Foreign currency exchange prices

Commodity price

Equity prices


Fair value components

Volatility

Surrender riskMinimum liability is demand deposit floor

Servicing costs / feesCosts can be estimated by looking at fees charged by other market participants

Likely that present value of fees equals origination costs – unless evidence charging more than the market

Renewal PremiumsNot clear whether these should be included – pragmatically they are being included


Methodology

Liability is the discounted value of future cash flows

Future cash flows include:

Payments to policyholders

Premiums received from policyholders (?)

Policy administration and maintenance costs

Transaction based taxes and levies relating to existing contracts

Future policy loans and repayments of these by the policyholder

All guarantees and options


Assumptions

Discount rate is the risk free rate adjusted for credit standing

Credit standing is claims paying ability of insurance company

Assumptions should be best estimate with allowance for risk (MVMs)

Lapses

Expense inflation

Etc.


Unit-linked example

Discounted cash flows

Investment management fees limited to transaction costs

Therefore liability at inception equals premium minus transaction costs

But how does this tie up with IAS 39 requirements?

Demand deposit floor – Surrender value may be greater, therefore limits the liability


Fair value exceeds best estimate

Fair value exceeds premium minus transaction costs, creating loss at issue

Fair value probably requires a margin (“MVM”) on cash flows

Positive MVMs needed to calibrate to initial premium

Addition to discount rate for credit risk would reduce liability

Fair value observations


“… the amount at which the financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount ….”

(IAS 39 paragraph 9 paraphrased)

Amortised cost definition


The effective interest method gives a liability where the initial amount is grown by the effective interest rate to the maturity period.

The effective interest rate exactly discounts the estimatedfuture cash payments or receipts through maturity to the initial amount.

If cash flows cannot be reliably measured – contractual cash flows are used

Effective interest method


Initial amount

The initial amount is made up of:

Fair value at issue – initial premium

Minus

Transaction costs

Implicitly creates deferred acquisition cost


Premium = 1000

Commission = 50

IA = 950

Maturity value in one year = 1100

Effective interest rate grows 950 in one year to 1100

Effective interest rate = 15.9%

Traditional contract example


Surrender options in contracts create the requirement for estimation

Use the best estimate surrender assumptions and expected surrender payments

Calculate the effective interest rate on a cohort of policiesCohort to be product / inception year or lower

Surrender options


Premium = 1000

Commission = 50

IA = 950

Assume 10% of policyholder surrender half way through the year

Surrender value at mid year = 1020

Maturity value in one year = 1100

Effective interest rate = 15.76%

Estimated cash flows


MethodologyEffective interest rate remains the same

Update assumptions for current expectations

Recalculate liability as discounted future cash flows

Changes in liability flow through income statementAmortisation of liability

Changes due to experience being different from expected

Changes due to changing expectation of the future

Re-measurement


Amortised cost or fair value

Issue Fair Value Amortised CostFair value disclosure requirement fulfilledEmbedded derivatives already fair valuedConsistent with Phase II expectation for insurance Consistent with trading assetsConsistent with AFS assets ½Minimal implementation effort


Key learning points

Asset and liability classification should be consistent

Decision on fair value or amortised cost is elective

Fair value calculated using discounted cash flows

Amortised cost calculated using effective interest method

If amortised cost is used, then embedded derivatives need to be separated and fair value disclosed


Investment Contract revenue recognition –IAS 18


Background

Guidance for investment contracts with investment management services is found in IAS 18: Revenue

Unit-linked

Applies to revenue recognition & acquisition cost recognition

IAS 18 amended by IFRS 4

Requirements are included inIAS 1: Presentation of Financial Statements, paragraphs 32 - 35

IAS 18 paragraphs 20 - 28

IAS 18 Appendix paragraph 14 (b) (iii)


Practical

IAS 1 & 18 key words:

Shall not be offset unless required or permitted by a standard or interpretation

Fees recognised as services are provided – stage of completion

Transaction costs (as defined in IAS 39) recognised in line withrevenue

Recoverability performed on portfolio basis


Stage of Completion

Defined asServices provided to date

total services over life of the contractServices measured by costs, or by other approaches

Applies to all service contractsSimilar to Construction contracts

Requires reliable cost accountingStraight-line methodology can be used where:

Indeterminate number of acts

There is no evidence that another methodology would not better represent the stage of completion


Questions

1. The initial fees and initial expenses are designed to offset each other. Deferral of both initial fees and initial expenses will not impact the profitability. Can this be done?

2. We currently amortise DAC using US GAAP methodologies. Can this be continued? If not, what methods can we use?


Conclusions

1. The initial fees and initial expenses are designed to offset each other. Deferral of both initial fees and initial expenses will not impact the profitability. Can this be done?

AnswerIAS 1 states that no items should not be offset.

IAS 18 states that revenue for a significant act should be recognised when that act is performed.

Is payment of commission to an IFA a significant actThe conclusion is no:

The payment of commission forms part of a contract between the insurance company and the IFAThis is not part of the contract between the insurance company and the policyholderTherefore it is not a significant act in the context of the contract between the insurance company and the policyholder


Conclusions

2. We currently amortise DAC using US GAAP methodologies. Can this be continued? If not, what methods can we use?

AnswerUS GAAP has the following features

Retrospective cumulative catch-up on change in assumptionsAmortisation is in line with discounted gross profits (fees less expenses)Amortisation with interest

IAS 8 only allows effect of changes in estimates to be prospective.Therefore no retrospective cumulative catch-up

IAS 18 states amortisation as revenue is recognisedNo discounting as do not recognise revenue on discounted basis

Service contracts are not financial instrumentsMethods for financial instruments do not workDAC is really an intangible – common analogy is depreciation


So what methods can be used?

0

10

20

30

40

50

60

70

80

90

100

0 1 2 3 4 5 6 7 8 9 10

Straight LineExpected lapsesActual lapseTrue up

One example – in line with policies (straight-line)


So what methods can be used?

0

10

20

30

40

50

60

70

80

90

100

0 1 2 3 4 5 6 7 8 9 10

Straight LineRP AMCSP AMC

Another example – in line with AMC


Liability Adequacy Test


Background

Liability adequacy testing applies to NET CARRYING AMOUNTS of insurance contracts and investments contract with Discretionary Participation features

Net carrying amount is gross liability minus intangibles such as DAC / PVFP

Requirements for liability adequacy testing IFRS 4.15-4.19

IFRS 4.35 (investment contracts with DPFs)


Practical

IFRS 4.15 key words:Each reporting date

Current estimates of future cash flows under its insurance contracts

If inadequate in the light of future cash flows, entire deficiency shall be recognized in P&L


Minimum requirements for local testsContinuation of local test if the following two criteria are met:

Current estimates of all contractual cash flows, related cash flows (claims costs) and cash flows resulting from embedded options and guarantees

If the test shows that the liability is inadequate, entire deficiency is recognised in P&L

If the existing test does not meet the requirements, application of approach found in IAS 37


Example

Applied test is as followsCash flows are determined including cash flows from guaranteesFor unit linked products with interest guarantees, actual fund values are taken into account

Investment returns are based on actual investments and reinvestments based on actual yield with a floor of

4% for production until August 19993% for production as from August 1999

Discounting based on 3% or 4% Investment returns and discounting are regulatory requirements (from 1999!!!)Regulator does not require taking the value of guarantees into consideration.

Intrinsic value of guarantees (shortfall of available assets in relation to the guaranteed amounts) is deducted from marginProvision related to guarantees is included in margin

Calculated as discounted value of future shortfalls according to a stochastic model


Example

To come to an IFRS test the applied test is corrected for:Market Value for assets

Elimination of deferred realized gains

Potential issuesA mandated regulatory yield may overlook a yield deficiency

Need to consider aggregation policies and make sure these are consistent

May be possible to ‘improve’ current test to meet IFRS 4 requirements


Our questions

1. Does this test meet the minimum IFRS 4 requirements?

2. Should the provision for guarantees be treated as an available margin in the adequacy test or should this be considered as the market value of the costs of the guarantees that you need for future estimated shortfalls?


Our conclusions

1. Does this test meet the minimum IFRS 4 requirements?

AnswerThe Dutch liability adequacy test takes into consideration deficits (if any) of available assets in relation to the guaranteed policyholders benefits up to balance sheet date only. IFRS 4.16 requires that all cash flows from options and guarantees until expiration of the relating policies are taken into consideration.

At this moment, there are no rules that explicitly require measuring these cash flows on a stochastic basis; a deterministic approach is still acceptable. However, the Dutch Liability Adequacy Test as described in this memo only qualifies for IFRS when there is documented proof that a discount rate based upon a realistic investment scenario does not result in higher policyholders’ liabilities than the present approach where the regulatory interest of 3% and 4% is used as estimated future investment yield.


2. Should the provision for guarantees be treated as an available margin in the adequacy test or should this be considered as the market value of the costs of the guarantees that you need for future estimated shortfalls?

AnswerThe provision for guarantees has been based by the insurer upon a stochastic scenario. The analysis above implies that under the present rules, nothing prevents the insurer from considering the excess of these provisions above the deterministic estimate as an available margin in the adequacy test for IFRS.

Should the insurer decide that options and guarantees should be measured based upon a stochastic scenario in the IFRS LAT, this would be an acceptable approach, provided that it would be applied consistently.

Our conclusions


Phase I – Disclosure Requirements


Insurance disclosurerequirements

IFRS 4 Two high level principles:

Principle 1 – Explanation of recognised amountsPrinciple 1 – Explanation of recognised amounts

Principle 2 –Amount, timing and uncertainty of cash flowsPrinciple 2 –Amount, timing and uncertainty of cash flows

Implementation guidance - runs to 61 paragraphs – but does not create additional requirements!

Fair Value Disclosure for insurance contract assets and liabilitiesFair Value Disclosure for insurance contract assets and liabilities


Materiality

Specific disclosure requirement need not be satisfied if the information is not material

Specific disclosure requirement need not be satisfied if the information is not materialIAS 1IAS 1

“Omissions or misstatements of terms are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements.”

“Omissions or misstatements of terms are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements.”


Reinsurance

All disclosures are required to be gross / ceded

Follows on from requirements not to offset reinsurance against insurance

Bear this in mind when looking at the number of required disclosures


Principle 1 disclosures

Accounting policies forInsurance contracts

Related assets

Related liabilities

Related income and expense

Amounts ofKey assets

Key liabilities

Key income, expense and cash flows



AssumptionsSignificant assumptions and their derivationOther sources of measurement or uncertaintyChanges in assumptions

Changes in liabilities – reconciliations requiredInsurance liabilitiesDeferred acquisition costsIntangible assets from

Business combinationsPortfolio transfer



Gain or loss on buying reinsurance

If accounting policies amortise this gain or loss then

Starting position

Amortisation over period

End position



Risk managementObjectivesPolicies for mitigating risk

Asset/liability matchingUnderwriting

Terms and conditionsSignificant effect on the amount, timing and certainty of future cash flows

Nature of risks coveredConcentrations of riskSummary of material guaranteesParticipation features and methods for crediting interest



Monitoring insurance riskExposures reported gross and net of reinsurance

Analysis of liabilities by time of expected maturity

Sensitivity analysis

Areas of concentration of risk



Run off triangles (claims development)Only claims where amount or timing of payment is unknown

Only claims where settlement takes longer than 1 year.Unlikely to affect Life Insurance

Back to earliest material incurred claim aroseMaximum of 10 years

Maximum of 5 years required on transition

If impracticable, then not historic years not required

Can be based on accident year / underwriting year


Guarantees and options

Information about material exposures to interest and credit risk for guarantees and options which are not held at fair value

This is expected to coverGAO – Guaranteed annuity options

GMDB – Guaranteed minimum death benefits

GMIB – Guaranteed minimum income benefits

GMMV – Guaranteed minimum maturity values


Investment contract disclosures

Similar to insurance disclosures

Plus fair value disclosures for contracts not held at fair value

Investment contracts measured at amortised cost

Investment contracts with discretionary participation features

Reconciliation required for IAS 18 DAC and DIR


Risks to level / natureof disclosure

Disclosures based on IAS 32 and other standards

Current project – Financial Risks and Other Amendments to Financial Instruments Disclosures

Recommendations from this project will probably affect disclosures for Insurance


Key learning points

Significant disclosure requirements

Disclosures to be informative rather than voluminous

Gross / reinsurance presentation in all disclosures

Analysis of movement in reserves required

Disclosure of amortisation of reinsurance gains or losses

Disclosures of material guarantees and options


Thank you for your time

Any questions?

For additional details, please contact:Jonathan Zhao, FSA, [email protected], (852) 2846-9023Bruce Moore, FSA, [email protected], (8610) 5815-3364

mailto:[email protected]

mailto:[email protected]

Documents

IFRS 4 Implementation Issues Workshop - actuaries.org.hk · may cause the contract to be classified as insurance. This exemption also applies if meets the definition of DPF If a derivative