©2005 deloitte & touche llp new zealand society of actuaries financial services forum 27...
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©2005 Deloitte & Touche LLP
New Zealand Society of Actuaries Financial Services Forum
27 November 2009
IFRS: Insurance Accounting.
Charles Hett
November 2009
Audit. Tax. Consulting. Actuarial. Financial Advisory
3 ©2009 Deloitte Touche Tohmatsu
Recap the Insurance Project to date
Key Features of the Phase II Framework
Issues and recent developments
What this means for NZ reporting
Implications and other
IFRS/Reporting factors
Agenda
Recap the Insurance Project.
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Insurance Accounting timeline
Thinking/Concern
IFRS IFRS Phase IIDevelopment
Issues Paper1999
IASBIFRS
1990sJuly 2001
January 2005
2007
Discussion Paper
May’07
Extended ConsultationDSOP
Issued
IFRS 4Phase 1
NZ 1 Jan 07
Back to the Drawing Board
2008+
??
IFRS Insurance Accounting - November 20096 ©2009 Deloitte, Touche Tohmatsu,.
•Intangible assets
IFRS 4 Phase I
Life insurance companies
Non-lifecompanies
Insurance Disclosures
Contract classification
Claims development
Assumptions and risk objectives
Analyses & Reconciliations
Sensitivities
Risk concentration
Temporary measure to continue until Phase II standard emerges
NZ FRS 35 NZ FRS 34
Insurance & Participating Contracts – Local GAAPInvestment Contracts – IAS 39
Best Estimate
Planned Margins
(recover AC)
Central Estimate
OCR / IBNR
UPR, DAC
Risk Margin
Liability Adequacy
NZ ~ Little methodology change, mostly level of disclosure
Development of Phase II.
IFRS Insurance Accounting - November 2009 8 ©2009 Deloitte, Touche Tohmatsu
The Proposed Model
3 building blocks to measure insurance liabilities :
Explicit, unbiased, probability weighted and current estimates of the contractual cash flows;
Current market discount rates that adjust the estimated cash flows for the time value of money;
Margin: Explicit - Bearing risk (a risk margin) and providing other services (a service margin)Composite - Single margin (calibrate to premium)
IFRS Insurance Accounting - November 2009 9 ©2009 Deloitte, Touche Tohmatsu
Phase II – Measurement: Three Building Blocks
Estimates of future cash flows Explicit and Current view (Balance Sheet date)
Unbiased and Probability weighted
ConsiderationsNot necessarily most recent informationAvailability of “market” data for insurance liabilities As consistent as possible with observed market prices“Market consistent” vs. “Entity specific”
Complexity of possible stochastic scenarios – Looks unlikely
IFRS Insurance Accounting - November 2009 10 ©2009 Deloitte, Touche Tohmatsu
Phase II – Measurement: Three Building Blocks (cont’d)
ConsiderationsConsistency with observable market ratesAvailability of market rates for long term insurance liabilitiesDoes not reflect risk inherent in cash flowsOwn insurer’s credit position in measuring liabilities – unlikelyUse of asset-based rates – only if directly linked to liabilitiesLiquidity Premium (avoid annuity mismatching)Further guidance – unlikely (Fair Value measurement: IAS39)
Discounting Observable market rates:
1) Timing 2) Currency 3) Liquidity
IFRS Insurance Accounting - November 2009 11 ©2009 Deloitte, Touche Tohmatsu
Phase II – Measurement: Three Building Blocks (cont’d)
Margins – Composite or ExplicitComposite: single margin calibrated to premium (essentially current MoS)
Risk Margin: Allow for variance and skew in underlying distribution(s)(Uncertainty in projected cash flows)
Service Margin: The amount for servicing the contract
Considerations:• Risk Margin methods can have very different outcomes
– Percentile Basis (~ NZ non-life margin: 75% confidence level) – Cost of Capital (~ Solvency II)– Economic Capital (~ Adverse Scenarios/MCEVs)– Not a shock absorber
• Availability of “market participant” data on servicing– “Sub-contractor” profit margin or use “entity-specific” basis
• Residual Margin: To ensure no Day 1 profits
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Phase IIKey Issues.
IFRS Insurance Accounting - November 2009 13 ©2009 Deloitte, Touche Tohmatsu
Other Key Issues
DAC and Revenue Recognition
Exit Price or Fulfilment Value : IAS 37
Margins
Future Premiums: Contract Boundary
Profit/Loss at Inception
Other Issues
½½
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Position at Mid-October 2009
• IASB
• Initial Measurement– Selling should not affect measurement
– Day 1 revenue to cover acquisition costs
– AcqCosts – direct and incremental
• IAS 37 approach (draft)– IAS 37 influenced by Insurance Project
– Consistency with other liabilities
– No market info. => Entity based estimates
• Explicit Margins– (Risk, Service, Residual)
– Risk/Service Margin remeasured
• Expense Initial Costs as incurred
• No Profit/Loss at Inception
• FASB
• Initial Measurement– Contract liability based on consideration
– Prohibit DAC (No Service at PoS)
• Current Fulfilment (CFV)– Not inconsistent with IAS 37 (draft)
• Composite Margin– Consistency with approach to Revenue
• Expense Initial Costs as incurred
• No Profit/Loss at Inception
IFRS Insurance Accounting - November 2009 15 ©2009 Deloitte, Touche Tohmatsu
Proposed Models – Mid October 2009
IFRS Insurance Accounting - November 2009 16 ©2009 Deloitte, Touche Tohmatsu
Proposed Models – Mid October 2009
IFRS Insurance Accounting - November 2009 17 ©2009 Deloitte, Touche Tohmatsu
Proposed Models – Mid October 2009
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Recent Developments.
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Late October 2009Unwelcome Convergence!
• Revenue recognition is paramount
• Acquisition Costs expensed as incurred
• IASB agreed margins calibrate to full contract premium (after PoS)
• FASB agreed explicit margin for Risk (Uncertainty)
• Revisiting Policyholder Accounting– Insurance Policies held by Customers (as assets) – reconsider, no decision
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Proposed Models – Before 28 October 2009
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Proposed Models – After 28 October 2009
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Other IssuesYet to be Discussed/Resolved
Policyholder Accounting
Policyholder Participation Rights
Credit Characteristics of insurance liabilities
Unbundling
UPR, Recognition, IAS 39
Disclosure
©2005 Deloitte & Touche LLP
What This Means.
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• Exposure Draft to be issued January April 2010
• A joint IASB/FASB Exposure Draft
• Comment period to May August 2010
• Standard to be in place by June 2011
• Substantial IASB membership changes July 2011
Timetable (Updated 18 Nov)Next two years
IASB/FASB appear to be allocating resource to ensure this timetable can be met
25 ©2009 Deloitte Touche Tohmatsu.
• Many similarities to NZ MoS (composite margin)
• Some differences:
• Explicit assessment of Risk & Service margins
• Residual Margin may not be remeasured
• No income to cover acquisition costs (No DAC, -’ve PL)
• No mention of Tax (anywhere) => Gross of Tax liabilities and
margins
• Reinsurance treated explicitly (as current)
• Financial Advice at Point of Sale a service?
Implications for New Zealand
IFRS Insurance Accounting - November 2009 26 ©2009 Deloitte, Touche Tohmatsu
Business Implications for the Insurance Industry
IFRS Phase II
IFRS Phase II
Need to review impacts on:
External reporting, disclosures and financial communication
External reporting, disclosures and financial communication
Management reporting and budgetting
Management reporting and budgetting
Capital ManagementCapital Management
Regulatory ReportingRegulatory Reporting
Systems, data, models & processes
Systems, data, models & processes
Experience Monitoring Assumption setting
Experience Monitoring Assumption setting
Asset and Liability matchingAsset and Liability matching
Product pricing and designProduct pricing and design
Value CreationValue CreationTax and Tax PlanningTax and Tax Planning
27 ©2009 Deloitte Touche Tohmatsu.
Three key areas to consider
Valuation
Increased reliance on actuarial models
Analysis to derive explicit margins ~ risk margin
Assumption changes => not Re-spread ~ volatility
Yet more disclosure?
Product Development
Reporting incentives to structure products
(contract boundaries)
Higher profit volatilityUse of Reinsurance
Impact of acquisition cost reporting loss on
distribution costs
Risk Management
Risks and Controls for valuation models
Managing market risk to mitigate profit volatility(closer link between risk
management and reporting)
Risk Margins Risk Management
Overall a more explicit risk based reporting requirement should lead to stronger links between reported profits, risk management,
reinsurance and investment strategy and capital requirements
IFRS 4 Phase II will likely be the chance to move more fully to a gross of tax profit reporting requirement (separate IAS 12 tax treatment)
©2005 Deloitte & Touche LLP
ContactsCharles HettHead of Actuarial Services
+64 4 470 3866+64 21 616 [email protected]
Klaas StijnenManager - Actuarial Services
+64 4 470 3660+64 (0)21 273 [email protected]
Margaret CantwellManager - Actuarial Services
+64 4 470 3537+64 21 267 [email protected]
IFRS Insurance Accounting - November 2009 29 ©2009 Deloitte, Touche Tohmatsu
This presentation and the accompanying handouts cover topics only in general terms and are intended to give a wide audience an outline understanding of certain issues relating to Phase II of the IASB insurance project, and therefore cannot be relied on to cover specific situations; applications of the principles set out will depend on the particular circumstances involved. Furthermore, responses given in the presentation to questions are based on only an outline understanding of the facts and circumstances of the cases and therefore do not form an appropriate substitute for considered specific advice tailored to your circumstances. We recommend that you obtain professional advice before acting or refraining from acting on any of its contents. We would be pleased to advise you on the application of the principles demonstrated at the seminar and other matters to your specific circumstances but in the absence of such specific advice cannot be responsible or liable.
Deloitte & Touche LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at Stonecutter Court, 1 Stonecutter Street, London EC4A 4TR, United Kingdom. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu ('DTT'), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other's acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT.
©2005 Deloitte & Touche LLP
New Zealand Society of Actuaries Financial Services Forum
27 November 2009