Download - IFRS 4 Insurance Contracts: update on key issues

IFRS 4 Insurance Contracts:update on key issuesHosted by the EY Global Insurance Center

9 July 2014

IFRS 4 Insurance Contracts: update on key issues

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International Accounting Standards Board(IASB) disclaimer► Expressions of individual views by members of the IASB

and its staff are encouraged. The views expressed in thiswebcast are those of the presenter. Official positions ofthe IASB on accounting matters are determined only afterextensive due process and deliberation.


Disclaimer: third party presenters

► The opinions expressed by third parties during thiswebcast are not necessarily those of the global EYorganization or its member firms. Their opinions shouldalso be viewed in the context of the time they wereexpressed.

► The opinions expressed by third parties are those of theindividual or individuals concerned, and not necessarilythose of their organisation or entity.


Today’s moderator

David FosterErnst & Young LLP (UK)Partner


Today’s agenda

► Timelines► IASB proposal► Model for participating contracts► What’s next?

Join today’s Twitter discussion:#EY_Insurance


Today’s presenters

Darrel ScottIASB member

Kevin GriffithErnst & Young LLP (UK)

Partner

The information contained herein is a summary in nature. Viewers should consult theirown professional advisors to address their individual circumstances and concerns.

Harm van deMeerendonkING Insurance


Today’s agenda




Timelines - New IFRS for insurance contractsExpected to be mandatory 2018?

2010 2011 2012 2013 2015 2016 2017Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Ongoing FASB/IASB deliberations Implementation period Reporting

2014

Other considerations: Insurance project no longer jointly re-deliberated with FASBIFRS 9 mandatory effective date – 2018New EU Regulatory framework (Solvency II) - 2016

PotentialIASB FinalStandard

Potentialeffectivedate 1 Jan2018

Potential firstannualfinancialstatements

IASBRe-exposure DraftFASB ExposureDraftH1 2013

IASBExposureDraft

FASBDiscussionPaper

Potential startof comparativeperiods

2018


Today’s agenda




IASB proposalReminder on the ED

Expected valueof future cashflows

Discount rate

Risk adjustment

Contractualservice margin

Reinsurance

Disaggregation

PresentationSeparation

Definition andscope Disclosure

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Regulatory Frameworks

Financial Instruments and other accounting changes

Transition

Simplified approach

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IASB re-deliberationsMain tentative decisions

Targeted topics of the ED:► Use of OCI for discount rate changes is no longer

mandated► Accounting policy choice applied consistently to similar contracts► Guidance on when a policy change is justified will be developed

► ‘Unlocking’ of Contractual Service Margin confirmed► Unlocking will include changes in the risk adjustment► CSM should be released on the basis of passage of time

► Use of insurance contracts revenue confirmed► Remaining topics:

► Accounting for participating contracts and transition


IASB re-deliberationsMain tentative decisions (cont’d)

Non-targeted topics:► Principle for discount rate confirmed

► Additional guidance on how to determine discount rates whenthere is a lack of observable data

► Level of aggregation clarified► Contracts can be aggregated as long as the resulting

measurement is consistent with measuring individual contracts► Onerous contracts cannot be combined with profitable contracts

when determining CSM

► Reinsurance contracts held treated symmetrically withunderlying direct contracts for subsequent measurement

► Option for fixed fee service contracts


IASB proposalImpact of re-deliberations

Key considerations for insurers:► Optional OCI reduces the risk of accounting mismatches

with the mixed measurement model of IFRS 9

► Insurers need to determine what these decisions meanfor them and how to implement

► The devil may be in the detail: the final wording will becritical to fully understand the Board’s intentions


Today’s agenda

► Timelines► IASB proposal► Model for participating contracts► What’s to do next?



Participating contractsBackground from the ED

Performancereporting

Options &Guarantees

Shareholder’sshare in

underlying items

Scope

Interestexpense in PL


Participating contractsKey features of alternative proposal

► Broad rejection in the comment letters of the ED'smirroring approach, leading to an alternative proposal

► CFO Forum played an active role in the development, butprinciples are also supported by others as an alternativeto mirroring

► Alternative proposal contains agreed key-principles;certain details are to be further elaborated

► The alternative proposal is designed to accommodate:► the building block approach for all contracts► a single measurement basis without “mirroring-exception”► a current fulfilment value balance sheet combined with P&L

based on allocation of total contract profit to the period► the proposed mixed-measurement model for assets in IFRS 9


Participating contractsKey features of alternative proposal (cont’d)

► Key principles of the alternative proposal:► Scope includes all contracts where liability cash flows depend

significantly on the performance of underlying items► No bifurcation of cash flows – one discount rate curve for all

cash flows► Interest expense recognised in P&L using an updated book yield

when FVOCI is applied► Unlocking of the CSM for all changes that impact expected

future profit – including performance of underlying items► Options/guarantees treated consistently with all other cash

flows – not mandatory FVPL; accounting should reflect hedging ofoptions and guarantees to avoid accounting mismatches


Participating contractsStatus of IASB discussions► Board is considering how the general building block

approach could be adapted to participating contracts► Board held educational discussions in May and June► Key themes emerging from these sessions:

► Board would consider unlocking CSM for shareholder share onlyif circumstances indicate it is an implicit asset management fee

► Board would consider using book yield for determining theinterest expense in profit or loss only if:

► Application can be restricted to limited circumstances► Mechanics of the approach can be better understood and clearly

articulated► Discussions also included bifurcation, options and guarantees

and allocation of CSM


Participating contractsStatus of IASB discussions (cont’d)► Staff will develop papers based on board tentative

leanings► Board understands this is a complex area and is taking

its time to ensure ramifications of decisions are fullyconsidered

► Board will continue to explore the mechanics of an OCIapproach at meeting in July

► Decision making meetings will occur after August break


Participating contractsKey debates and challenges

► Comment letters clearly point towards an alternative tomirroring► An adaptation of the general building block model to participating

contracts seems to be inevitable

► Alternative is developed within the insurance industry► Can a compromise be found?

► Insurers need to carefully plan how to address accountingmismatches

► Implementation challenges► Some complexity will always remain, regardless of the ultimate

solution


Today’s agenda




What’s next

► Resolving the issue of participating contracts will be key toget the Insurance project completed

► It is likely middle ground needs to be found for some keyareas

► Will the timing of the final standard allow for alignmentwith the proposed IFRS 9 effective date (2018)

► Preparation and implementation- operational impact willbe huge:► Systems, models and data► Reporting framework► Explaining the results


Contact us

David Foster

Kevin Griffith

Richard Lynch

Hans van der Veen

+44 (0)20 7951 [email protected]

+44 20 7951 [email protected]



Follow us on Twitter: @EY_Webcasts


Resources

► Global Insurance websitewww.ey.com/insurance

► IFRS Insurance Insightswww.ey.com/insuranceifrs

► Solvency IIwww.ey.com/solvencyii

Thanks for participating!

IFRS 4 Insurance Contracts:update on key issuesHosted by the EY Global Insurance Center

9 July 2014

Download - IFRS 4 Insurance Contracts: update on key issues

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