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IFRS 17 Insurance Contracts Breakfast Briefing Series Launch event 30 May 2017

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  • IFRS 17 Insurance ContractsBreakfast Briefing Series Launch event30 May 2017

  • 2 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Agenda

    .

    Agenda Items Speaker

    Introduction Eimear McCarthy

    Scope of IFRS 17 Maaz Mushir

    Measurement Maaz Mushir

    Presentation and disclosures Carla Dunne

    Transition Carla Dunne

    IFRS 4 and IFRS 9 considerations Carla Dunne

    Programme Delivery David Walsh

    Closing remarks Ciara Regan

  • Introduction

  • 4 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Meet our team

    Welcome and Introduction

    Eimear McCarthyPartner - Audit and AssuranceE: [email protected]: +353 1 417 2685

    Donal LehanePartner ConsultingE: [email protected]: +353 1 417 2807

    David WalshManager ConsultingE: [email protected]: +353 1 417 3943

    Carla DunneManager - Audit and AssuranceE: [email protected]: +353 (0) 1 417 3863

    Ciara ReganPartner - Audit and AssuranceE: [email protected]: +353 1 407 4856

    Angela McNallyDirector - Audit and AssuranceE: [email protected]: +353 1 417 2279

    Maaz MushirManager - Audit and AssuranceE: [email protected]: +353 1 417 2234

    Actuarial

    Accounting Processes, People and Technology

    mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

  • 5 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    1999

    Welcome and Introduction

    Baby One More Time!

  • 6 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    IASBs insurance contracts project

    25 Oct 2013Comment deadline

    2014 and H1 2016Board re-deliberations

    16 Nov 2016Approval of post-field test staff recommendations

    April 1999

    Project commenced

    12 Sep 2016IFRS 9 decoupling Deferral possible for some insurers to 1/1/2021

    20 Jun 2013

    ED Issued

    16 Feb 2016IFRS 17 deliberations complete, balloting begins

    23 Sep 2016Completion of field testing

    18 May 2017Publication date for IFRS 17

    1 Jan 2020 *Comparatives and IAS 8 disclosures Transition date IFRS 17 & IFRS 9

    1 Jan 2021Effective date IFRS 17 and IFRS 9 (deferral approach)

    1 Jan 2018Effective date IFRS 9 (full application or overlay approach)

    * Illustrative for entities with 31 December year-end

  • 7 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Key objectives of IFRS 17

    Introduction

    The key objectives of the IASBs insurance project are to:

    Introduce for the first time a single IFRS accounting model for all types of insurance contracts;

    Make the new accounting model highly transparent; and

    Align as much as possible insurance accounting with the general IFRS accounting of other industries.

    The key change from the existing standard will be the prescription of the valuation method for insurance liabilities and the recognition of revenue.

    The new presentation and disclosure requirements will also report revenue in a way that is more consistent globally and across industries.

    Full retrospective application of the new requirements is required, unless this is impracticable.

    While there are many similarities between the new Insurance IFRS and Solvency II framework, their goals are quite different.

    IFRS focuses on shareholders interests while Solvency II is designed to protect policyholders.

  • 8 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Solvency II vs IFRS 17 Balance Sheet

    Assets

    Best estimate

    liability

    (BEL)

    Risk

    Adjustment

    (RA)

    Contractual

    Services

    Margin

    (CSM)

    Assets

    BEL

    Risk Margin

    Other liabilities

    Subordinated

    liabilities

    Excess of assets

    over liabilities

    Callable capital

    instruments Goodwill

    Changes in cash flows

    related to past & current

    services

    Income statement

    (underwriting result)

    Income statement

    (investment result)

    Other comprehensive

    income (OCI)

    Release of CSM

    Release of RA related to

    current period

    Interest on Insurance

    liability

    Changes in discount rates

    Technical

    provisions

    Basic Own

    Funds

    Ancillary Own

    Funds

    Shareholder

    equity

    Solvency II IFRS 17

    Typical balance sheet Typical balance sheet Income statement

    Other liabilities

  • 9 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Fact sheet

    OneOne accounting model for all insurance

    contracts in all IFRS jurisdictions.

    450listed insurers using IFRS Standards

    $13 trilliontotal assets of those listed insurers

    Betterinformation about profitability

    2021mandatory effective date of the new Standard

    3.5years for companies to implement the new requirements

    900meetings, roundtables and discussion forums

    Moreuseful and transparent information

    600comment letters

    Who is affected?

    IFRS 17 Insurance Contracts

    When?

    What changes?

    How was industry feedback collated?

  • Scope of IFRS 17

  • 11 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    What has improved under IFRS 17?

    1Valuation of technical provisions

    Use of current assumptions.

    Consideration of time value of money.

    Use of consistent discount rates.

    2Profitability

    Consistent recognition of profit about current and future profitability.

    Profit will be earned in a consistent manner as insurance services are provided to insurance clients.

    Reporting of onerous contracts.

    3Comparability among companies

    IFRS 17 increases comparability between insurance companies in the same jurisdiction or across different jurisdictions.

    4Comparability between insurance contracts

    IFRS 17 increases comparability between insurance companies issued by the same company or companies within a group. Several multi nationals consolidate their subsidiaries using non-uniform accounting policies.

    5Comparability among industries

    The principles of revenue and profit recognition under IFRS 17 make it consistent with other industries.

  • 12 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Scope of IFRS 17

    IFRS 17 will apply to a range of different contracts, which fall under the following categories:

    Insurance and reinsurance contracts issued;

    Reinsurance contracts that an entity holds (ceded reinsurance); and

    An investment contract with a discretionary participation feature (DPF) that it issues, provided that the entity also issues insurance contracts

    Remaining contracts which are typically issued by insurance companies are those which comprise investment components, normally referred to as investment contracts. These are financial instruments in substance and thus are accounted for in accordance with IFRS 9.

  • Measurement

  • 14 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Three approaches to the measurement of insurance contracts

    Premium Allocation Approach

    Short-term general insurance

    Short-term life and certain group contracts

    Building Block Approach

    Variable Fee Approach

    Long-term business Whole life insurance Term assurances Protection business Annuity Contracts Reinsurance written Certain general insurance

    contracts

    Unit-linked contracts, Variable annuities and

    equity index-linked contracts Continental European 90/10

    contract UK with profits contracts Unitised with profits

  • 15 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Building Blocks Approach (BBA)

    Principles

    Measurement model uses a building block approach

    Measurement objective is to quantify the notion of the insurers fulfilment of obligations under the contract

    Measurement is current assumptions must not be locked-in, except the discount rate used to calculate CSM

    Discount rate can be developed from market interest rates using either a top down or bottom up approach

    Discount rates based on market interest rates whose characteristics match those of the liability (currency, duration, liquidity)

    Contractual service margin (CSM) eliminates the recognition of any future accounting profit at inception

    Obligation to provide service, measured at inception as the expected contract profit.

    Compensation for uncertainty for certain liability cash flows. Similar to Risk Margin concept in Solvency II.

    Use a market discount rate that considers the currency, timing and liquidity of liability cashflows.

    Expected cash flows from premiums and claims and benefits.

    Block 1: Expected Future Cash

    Flows (unbiased probability-

    weighted mean)

    Block 4:Contractual Service

    Margin

    Block 3:Risk Adjustment

    Fulfilment cash flows

    Total IFRS Insurance Liability

    Block 2:Time value of money

  • 16 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Building Blocks Approach (BBA)

    Principles

    Measurement model uses a building block approach

    Measurement objective is to quantify the notion of the insurers fulfilment of obligations under the contract

    Measurement is current assumptions must not be locked-in, except the discount rate used to calculate CSM

    Discount rate can be developed from market interest rates using either a top down or bottom up approach

    Discount rates based on market interest rates whose characteristics match those of the liability (currency, duration, liquidity)

    Contractual service margin (CSM) eliminates the recognition of any future accounting profit at inception

    Obligation to provide service, measured at inception as the expected contract profit.

    Compensation for uncertainty for certain liability cash flows. Similar to Risk Margin concept in Solvency II.

    Use a market discount rate that considers the currency, timing and liquidity of liability cashflows.

    Expected cash flows from premiums and claims and benefits.

    Block 1: Expected Future Cash

    Flows (unbiased probability-

    weighted mean)

    Block 4:Contractual Service

    Margin

    Block 3:Risk Adjustment

    Fulfilment cash flows

    Total IFRS Insurance Liability

    Block 2:Time value of money

    How it works Read the overview

    Forced

    Hedging

    0

    1

    Allocation of

    share class

    specific

    expenses

    0

    2

    Hedging

    Ratio

    0

    3

    Class

    Specific

    Transactions

    0

    4

    Rounding of

    shareholder

    transactions

    0

    5Divergence from

    Benchmark

    0

    7

    Design of

    performance

    fee

    methodology

    0

    6

    The CSM represents the most fundamental change in the measurement of insurance contract liability from the current accounting and solvency standards.

    If fulfillment cash flows 0, CSM = 0

    The level of aggregation (unit of account) applied in the calculation of CSM is going to be a key challenge for insurers in the implementation of the standard.

  • 17 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Recognition of changes in estimates and assumptions

    Subsequent measurement under BBA

    Block 1: Expected Future Cash

    Flows (unbiased probability-

    weighted mean)

    Block 4:Contractual Service

    Margin

    Block 3:Risk Adjustment

    Fulfilment cash flows

    Total IFRS Insurance Liability

    Block 2:Time value of money

    CSM is adjusted by changes in estimates and is allocated to profit or loss on basis of passage of time.

    For some contracts, changes in estimate include entity share of policyholders assets.

    In each reporting period, an entity re-measures the fulfilment cash flows using updated assumptions about cash flows, discount rate and risk.

  • 18 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    There are four broad categories to adjust SII contract value to that defined under IFRS 17. However, the devil is always in the details.

    An extremely simplistic illustration of the differences in SII and IFRS 17 Insurance Liabilities

    SolvencyII

    TechnicalProvisions

    SIIcontract

    boundaries

    RiskMargin

    DiscountRates

    CSM IFRS 17InsuranceLiabilities

    Best Estimate Liabilities

    Risk margin

    PV of Fulfilment Cashflows

    Risk adjustment

    Contractual Service margin

  • 19 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Evolution of IFRS 17 vs Local GAAP profits over time (measured under BBA)

    -8000

    -6000

    -4000

    -2000

    0

    2000

    4000

    6000

    8000

    10000

    12000

    1 3 5 7 9 11 13 15 17 19

    Term Assurance

    Local GAAP IFRS 17

    0

    2000

    4000

    6000

    8000

    10000

    12000

    14000

    16000

    18000

    1 2 3 4 5 6 7 8 9 1011121314151617181920

    Annuities

    Local GAAP IFRS 17

  • 20 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Evolution of IFRS 17 vs Local GAAP profits over time (measured under VFA)

    1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

  • 21 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Premium Allocation Approach

    PAA is the option to use premium as proxy for the valuation of insurance contracts for short term incepted

    but unexpired risks

    Discounted probability weighted average of expected

    future cash flows

    Risk Adjustment

    Premium Allocation Approach

    (PAA)

    Onerous

    Discounted probability weighted

    average of expected

    future cash flows

    Risk Adjustment

    CSM

    Incurred Liability Liability prior to date when claims are incurred

    Fulfilment CF value for claims reserves

    Fulfilment CF value for unexpired and unincepted risks

    Minimum liability for unincepted contracts

    or unexpired coverage.

    AND

    Premium Allocation Approach

    (PAA)OR OR

    Building Blocks Approach/ General Model

  • Presentation and disclosures

  • 23 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Significant changes to the balance sheet

    New IFRS balance sheet

    1. Liabilities under insurance contracts(including unallocated surplus) willchange with the underlying valuation basis

    2. Reinsurers share of liabilities willchange in line with underlying inwardsvaluation basis

    3. Deferred acquisition costs will no longerexist

    4. Other assets / payables and otherfinancial liabilities will no longer includeinwards and outwards future premiums

    5. Intangible assets that relate to futureprofits will be deferred as part of the CSM

    6. Retained earnings will differ due to:

    Retrospective application of Standardsat inception

    Different emergence of profit

    KPIs will change as a result

  • 24 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Fundamentally different

    New IFRS Income Statement

    KPIs will change as a result

    1. Gross written premiums - replaced byInsurance Revenue comprising of:

    Release of CSM

    +/- Change in Risk Adjustment

    + Expected net cash flows

    2. Claims and change in insurance liabilitieswill include actual net cash outflow,fundamentally changing to reflect themeasurement basis

    3. Acquisition costs:

    Attributable expenses included in BEL

    Non-attributable expenses recognised inincome statement immediately

    4. Finance costs:

    Unwind of initial discount a cost in eachperiod based on discount rates at inception

    New discount rate option to take theimpact of changes through profit/loss orother comprehensive income

  • 25 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Disclosures overview

    An entity shall disclose qualitative and quantitative information about:

    The amounts recognised in its financial statements that arise from insurance contracts; (explanation of recognised amounts)

    The significant judgements, and changes in those judgements; and (significant judgements)

    The nature and extent of the risks that arise from contracts within the scope of the Standard. (risks)

    There are also extensive disclosures relating to transition.

  • Transition

  • 27 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Overview

    IFRS 17 Transition

    Three possible approaches to be applied

    The retrospective approach should be applied to groups of insurance contracts, unless it is impracticableor if groups at inception of contracts in force on transition cannot be identified.

    An entity is then permitted to choose between the modified retrospective approachand the fair value approach.

    Where impracticable to apply the modified retrospective approach, a fair value approach is applied from the date of transition.

    Key definitions in transition

    Impracticable: Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. (IAS 8.5)

    Fair value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (IFRS 13.A)

  • 28 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Illustration (effective date: 1/1/2021)

    IFRS 17 Transition

    The objective of the modified retrospective approach is to approximate full restatement

    The use should be only to the extent the entity does not have reasonable and supportable information to restate

    Retrospective approach

    Modified retrospective approach

    Fair value approach

    BS3BS2BS11

    /1

    /2

    02

    0

    1/

    1/

    20

    21

    (eff

    ecti

    ve d

    ate

    )

    31

    /1

    2/

    20

    21

    IS1 IS2

    Maximum Comparative Periods

    Each bar represents all of the groups of contracts issued in those years and part of the different portfolios

    BS = Balance SheetIS = Statement of Comprehensive Income

    - 1 yr

    - 2 yr

    - 3 yr

    - 4 yr

    - 5 yr

    - 6 yr

    - 7 yr

    - 12 yr

    - 13 yr

    - 14 yr

    IMPRACTICABILITY ARISES

    IMPRACTICABILITY ARISES

    - 11 yr

    - 8 yr

    - 9 yr

    - 10 yr

  • IFRS 4 and IFRS 9 considerations

  • 30 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Key Principles

    IFRS 9

    AC FVTOCIFVTPL/

    FVTOCI Option for certain equity instruments

    Within the scope of the impairment model

    Outside the scope of the

    impairment model

    Financial assets in the scope of IFRS 9Loan

    commit-ments

    (unless @ FVTPL)

    Financial guarantees

    (unless @ FVTPL)

    Lease receivables

    Contract assets

    (IFRS 15)

    Subsequent measurement

    1. Classification and Measurement

    2. Impairment

    3. Hedge Accounting

  • 31 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Overview

    IFRS 4 Interaction with IFRS 9

    1. Overlay Approach

    apply IFRS 9, but adjust profit or loss to remove volatility for designated assets arising from the accounting mismatches

    available to all insurers

    effective when an insurer first applies IFRS 9

    apply IAS 39 in the financial statements

    available to insurers whose activities are predominantly connected with insurance

    eligible at reporting entity level

    deferral option to 2021

    2. The Temporary Exemption

    IFRS 9 Financial Instruments is effective from 1 January 2018. As such, IFRS 17 will have a later implementation date than that of IFRS 9 which may cause: additional accounting mismatches; and volatility in profit or loss that may arise in this gap period.

    As a result, the IASB amended IFRS 4 to introduce two options for insurers:

  • 32 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    The Overlay approach

    IFRS 4 Interaction with IFRS 9

    IFRS 9 is applied in full.

    Reclassify between P&L and OCI the difference between amounts reported applying IFRS 9 and amounts that would have been reported applying IAS 39.

    For financial assets:

    measured at FVTPL under IFRS 9 but would not have been measured at FVTPL in their entirety under IAS 39; and

    that relate to contracts within the scope of IFRS 4.

    Statement of Comprehensive Income

    Insurance contracts revenue X

    Incurred claims and expenses (X)

    Operating result X

    Investment income IFRS 9 X

    Interest on insurance liability (X)

    Overlay approach-adjustment (X)

    Investment result X

    Profit / (Loss) X

    Overlay approach-adjustment X

    Effect of discount rate changes on insurance liability

    (X)

    Other comprehensive income X

    Total comprehensive income X

  • 33 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    The Temporary Exemption

    IFRS 4 Interaction with IFRS 9

    To qualify for the temporary exemption an insurer must have:

    not previously applied IFRS 9

    significant IFRS 4 liabilities compared to total liabilities

    activities predominantly connected with insurance being:

    *P > 90%; or

    80% < *P 90% (and no significant activity unconnected with insurance)

    *P = (Liabilities from IFRS 4 contracts + Investment contracts at FVTPL + Other connected liabilities) / Total Liabilities

    The temporary exemption is effective for annual periods beginning on or after 1 January 2018, with a fixed expiry date of 2021.

  • 34 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Key considerations

    IFRS 4 Interaction with IFRS 9

    IFRS reporter

    Do you qualify for the temporary exemption? Judgement involved. Need to consider both qualitative and quantitative factors.

    Are you are planning to early adopt IFRS 17 before 1 January 2021? If so, you must also apply IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers.

    IGAAP reporter with IFRS group reporting

    Have you considered the implications on your group reporting requirements? Need to consider the costs and complexities of preparing financial information under both IAS 39 and IFRS 9.

    IGAAP reporter with no IFRS group reporting

    What is the timing for FRS 102 to change?

  • Programme Delivery

  • 36 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    IFRS 17 Programme Delivery

    Project Planning

    Resource Planning Budget Planning Workstream identification Programme structure Programme governance Implementation Roadmap

    IT Solutions

    Data Requirements System Requirements Vendor Benchmarking System Build V Buy analysis

    Operating Model

    Day 2 readiness Processes, people and technology Management Information (MI) Month End KPIs Internal Controls Transition & Post Go Live Controls

    Communications Internal Comms Investor Relation Comms Treasury Comms

    Kicking off your IFRS 17 project

  • Closing remarks

  • 38 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    What should you do next?

    Understand the impact of IFRS 17 and IFRS 9 changes on your business

    Understand the impact on your profit profiles, accounts and KPIs

    Early planning, resources and training

    Complete a business case and secure budget

    Educate senior management and the market

    Future-proof in-flight initiatives

    Start early, start small and keep it simple

  • 39 2017 Deloitte Ireland. All rights reserved.

    IFRS 17 Insurance Contracts

    Deloitte Next Steps

    JULY 11 AUGUST 2 SEPTEMBER 5

    Deep dive of the new

    Insurance Contracts

    Standard, IFRS 17

    Understanding the

    financial and practical

    impacts for reserving

    Understanding the

    impact across the

    entire business: from

    IT to actuarial and

    finance

    Series of upcoming breakfast briefings:

    Launch of new series of on demand webcasts and eminence papers on topical issues that will follow the insurers IFRS 17 journey to implementation

    Publication of an IFRS 17 practical guide

    Deloitte interpretative guidance on IFRS 17 will be released continuously on our online accounting research tool IASPlus.com

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