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willistowerswatson.com IFRS 17 Insurance Contracts Why actuaries need to care 1 August 2017 Joint Regional Seminar - Taipei © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 0

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IFRS 17 Insurance Contracts

Why actuaries need to care

1 August 2017

Joint Regional Seminar - Taipei

2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

0

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Q&A

Introduction

Getting the numbers right

Getting the numbers on time

Business implications

Agenda

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The IFRS insurance contracts standard 20 years in the making

Mandatory for annual periods beginning on or

after 1 January 2021

Opening balance sheet requiredas of 1 January 2020

Early adoption possible

The story so far now the interesting part really starts

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1997 Kick-off IASC starts the Insurance Contracts project

May 2017 Publication of IFRS 17 Insurance Contracts

July 2013 Re-Exposure Draft Insurance Contracts

May 2002 Insurance project split into Phase 1 and Phase 2

July 2010 Exposure Draft Insurance Contracts

May 2007 Discussion Paper: Preliminary views

March 2004 IFRS 4 Insurance contracts Phase I issued

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Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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Current Balance Sheet Overview and where IFRS 17 fits in?

2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

FinancialInstruments

ShareholderEquity

Property

IntangibleAssets

IFRS 4 Insurance Contracts

--------------

IAS 39 Financial instruments: Recognition and Measurement

IAS 18 Revenue

IAS 38 Intangible Assets

IAS 40 Investment Property

IAS 39 Financial instruments: Recognition and Measurement

IAS 32: Financial Instruments: Presentation

IFRS 7 Financial Instruments: Disclosures

Assets Liabilities

Other IAS 12 Income Taxes IAS 19 Employee Benefits

Debt

OtherIAS 37 Provision, Contingent Liabilities and Contingent Assets

DACIAS 18 Revenue IFRS 4 Insurance Contracts

IAS 37 Provision, Contingent Liabilities and Contingent Assets

In 2014 standards finalised for: IFRS 9 to replace IAS 39 IFRS 15 to replace IAS 18In 2017 standards finalised for: IFRS 17 to replace IFRS 4

Insurance liabilities

Investment liabilities

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

3

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Why is it being introduced?

IFRS 4 was always intended to be replaced It allowed a wide variety of approaches some of which were deemed

to not adequately reflect the underlying financial performance of insurance contracts

Objectives for IFRS 17Globally consistent approach Explicit risk measurement and

allowance for the time value of guarantees and options

More useful and understandable information for the users of financial statements

Use of current estimates for all cash flows and maximum use of observable market data

Exclude distinct investment components from insurance revenue

Insurance revenue recognised as performance obligations fulfilled

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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Publication of IFRS 17 is a starting gun not a finishing line

2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

2021

Final insurance contracts standard

published as IFRS 17

2017 2018

Gap analysis, assessment of options, implementation, modification and testing

2020

Dry run 2018/19IFRS 17

IFRS 9 Effective

For insurance entities, two options apply:Overlay Approach or Deferral Approach

IFRS 9 or/andIAS 39 and

IFRS 4

IFRS 9 or/andIAS 39 and

IFRS 4

IFRS 9 + IFRS 17IFRS 9 + IFRS 17

Opening balance

sheet

Fullfinancial

statements

Dry Run

Implementation

2019

Q1 reporting

5

2021 IFRS financial statements under IFRS 17 with comparatives for 2020

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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Getting the numbers right

Getting the numbers on time

Business implications

Key implementation challengesMore than a compliance exercise

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Applying judgement in a principles-based standard

Complexity of implementation within a tight timeframe

Setting-up and running complex actuarial cash-flow models

Aligning processes, including increased automation

Dealing with multiple metrics

Managing stakeholder expectations

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Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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General model measurement of fulfilment cash flows

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Explicit Unbiased Entity perspective Within contract boundary

Cash Flows

Reflect liquidity characteristics of cash flows Consistent with

observable market prices Exclude factors not

relevant to the cash flows

Time Value of Money

Compensation the insurer requires for bearing uncertainty May reflect diversification

within and between portfolios Disclosure of confidence

level

Risk Adjustment

Expected cash flows

Risk adjustment

CSM

TotalInsurance ContractLiability

Fulfilment cash flows are updated each reported period: Actual vs expected cash flow variances for current period flow through to P&L Changes in estimates of future cash flows related to future coverage adjusts CSM ALM mismatches flow through to either the P&L or Other Comprehensive Income

Fulfilment cash flows

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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Building block approach contractual service margin

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Effectively a balancing item that eliminates day one gain Cannot be negative except for reinsurance

held Released as services are provided Adjusted to reflect impact of changes in

best estimate assumptions in respect of future service thereby reducing profit variability CSM discount rate locked at inception

except for directly participating business

Contractual Service Margin

Expected cash flows

Risk adjustment

CSM

TotalInsurance ContractLiability

A modified variable fee approach applies for direct participation business

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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Grouping of contracts

Each portfolio is then divided into three groups:

Contracts in each group need to be sub-divided into annual cohorts

Contracts initially to be split into portfolios, meaning contracts that are subject to similar risks and managed together.

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Contracts that are onerous at initial recognition

Contracts that at initial recognition have no significant possibility of becoming onerous subsequently

The remaining contracts in the portfolio

9

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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Discount rates alternative approaches

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Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

Liquid risk-free curve

Illiquidity premium

Gross yield on reference

portfolio

Allowance for

uncertainty

Elimination of credit risk and any other, not relevant factors

Consistency with observable market prices of financial

instruments with consistent characteristics as liabilities such as

timing, currency and liquidity

Bottom-up

Top-down

Expected defaultIFRS 17

discount rate

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Risk adjustment principle very different from current approachesMarkets and insurers likely to make different choices on implementation

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Purpose of the Risk AdjustmentTo reflect the compensation that the entity requires for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risk

Required to disclose equivalent confidence level What risk measure (VaR, TVaR, CoC), which percentile? How to account for and allocate diversification benefits? How to achieve consistency with other requirements?

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Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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Statement of Comprehensive IncomeSo what happened to written premiums?

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Insurance contract revenue and service expenses exclude any deposit components

Revenue and expense are recognised as earned or incurred

Insurance contract revenue represents the transfer of promised services and comprises: Expected claims and expenses Risk adjustment CSM Acquisition cash flows

Insurance finance expense is excluded from insurance service (underwriting) result

Accounting policy choice to present insurance finance expense either fully in P&L or in P&L and OCI

Statement of Comprehensive Income

2021

Insurance contract revenue X

Insurance service expenses (X)

Insurance service result X

Investment income X

Insurance finance expense X

Net financial result X

Profit/Loss X

Discount rate changes on insurance liability (optional) X

Total comprehensive income X

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Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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Complex transitional requirements

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Can a full retrospective approach be

applied?

Full retrospective approach

If possible

Modified retrospective approach

Fair value approach

If impracticalChoice of transition approach

decided at group of contract level

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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Implementing IFRS 17 requires a holistic approach

2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

PEOPLE

TECHNICAL DECISIONS

TOOLS

PROCESSES

IFRS

+

+

+

Target operating model

Training

Board sponsorship

Software solutions

Process automation & governance

Actuarial models/ reserving

Data requirements

Impact analysis

Technical decisions

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Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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with actuaries needing to take a major interest in implementation

Technical judgements and decisions will impact equity, profit emergence and implementation complexity

Requires new actuarial models dealing with CSM retrospective assumptions, calculations and analysis

Further pressure on reporting processes, requiring new systems, people and target operating model

14

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

willistowerswatson.com 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

16

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

IFRS 17 will require new, slicker financial reporting processes and models

Calculation engines and reporting systems need more flexibility but also ensure robust, reliable, repeatable and timely delivery of required figures

Risk adjustment

Contractual service margin

Reporting and disclosure requirements

Cash flows and discount rates

Par business Variable Fee Approach

Segmentation and contract boundaries

Model Capabilities / IFRS Requirements

More granularity and complexity in B/S and P&L for Life and General Insurers

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Actuarial model processes need to be industrialized

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Asset data

DeterministicLiability model

Input

Liability data

Assumptions

Otherreports

Outputdata

Reporting templates

StochasticModel

Various sources Different responsibilities Different formats /

interfaces

Separate models (Unnecessarily) complex coding ? Ongoing reconciliation

Various reports Spreadsheet cascades Manual adjustments

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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Implement the new IFRS 17 content at the right placeDesign and orchestrate seamless End-to-End process through workflow engine

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Life Cash Flows & Results

P&C Cash Flows & Results

Third Party Calculation Tools

Input Data

P&C

Life

Reporting systems

MCEV / NBV

Financial Reporting

IFRS Accounts

General Ledger

Consolidation

Capital / Regulator

ETL

Pricingdata

Actual claims

Actual costs

Actual premium

Cessiondata

Pricingdata

Actual claims

Actual costs

Actual premium

Cessiondata

ETL

ETL

ETL

Third PartyData

Warehouse

Store

IFRS / capital Results

Feeder systems

AdminP&C

AdminLife

Assets

ESG

Re-Insurance

ETL

ETL

18

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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More than just accounting: significant commercial impacts likely

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The different equity and profit emergence and revised presentation requirements should lead insurance companies to review or revise:

1

2

4

3

Key metrics used

Asset-liability management

Product strategy and pricing

Capital and risk management

5 Investor engagement

19

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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Impact of IFRS 17 on key insurer metrics

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Metric Impact

Profit IFRS profit top metric for insurers Will become more complex under IFRS 17

Distributablecash flow

Top priority for investors Impact of IFRS 17 on dividend paying capacity

unclear; may vary by country

Value Mix of IFRS, EV & Solvency reporting used Use of IFRS equity as Value starting point? CSM and EV VIF / NB margin reconciliation?

Capital Current focus on RBC No direct impact of IFRS 17 but maybe indirect

20

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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ALM: update framework

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Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

RBC ratio RBC balance sheet

IFRS Profits

Ratio

Time

100% SCR

Profit

Time

? IFRS Equity / ValueA LA L

Update ALM framework and governance to reflect: KPI approach/Investor

messaging Projected and stress

tested ALM-related constraints and volatilities

Clear delegations

Critical factors may include: IFRS distributable reserve

or earning constraints, dividend payout ratio

P&L or OCI for market assumption changes

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Engaging with investors

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Plan the investor communication the earlier the better!

One of the biggest investor

communication challenges

we have ever seen

Book Value

Market based

approachIFRS 17

Revenueexcluding deposits

22

Statement of Comprehensive Income

2021

Insurance contract revenue X

Insurance service expenses (X)

Insurance service result X

Investment income X

Insurance finance expense X

Net financial result X

Profit/Loss X

Discount rate changes on insurance liability (optional) X

Total comprehensive income X

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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Start now

Maximise synergy

Industrialise

Key messagesMore than a compliance exercise

2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

Adopting IFRS 17 is a significant task, now is the time to plan and budget

Get the most out of past investments

Consider what else updated tools can be applied to

Look to what else you may need to do in the future

Reduce process risk

Produce results on a timely basis

`

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Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

Communication will be key to managing internal and external expectations

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Any questions

24

Introduction Getting the numbers on time Q&AGetting the

numbers right Business implications

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About Willis Towers WatsonWillis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 40,000 employees serving more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas the dynamic formula that drives business performance. Together, we unlock potential.

The information in this publication is of general interest and guidance. Action should not be taken on the basis of any article without seeking specific advice.

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Willis Towers Watson is uniquely placed to help both Life and P&C insurers interpret and implement the new standard developed by the IASB. We:

Advise more than three-quarters of the world's leading insurers

Are the industry's leading risk specialist and a leader in financial modelling

Are the largest provider of actuarial software in the world

Have more actuaries and chartered enterprise risk analysts (CERAs) serving the insurance industry than any other professional services company.

Willis Towers Watson and IFRS 17

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For more information about how we can help you turn IFRS 17 into a success story, please contact your Willis Towers Watson consultant, email our IFRS Lead for insurers, John Nicholls, at [email protected] or Dion Heijnen, at [email protected]