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© 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. IFRS 17 Insurance Contracts A new perspective on insurance accounting May 2017 kpmg.com/ifrs

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  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    IFRS 17 Insurance ContractsA new perspective on insurance accounting

    May 2017

    kpmg.com/ifrs

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Greater comparability and transparency

    2

    Joachim Klschbach,

    KPMGs global IFRS insurance leader

    IFRS 17 will give users of financial statements a whole new perspective. For the first time, insurers will be on a level footing internationally. It will open up the black box of current insurance accounting.

    The ways in which analysts interpret and compare companies will change. Increased transparency will give users more insight into an insurers financial health than ever before.

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Whats the issue?

    3

    Analysts currently have to adjust insurance companies financial positions and performance to be able to compare them

    IFRS 17 increases transparency about profitability and will add comparability

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    The changes could significantly affect insurers

    4

    Volatility of financial results and equity

    Level of transparency about profit drivers

    Equity levels

    The magnitude of the accounting

    change for life and non-life insurers will

    be different

    Profitability patterns

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    A new, comprehensive accounting model

    5

    IFRS 17s general measurement model(GMM) is based on a fulfilment objective and uses current assumptions

    It introduces a single, revenue recognition principle to reflect services provided

    And is modified for certain contracts

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    The general measurement model

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Initial recognition

    7

    Key components

    Net cash outflows result in no CSM a loss is recognised immediately

    Fulfilment cash flowsRisk-adjusted present value

    of future cash flows e.g. premiums, claims

    Contractual service margin (CSM)Represents unearned profit

    results in no gain on initial recognition

    1

    3

    2

    4

    Future cash flows

    0

    In-flows

    Out-flows

    1

    Discounting2

    Risk adjustment3

    CSM4

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Subsequent measurement Composition

    8

    Liability for remaining coverage (LRC)

    Fulfilment cash flows related to future services, plus

    CSM (unearned profit) remaining

    + Liability for incurred claims (LIC)Fulfilment cash flows for claims incurred,

    but not yet paid

    Total liability of a group of insurance contracts

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Subsequent measurement

    9

    Past and current services

    Future services

    Changes in current estimates

    Adjust the CSM

    CSMallocation

    Fulfilment cash flows

    CSM

    Financial risk assumptionsEither

    Or

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Recognising insurance revenue

    10

    Expected insurance claims

    and expensesRisk adjustment CSM allocation

    Insurance revenue is derived from the changes in the LRC for each reporting period, covering

    Acquisition cash flows

    These items represent a companys consideration for providing services

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Level of aggregation

    11

    PortfolioAnnual cohortGroup

    The CSM is determined for groups of insurance contracts

    IFRS 17 limits offsetting of

    onerous contracts against profitable

    onesInsurers will need to account for their business performance at a more granular level

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Modifications to the GMM

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Premium allocation approach (PAA)

    13

    While unearned premium is a

    familiar concept, the revenue recognition pattern could differ

    Liability for remaining coverage (LRC)

    PAA replaces the GMM for short-duration contracts

    Liability for incurred claims (LIC)

    May need to be discounted

    Premium is recognised over time as revenue unless release of risk follows a different pattern

    Total liability of a group of insurance contracts

    +

    The PAA is an optional, simplified model for measuring the LRC

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Variable fee approach (VFA)

    14

    The approach considers the variable fee associated with direct participating contracts

    Obligation to policyholder =

    Obligation to pay fair value of

    underlying items - Variable fee

    Recognised immediately

    Adjusts the CSMSubsequent measurement Accounting for changes

    The VFA reduces the volatility of net results

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    For reinsurance contracts held

    15

    The GMM and PAA still apply, with modifications

    The reinsurance contract held is accounted for separately from the underlying direct contract

    Reinsurance gain or loss is recognised as reinsurance services are received

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Presentation and disclosures

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Presentation

    17

    Investment components are excluded from insurance revenue and service expenses

    Entities can choose to present the effect of changes in discount rates and other financial risks in profit or loss or OCI to reduce volatility

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Disclosures

    18

    Information should be disclosed at a level of granularity that helps users assess the effects contracts have on

    Financial position

    Financial performance

    Cash flows

    New disclosures relate to expected profitability and attributes of new business

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Transition

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Full retrospective approach is required

    20

    but expedients can be used

    Modified retrospective approach, if possible

    Fair value approach

    Yes

    No

    Either

    Is it impracticable to use a full retrospective approach?

    Or

    Full retrospective approach

    A company can apply different approaches for different groups

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Making the transition

    21

    Comparative information is restated

    Limited ability to redesignate some financial assets on initial application

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Potential accountingchanges for insurers

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Life insurers

    23

    Significant accounting changes are almost certain to occur under the new standard

    Sources of complexity include

    Use of current estimates

    Disaggregating changes in LRC

    Tracking the CSM at a group level

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Non-life insurers

    24

    Accounting for non-life insurers may have similarities to current practice

    But major impacts may arise around

    Qualifying for the PAA

    LIC discounting

    Onerous contracts

    !%

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Other things to think about

    25

    Accounting mismatches may occur but accounting policy choices and transition provisions could reduce them

    More consistency and transparency for options and guarantees

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Effective date and next steps

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Get ready

    27

    Fundamental operational challenges lie ahead and there isnt much time

    You need to

    Complete an initial assessment

    Review your contracts

    Plan your accounting policy decisions

    Determine your needs for systems, processes and resources

    Effective date

  • 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

    Find out more

    28

    Talk to your usual KPMG

    contact

    Follow KPMG IFRS on

    LinkedIn

    Find out more at kpmg.com/ifrs

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    2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

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    IFRS 17 Insurance ContractsGreater comparability and transparencyWhats the issue?The changes could significantly affect insurersA new, comprehensive accounting modelThe general measurement modelInitial recognitionSubsequent measurement CompositionSubsequent measurementRecognising insurance revenueLevel of aggregationModifications to the GMMPremium allocation approach (PAA)Variable fee approach (VFA)For reinsurance contracts heldPresentation and disclosuresPresentationDisclosuresTransitionFull retrospective approach is requiredMaking the transitionPotential accountingchanges for insurersLife insurersNon-life insurersOther things to think aboutEffective date and next stepsGet readyFind out moreSlide Number 29