ifrs 4 insurance contracts: update on key issues

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IFRS 4 Insurance Contracts: update on key issues Hosted by the EY Global Insurance Center 9 July 2014

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This slide deck was designed to accompany a video webcast that included an interactive discussion by a moderator and three panelists, held on 9 July 2014. The International Accounting Standards Board (IASB) is currently working on modifications to IFRS 4 Insurance Contracts after the Exposure Draft (ED) received extensive comments from those that prepared the modifications and industry practitioners. In recent deliberations following the receipt of comments, the IASB has reached tentative decisions about recognising the contractual service margin in profit or loss. Further tentative decisions have been reached concerning fixed-fee service contracts, significant insurance risk, portfolio transfers and business combinations. This webcast discussed the background to the ED and the current project status. Our panel reviewed the insurance industry’s responses to IFRS 4, and outlined the IASB’s path towards finalising the project, focussing on key issues, challenges and operational impacts, and on what the IASB expects from the insurance industry. You are welcome to join the on-demand version of this interactive discussion: http://www.ey.com/GL/en/Issues/webcast_2014-07-09-1400_ifrs4-insurance-contracts-update-on-key-issues This webcast is part of an ongoing series. Register for any webcast and you will be asked if you want to receive invitations to future webcasts.

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  • 1.IFRS 4 Insurance Contracts: update on key issues Hosted by the EY Global Insurance Center 9 July 2014

2. Page 2 IFRS 4 Insurance Contracts: update on key issues Disclaimer This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. The views expressed by the presenters are not necessarily those of EY. This presentation is 2014 EYGM Limited. All Rights Reserved. EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more of the member firms, of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. 3. Page 3 IFRS 4 Insurance Contracts: update on key issues International Accounting Standards Board (IASB) disclaimer Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this webcast are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation. 4. IFRS 4 Insurance Contracts: update on key issuesPage 4 Disclaimer: third party presenters The opinions expressed by third parties during this webcast are not necessarily those of the global EY organization or its member firms. Their opinions should also be viewed in the context of the time they were expressed. The opinions expressed by third parties are those of the individual or individuals concerned, and not necessarily those of their organisation or entity. 5. IFRS 4 Insurance Contracts: update on key issuesPage 5 Todays moderator David Foster Ernst & Young LLP (UK) Partner 6. IFRS 4 Insurance Contracts: update on key issuesPage 6 Todays agenda Timelines IASB proposal Model for participating contracts Whats next? Join todays Twitter discussion: #EY_Insurance 7. IFRS 4 Insurance Contracts: update on key issuesPage 7 Todays presenters Darrel Scott IASB member Kevin Griffith Ernst & Young LLP (UK) Partner The information contained herein is a summary in nature. Viewers should consult their own professional advisors to address their individual circumstances and concerns. Harm van de Meerendonk ING Insurance 8. IFRS 4 Insurance Contracts: update on key issuesPage 8 Todays agenda Timelines IASB proposal Model for participating contracts Whats next? Join todays Twitter discussion: #EY_Insurance 9. Page 9 IFRS 4 Insurance Contracts: update on key issues Timelines - New IFRS for insurance contracts Expected to be mandatory 2018? 2010 2011 2012 2013 2015 2016 2017 Q1 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 FASB IFRS 9 mandatory effective date 2018 New EU Regulatory framework (Solvency II) - 2016 Potential IASB Final Standard Potential effective date 1 Jan 2018 Potential first annual financial statements IASB Re-exposure Draft FASB Exposure Draft H1 2013 IASB Exposure Draft FASB Discussion Paper Potential start of comparative periods 2018 10. IFRS 4 Insurance Contracts: update on key issuesPage 10 Todays agenda Timelines IASB proposal Model for participating contracts Whats next? Join todays Twitter discussion: #EY_Insurance 11. IFRS 4 Insurance Contracts: update on key issuesPage 11 IASB proposal Reminder on the ED Expected value of future cash flows Discount rate Risk adjustment Contractual service margin Reinsurance Disaggregation PresentationSeparation Definition and scope Disclosure BuildingBlockApproach Regulatory Frameworks Financial Instruments and other accounting changes Transition Simplified approach BuildingBlockApproach 12. IFRS 4 Insurance Contracts: update on key issuesPage 12 IASB re-deliberations Main 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 13. IFRS 4 Insurance Contracts: update on key issuesPage 13 IASB re-deliberations Main tentative decisions (contd) Non-targeted topics: Principle for discount rate confirmed Additional guidance on how to determine discount rates when there 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 with underlying direct contracts for subsequent measurement Option for fixed fee service contracts 14. IFRS 4 Insurance Contracts: update on key issuesPage 14 IASB proposal Impact 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 mean for them and how to implement The devil may be in the detail: the final wording will be critical to fully understand the Boards intentions 15. IFRS 4 Insurance Contracts: update on key issuesPage 15 Todays agenda Timelines IASB proposal Model for participating contracts Whats to do next? Join todays Twitter discussion: #EY_Insurance 16. IFRS 4 Insurance Contracts: update on key issuesPage 16 Participating contracts Background from the ED Performance reporting Options & Guarantees Shareholders share in underlying items Scope Interest expense in PL 17. IFRS 4 Insurance Contracts: update on key issues Participating contracts Key features of alternative proposal Page 17 Broad rejection in the comment letters of the ED's mirroring approach, leading to an alternative proposal CFO Forum played an active role in the development, but principles are also supported by others as an alternative to 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 18. IFRS 4 Insurance Contracts: update on key issues Participating contracts Key features of alternative proposal (contd) Page 18 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 of options and guarantees to avoid accounting mismatches 19. IFRS 4 Insurance Contracts: update on key issues Participating contracts Status 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 only if circumstances indicate it is an implicit asset management fee Board would consider using book yield for determining the interest 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 Page 19 20. IFRS 4 Insurance Contracts: update on key issues Participating contracts Status of IASB discussions (contd) 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 fully considered Board will continue to explore the mechanics of an OCI approach at meeting in July Decision making meetings will occur after August break Page 20 21. IFRS 4 Insurance Contracts: update on key issuesPage 21 Participating contracts Key debates and challenges Comment letters clearly point towards an alternative to mirroring 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 accounting mismatches Implementation challenges Some complexity will always remain, regardless of the ultimate solution 22. IFRS 4 Insurance Contracts: update on key issuesPage 22 Todays agenda Timelines IASB proposal Model for participating contracts Whats next? Join todays Twitter discussion: #EY_Insurance 23. IFRS 4 Insurance Contracts: update on key issuesPage 23 Whats next Resolving the issue of participating contracts will be key to get the Insurance project completed It is likely middle ground needs to be found for some key areas Will the timing of the final standard allow for alignment with the proposed IFRS 9 effective date (2018) Preparation and implementation- operational impact will be huge: Systems, models and data Reporting framework Explaining the results 24. IFRS 4 Insurance Contracts: update on key issuesPage 24 Contact us David Foster Kevin Griffith Richard Lynch Hans van der Veen +44 (0)20 7951 5687 [email protected] +44 20 7951 0905 [email protected] +1 212 773 5601 [email protected] +31 88 40 70800 [email protected] Follow us on Twitter: @EY_Webcasts 25. IFRS 4 Insurance Contracts: update on key issuesPage 25 Resources Global Insurance website www.ey.com/insurance IFRS Insurance Insights www.ey.com/insuranceifrs Solvency II www.ey.com/solvencyii 26. Thanks for participating! IFRS 4 Insurance Contracts: update on key issues Hosted by the EY Global Insurance Center 9 July 2014