insurance contracts jeong-hyeok, park research fellow september 29, 2010 agenda-d-2
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Insurance ContractsJeong-Hyeok, Park
Research Fellow
September 29, 2010
Agenda-D-2
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Contents
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1.Background
2.Working Group
3.Discussion Issues
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Contents
3
Working Group
Background
Discussion Issues
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Background
2004 ~ 2007 2011
Project history
2010
We are here
11• Issued in 2004
• Aimed at making only limited improvements
DP Preliminary Views on Insurance Contract
(Phase ll)• Issued in 2007
ED ‘ Insurance Contracts’
(Phase ll)
IFRS ‘ Insurance Contracts’
(Phase l)
• Issued in July 2010, comment due November 30, 2010
• Final standard : expected for Q2 2011
Joint Project with FASB • Since 2008
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11 22 3344
2008 2009
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Background continued
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Project Objective
Improve financial reporting for Insur-
ance contracts
Making it easier for users to under-
stand
Enhance compara-bility and trans-
parency
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Contents
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Discussion Issues
Working Group
Background
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Working Group
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Purpose• To assist the AOSSG in preparing improved proposals to the
IASB regarding the ED ‘Insurance Contracts’
Lead countryLead country • Korea
Co-lead countryCo-lead country • China
MembersMembers
• Australia, Hong Kong, In-donesia, Japan, Malaysia, Nepal, Thailand
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Working Group continued
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Chronology of Working Process
• September 03, 2010:
WG members’ preliminary views on ED
• September 14, 2010 :
Circulate draft of AOSSG WG’s preliminary views on questions in IASB’s ED
• September 16, 2010:
All AOSSG members’ comments on AOSSG WG’s preliminary views
• September 29, 2010:
1st AOSSG meeting
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September
Sun
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Contents
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Working Group
Discussion Issues
Summary
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Key Issues to be discussed
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Issue 1. Two Margin approach vs Single Margin Approach
Issue 2. Discount Rate
Issue 3. Acquisition Costs
Issue 4.
Issue 5. Transition
Presentation
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Issue 1. Two Margin approach vs Single Margin Approach
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premium
cash outflows
cash outflows
riskadjustment
residualmargin composite
margin
Two Margin Approach = Best Estimate of Liability + RA + RM
Single Margin Approach = Best Estimate of Liability + CM
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2
1 2
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Issue 1. Two Margin approach vs Single Margin Approach
Two Margin Approach Single Margin Approach
• Convey useful informa-tion about the amount of insurance risks
• Reduce the amount of RM for arbitrary release patterns
• Easier Application to practice
• Reduce possibility of a loss at the point of the first measurement
• Reduce fluctuation of gains or losses in sub-sequent measurement
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cash outflows
• Which model do you prefer? Two Margin vs Single Margin.
(Opinion) Diverse views existing
• Do you agree with the definition of Risk Adjustment?
(Opinion) Diverse views existing, Some concern that definition of
RA is not appropriate for a description of insurance liability
• Do you agree with the measuring RA at a portfolio level?
(Opinion) Most agree./ Options should be given / Entity wide basis
WG Preliminary Views
Issue 1. Two Margin approach vs Single Margin Approach
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cash outflows
• Do you agree with no recognition of gain at inception?.
(Opinion) Most agree. / Gradual recognition of such gain
• Do you agree with estimating margin at the level of portfolio?
(Opinion) Diverse views existing.
• Do you agree with the method of releasing the margin ?
(Opinion) Diverse views / Remeasurement. / More guides
• Do you agree with the accretion of interest on the margin?
(Opinion) Pros and Cons exiting
WG Preliminary Views
Issue 1. Two Margin approach vs Single Margin Approach
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Liabilities
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Issue 2. Discount Rate
• Reflecting characteristics of the insurance contract
• According to the dependence on the performance of specific assets
No ⇒ risk-free plus adjustment for illiquidity
Yes ⇒ consider performance of assets
How to determine discount rate?
NO Yes
Assets Liabilities
Risk-free rate
+
illiquidity
Liabilities
Assets Liabilities
performance of assets
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cash outflows
• Do you agree with the proposed discount rate?
(Opinion) Pros and Cons existing / Asset earned rate / Credit Spread should be reflected.
• Do you agree with considering the effects of liquidity?
(Opinion) Some concerns about how this might be done.
• Do you agree with concerns that discount rate misrepresent the economic substance?
(Opinion) Views are divergent.
WG Preliminary Views
Issue 2. Discount Rate
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Issue 3. Acquisition Costs
• incremental acquisition costs (on a contract level) are included in
the cash flows
• non-incremental acquisition costs are expensed
Measurement Level
Measurement Building Blocks
= Cash flows + Risk ad-justment
+ Residual margin
incremental ac-
quisition costs
non-incremental ac-
quisition costs
→ expensed
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WG Preliminary Views
Issue 3. Acquisition Costs
• Do you agree that the incremental acquisition costs should be included in the initial measurement?
(Opinion) Most agree. / The scope of acquisition costs
• Do you agree that non-incremental acquisition costs should be recognized as expenses when incurred?
(Opinion) All agree.
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Issue 4. Presentation (Summarized Margin Ap-proach)
Inception six months six months
1 Jan to 30 Jun to 31 Dec
Risk margin 21 26
Residual margin 2 2
Insurance margin 0 23 28
Experience adjustment (10) (10)
Changes in estimates (20) 0
Net gain at inception 0 0 0
Investment income 40 38
Interest on insurance liability (25) (23)
Net interest and investment 0 15 15
Profit 0 8 33
Examples
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WG Preliminary Views
Issue 4. Presentation (Summarized Margin Approach)
• Do you agree with the summarized margin presentation?
(Opinion) Most prefer premium approach(Traditional method)
Extended margin approach can be a choice.
• Do you agree with presenting all income and expense in
P&L?
(Opinion) Diverse views existing.
OCI presentation needs to be considered.
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Issue 5. Transition`
existinginsurance liabilities
cash flows
intangible assets
deferredacquisition costs
Risk adjustment
Previous GAAP Transition IFRS 4Phase II
Difference toretained earnings
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WG Preliminary Views
Issue 5. Transition
• Do you agree with the proposed transition requirements?
(Opinion) Diverse views existing.
(Modified) Retrospective / Prospective Application
No recognition of residual margin at the transition date
may have some problems
* Alternative - Residual Margin = Max [(A) – (B), 0] (A) Existing provision on the date of transition (Assuming that LAT was passed) (B) PV of fulfillment cash flows
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Thank you !!
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