introduction to ifrs 17 - 3blocks 17.pdf · introduction to ifrs 17 –mar 2019 3blocks ® 4...

Introduction to IFRS 17Pawel Wozniak, Agnieszka Hupert

March 2019

3Blocks®

Introduction to IFRS 17 – Mar 2019www.3blocks.co

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Introduction to IFRS 17Table of content

Introduction ……………………………………… 3

General Model …………………………………. 10

Risk Adjustment ………….……………………. 19

Contractual Service Margin …...………….. 24

Reinsurance ………….............................. 33

IFRS 17 Reporting …………….................... 41

Variable Fee Approach …….................... 52

Premium Allocation Approach .............. 62

Onerous contracts …………………............. 80

Acquisition costs ................................... 86

Full Retrospective Approach ................ 91

Mod. Retrospective Approach ............. 95

Fair Value Approach ............................. 104

Implementation considerations ........... 108

IFRS 17 vs Solvency II …........................ 124

Appendix ….......................................... 130


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Introduction to IFRS 17Background

Introduction


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Introduction to IFRS 17What is wrong with IFRS 4

IFRS 4 allows for a wide range of insurance liabilities modelling methods that can be applied as long as they satisfy the Liability Adequacy Test.

Lack of comparability between countries Lack of comparability between companiesDifferent levels of safety embedded in insurance liabilities calculations

Valuation of insurance liabilities does not have to be cash flow based

Discounting is not always required, typicallynon-life TPs valued on an undiscounted basis

Insurance liabilities may be calculated based on historical assumptions

IFRS 4 IFRS 17

Phase I (2005) Phase II (2022)

Insurance Contracts IFRS


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Introduction to IFRS 17Timeline

2017. . .

2019 2020 2021 2022

First Exposure Draft

Second Exposure Draft

IFRS 17 publication

Transitiondate

Effective dateInitial application

First IFRS 17fin. statements

2010 2013 2018

Drafting the new standard Implementation IFRS 17 reporting

Retrospective implementation

. . . 2023


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Introduction to IFRS 17Measurement models overview [1]

GeneralModel (GM)

Variable FeeApproach (VFA)

Premium AllocationApproach (PAA)

Default approach Contracts linked to underlying assets

Similar to unearned premium reserve

Short term contracts (less than 1 year)

LFRC

Application

PVCF + RA + CSM(FV Assets) - (Var. Fee)

+ RA + CSM

Endowments, Terms,Annuities, Whole Life

Unit Links,With Profits

1-year non-life,health or life insuranceExamples

Insurance issuedReinsurance held Insurance issued

Insurance issuedReinsurance held

LIC PVCF + RA PVCF + RA PVCF + RA

PVCF - Present Value of Cash Flows

RA – Risk Adjustment

CSM - Contractual Service Margin

LFRC - Liability for Remaining Coverage

LIC - Liability for Incurred Claims

Ins/Reins

Non-onerousOnerous

Non-onerousOnerous (*)

Non-onerous,Onerous(*)Onerousness

(*) measured using the fulfilment CF measurement


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Introduction to IFRS 17Measurement models overview [2]

IFRS 17 scope:

Insurance contracts

Reinsurance held

Investments with DPF

Insurance Risk

Discretionary Participation Features

No Discretionary Participation Features

VFA

Out of IFRS 17 scope

GM/PAA

Direct Participation

Features

No Direct Participation

Features

VFA

Investment contracts with Discretionary Participation Features (DPF)

No insurance Risk

Direct Participation

Features

No Direct Participation

Features

GM/PAA


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Introduction to IFRS 17Components of insurance liability

FulfilmentCash Flows

CSM

Liability for Remaining Coverage

(LFRC)

Liability for Incurred Claims(LIC)

Non-onerous contracts

Claimsincurred

Onerouscontracts

Loss Component

(LC)

LFRC excluding

the LC

Revenue Expenses Recognition of the loss component and reversals of the loss component recognition

*

*

Treatment of insurance liabilities’ movements recognised in the insurance result


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Introduction to IFRS 17Unit of account

CohortsContracts issued more than one year apart should not be included in the same group.

Insurance Portfolio• Subject to similar risks• Managed together• Within the same product line

Profitability• Onerous at initial recognition• At initial recognition no significant

possibility of becoming onerous• Remaining contracts

IFRS 17group

Groups established at initial recognition and their

composition should not be changed

Groups may be smaller that that prescribed above e.g.

quarterly instead of yearly cohorts

Onerous contract group may be identified by measuring

the set of contracts instead of on the individual basis

Regulatory pricing restrictions (e.g. Gender Directive)

driven profitability differentiation may be ignored


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Introduction to IFRS 17Measurement - GM

MeasurementGeneral Model (GM)


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Introduction to IFRS 17Overview

Insurance Liabilities

Future cash flows

Time valueof money

Risk Adjustment

Contractual Service Margin

Fulf

ilme

nt

Cas

h F

low

sC

SM

The General Model is a default IFRS 17 insurance liabilities measurement approach

The same approach for the initial and subsequent measurement

Initial and subsequent measurement methods are different

“+” for inflows

“-” for outflows

“+” or “-” dep. on

the CF sign & struc

“+”, Risk Adj.

increases the TP

“+”, CSM

increases the TP

Sign convention:


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Introduction to IFRS 17Cash flows


Future cash flows

Time valueof money

Risk Adjustment

ContractualService Margin

Best estimate of cash flows

Reassessed at each reporting date

Assumptions based on experience

Reflect conditions existing at the

measurement date

Within boundary of the contract

Unbundle distinct components:

investments, derivatives or service

Can be done at portfolio level and

allocated to insurance groups

0 1 2 3 4 5

Best estimate cash flows

Expenses Claims

Acquisition Premium

Recognition

The earliest of the following

• beginning of the coverage period

• date when the first premium becomes due

• when the group becomes onerous

Cashflow boundary

• Ability to reassess the risk and change

the premiums or benefits

• Possibility to do the reassessment at the

portfolio level


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Introduction to IFRS 17Discounting [1]


Future cash flows

Time valueof money

Risk Adjustment

ContractualServiceMargin

Insurance cash flows are not directly linked to assets

Insurance cashflows directly linkedto assets

Yield on theunderlying assets

Adj. yield on the underlying assets

Top-Down

Bottom-up

Assets reference portfolio rate

Duration mismatch adjustment

Credit Risk premium for expected losses (Probability of Default)

Credit risk premium for unexpected losses (Cost of Downgrade)

Top-down IFRS 17 discount rate

Bottom-up IFRS 17 discount rate

Liquidity premium

Swap rate (risk free rate)

5.5%

0.5%

-1.5%

-0.5%

4.0%

3.5%

1.5%

2.0%

Top-Down

Bottom-up


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Introduction to IFRS 17Discounting [2]


Future cash flows

Time valueof money

Risk Adjustment

ContractualService Margin

Bottom-upapproach

Top-downapproach

Liquid liabilitiesNot-liquid liabilities Semi-liquid liabilities

• Only u/w risks are longevity risk and expense risk

• Premiums have been paid

• No longevity risk• Mortality, longevity, morbidity, expense risk

• Not all premiums paid

The swap yield curve appropriate to the currency of the related cash flows.

The swap yield curve plus the liquidity premium.

The swap yield curve plus some portion of the liquidity premium.

e.g. Annuities, Single P. Terms e.g. Endowments, Terms e.g. Unit Links

Reference portfolio rate adjusted for mismatches and credit risk

No surrender risk Some surrender risk Substantial surrender risk

Examples

Surrender risk

Other liquidityindicators

[Swap Rate] + [Liq Prem] [Swap Rate] + F x [Liq Prem] [Swap Rate]

[Ref Portfolio rate] - [Mismatch adj.] - [Probability of Default] - [Cos of Downgrade]

Top-Down = Bottom-Up Top-Down ≠ Bottom-Up


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Introduction to IFRS 17Risk Adjustment


Future cash flows

Time valueof money

Risk Adjustment


Risk Adjustment calculation method not specified in the standard but it should follow the fallowing principles:

- longer duration- higher severity- wider distribution- less is known

Higher riskGreater Risk Adjustment

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%Mean

Conditional Tail Expectation

Value at Risk

Confidence level based methods


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Introduction to IFRS 17CSM initial measurement [1]


Future cash flows

Time valueof money

Risk Adjustment


Recognise Day 1 gain as the CSM

Futurecash flows

Discount

Risk Adj.

Init

ial m

eas

ure

me

nt Initial

cash flows

Pre-recong.Acquisit. CF

FCF FCF FCF FCF/BankInsurance

assetInsurance

liability

CSM


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Introduction to IFRS 17CSM initial measurement [2]


Future cash flows

Time valueof money

Risk Adjustment


Recognise Day 1 loss in the P&L

Futurecash flows

Discount

Risk Adj.

Init

ial m

eas

ure

me

nt

Pre-coverageAcquisit. CF

FCF FCF FCF FCF/BankInsurance

assetInsurance

cost

Initialcash flows

Initial loss


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Introduction to IFRS 17CSM subsequent measurement


Future cash flows

Time valueof money

Risk Adjustment


Sub

seq

ue

nt

me

asu

rem

en

t

Interest accreteat the locked-indiscount rate

Future fulfilment cashflows estimate variance measured at locked-in discount rate

Release to revenue in proportion to coverage units e.g. number of policies in-force


CSM[opening]

Release to revenue

CSM[closing]

Opening balance

Accretedinterest

Release to revenue

Fulfilment CF variances

Closingbalance

Newcontracts

Additions to the group

The effect of any new contracts added to the group in case the group is not closed yet.

Interest Estimate variance


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Introduction to IFRS 17Risk Adjustment

Risk Adjustment


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Introduction to IFRS 17Confidence level techniques

vs

0%

5%

10%

15%

20%Mean

Conditional Tail Expectation (TVaR)

Value at Risk (VaR)

Confidence level techniques

Easy to communicate to users

Calculated with reference to a „confidence level”

Require calculating of risk profile (risk distribution)

Possibility to leverage Solvency II calculations

Value at Risk Conditional Tail Expectation

How bad is my loss going to be?What loss will not be exceeded (with high probability)?

If things get bed – what is my expected loss?

Focuses on probability of loss Takes into account the size of loss (shape in the tail)

Less useful for shewed distributions Better reflection of extreme values

More common, simple concept, clear interpretation More advanced, more difficult

Lack of subadditivity (coherence) Superior mathematical properties (coherence)


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Introduction to IFRS 17Cost of capital method

Cost of Capital methodR

isk

Ad

just

me

nt

Cost of Capital = Capital x [CoC Rate]

Risk Adjustment = Discounted Cost of Capital at risk free rate

Companies already have Solvency II Risk Margin based on a CoC method

but…

Under IFRS 17, the equivalent „confidence level” has to be disclosed –additional work for CoC method.

If Solvency II Risk Margin was to be used, entities need to consider

Only non-financial risks included (non-hedgable market and general operational risk should not be covered by the RA)

Separate calculations for insurance contracts and reinsurance contracts

Allocation to IFRS 17 groups of contracts

Discount rates should be consistent with cash flows

RA at the consolidated level is the same as the RA at entity level

Benefits of using Solvency II Risk Margin may not be as great as could be expected.


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Introduction to IFRS 17Provision for adverse deviation method

Examples:

- Adjustment to mortality

- Adjustment to morbidity

- Minimum loss ratio

- Lower discount rate

- RA as fixed percentage of discounted cash flows (by line of business)

Provision for adverse deviation (PAD)

What is it?

Explicit margins on best estimate assumptions (non-fiancial risks)

RA equal to the difference between base scenario and shock scenario

Easy to implement – entities need to repeat base calculations

Easy to divide into groups of insurance contracts (policy by policy calculations)

Becoming more popular among companies

Challenges

Confidence level still needs to be assessed

Setting up explicit margins (selection of risks, selection of margins)

RA should be in line with principles defined in IFRS 17


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Introduction to IFRS 17Reinsurance risk adjustment

Risk adjustment for reinsurance contracts

IFRS 17.64:

Instead of applying paragraph 37, an entity shall determine the risk adjustment for non-financial risk so that it represents the amount of risk being transferred by the holder of the group of reinsurance contracts to the issuer of those contracts

Main consequence

Reinsurer share in RA cannot be calculated in separation from underlying contracts.

For proportional reinsurance (quote share) a percentage of gross RA can be a good proxy for reinsurer risk (depending on the size of risks on entity’s share).

GROSSRA

NETRA

REINS.RA

Gross Risk Adjustment

(i.e. excluding the reinsurancerisk minitagion effects)

Net Risk Adjustment

(i.e. excluding the reinsurancerisk minitagion effects)

Reinsurance RA

(i.e. the risk transferred to the reinsurer)


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Introduction to IFRS 17Contractual Service Margin



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Effect of any new contracts added to the group

Interest accreted on the CSM during the reporting period, measured at the discount rate locked-in at inception

Entity’s share of the change in the fair value of the underlying items

Changes in fulfilment cash flows relating to future service

Effect of any currency exchange differences on the CSM

Amount recognised as insurance revenue because of the transfer of services in the period

Introduction to IFRS 17CSM roll-forward

GM VFA

Yes Yes

Yes No

Yes Yes

No Yes

Yes Yes

Yes Yes

Dif

fere

nce

bet

we

en

th

e G

M a

nd

VFA

25

Roll-forward stepRef

44(a), 45(a)

44(b)

45(b)

44(c), 45(c)

44(d), 45(d)

44(e), 45(e)


3Blocks®Introduction to IFRS 17Initial measurement and locked-in discount rates

Q1 Q2 Q4Q3

Possible approach to the initial measurement discount rates

Possible approach to the locked-in discount rates

Avr Q1 Avr Q2 Avr Q3 Avr Q4

Avr Q1

Avr Q1-Q2

Avr Q1-Q3

Avr Q1-Q4

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One of the possible approaches


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Coverage UnitsCharacteristics

Reflect quantity of coverage provided by the contracts in the group

Determined on contract level i.e. CU for a group is a sum of CU for each contract

Not represent the pattern of expected cash flows or the changes in the risk adjustment

Pattern of investment related services is not determined by investment returns.

Not reflect the likelihood of ins. events to the extent that they affect amount expected to be claimed

Reflect size of the contract and different level of cover provided by contracts in different periods

For VFA determined by reference to both insurance and investment services

For GM determined by reference to insurance services only

Reflect likelihood of ins. events to the extent they affect duration

Can be calculated both on discounted and undiscounted basis

Introduction to IFRS 17Coverage Units concept

27


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Product Description Coverage Units

Credit life loan insurnce Death benefit equal to principal and insterest Loan balance

Credit life - variable amount Benefit equal to the outstanding credit balnce Expected credit balnce

Mortgage loss coverDefault losses on mortgage after recovering the value of the property on which the mortage is secured

Mortgage balance or mortgage balncess less propety value

Product waranty Replacement of a purchased item if it fails to work properly Product price

Live contingent annuity Pays a fixed monthly amount until the annuitant dies Monthly benefit

Deferred annuityAnnuity in future at a fixed rate Monthly benefit, no CU in pre-

annuity peiod

Extended product warrantyReplacement of a purchased item if it fails to work properly, after orginal waranty has expired

Product price, no CU in orginal warranty period

Introduction to IFRS 17CU examples - no investment component

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Product Description Coverage Units

Insurance and investment component with different durations

• Death Benefit in the first 5 years equal to the higher of 110% of the premium paid or the accum. account value

• An investment contract matures in year 10 and pays the customer the account value at maturity

• Death Benefit has been assessed to represent a significant insurance risk

Coveregare period 10 years, CU should reflect both insurance and investmnt component (no method has been sepcified)

Endowment Policy (WP)

Amount payable on death (Sum insured including allocated investemnt returns and bonuses)

• Regular level premiums

• Sum insured payable upon death or reaching the policy maturity of the life insurance

• Policyholder is entitled to share of the investment returns from an underlying pool of assets

• Possibility to allocate revisionary or terminal bonuses

• The investment returns are allocated to the policyholder though bonuses that are added to the policy sum insured

• Defined surrender value payable when the policy lapses before the maturity date

Introduction to IFRS 17CU examples - with investment component

29


3Blocks®Introduction to IFRS 17CU discounting

30

Interest rate 10%

Undiscounted coverage units

1 2 3 4 5

CSM opening balance 500 440 363 266 146

Interest accretion 50 44 36 27 15

Allocated to P&L 110 121 133 146 161

CSM closing balance 440 363 266 146 0

Coverage units 1 1 1 1 1

Coverage units - cumulative 5 4 3 2 1

Discounted coverage units

1 2 3 4 5

CSM opening balance 500 418 328 229 120

Interest accretion 50 42 33 23 12

Allocated to P&L 132 132 132 132 132

CSM closing balance 418 328 229 120 0

Coverage units 1 1 1 1 1

Coverage units - discounted 0.91 0.83 0.75 0.68 0.62

Coverage units - cumulative 3.79 2.88 2.06 1.30 0.62

Discounted coverage units result in more uniform release of the profit to income statement


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Sem

i-an

nu

alre

po

rtin

gA

nn

ual

rep

ort

ing

IFRS 17.B137:

Notwithstanding the requirement in IAS 34 Interim Financial Reporting that the frequency of an entity’s reporting shall not affect the measurement of its annual results, an entity shall not change the treatment of accounting estimates made in previous interim financial statements when applying IFRS 17 in subsequent interim financial statements or in the annual reporting period.

Main consequence

- IFRS 17 calculations will not be on a ‘year-to-date’ basis.

- Annual financial result for IFRS 17 will be the sum of the four individual quarters or two semi-annual periods.

Introduction to IFRS 17Interim reporting

31

(2000-300) x 2/4

2000 x 1/4

(1500-300) x 1/3

Difference


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Expected premium/acq. cost cash flows in the period

Actual premium/acq. cost cash flows in the period

100

(80)

20 Premium/acq. cost experience adjustment

VFA

GM

Revenue

CSMFuture service

Future service

FCF not assets dependent

-

VFA

GM

Current service

Current service

-

-

VFA Current service FCF assets dependent

B96(a) B113(a)/B96(a)

Introduction to IFRS 17Premiums and acquisition cost experience adjustment

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Introduction to IFRS 17Reinsurance

Reinsurance


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Introduction to IFRS 17Reinsurance mismatches

Reinsurance mismatches

Reinsurance CSM – underlying losses need to be recognised on

day one but gains on reinsurance held must be deferred

Different models – reinsurance held does not have to be

measured with the same model as related insurance contracts.

Additionally the VFA cannot be applied to the reinsurance held.

Contract boundaries – contract boundary of the reinsurance

contract held can be different that the contract boundary of the

related insurance.

Grouping – Reinsurance contracts held can follow different

grouping that do not map one-to-one with the related insurance

contracts groups.

Recognition - there are different reinsurance held recognition

rules comparing to the related insurance contract recognition.


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Introduction to IFRS 17Reinsurance CSM

CSM

Insurance contracts Reinsurance contracts held

Day 1Gain

(CSM)

Day 1Loss

P&L CSM

Day 1Gain

(CSM)

Day 1Loss

(CSM)

CSM

Day 1 Gain recognised in the BS as the CSM. Day 1 Loss recognised as an expense in the Income Statement.

Both Day 1 Gains and Day 1 Loss recognised in the BS as the CSM.

Reinsurance CSM

Underlying losses need to be recognised on day one but losses on reinsurance held must be deferred


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Introduction to IFRS 17Reinsurance measurement models

Different models

Reinsurance held does not have to be measured with the same model as related ins. contracts. Additionally the VFA cannot be applied to the reinsurance held.


VFA Reinsurance assetIns. liability GM

VFA Reinsurance assetIns. liability PAA

GM Reinsurance assetIns. liability GM

GM Reinsurance assetIns. liability PAA

PAA Reinsurance assetIns. liability GM

PAA Reinsurance assetIns. liability PAA


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Introduction to IFRS 17Reinsurance contract boundaries

Insurance contracts

Reinsurance held

Contract boundaries

Contract boundary of the reinsurance held can be different that the contract boundary of the related insurance.

Insu

ran

ce l

iab

ility

Re

insu

ran

ce a

sset


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Introduction to IFRS 17Reinsurance grouping

Grouping

Reinsurance contracts held can follow different grouping that do not map one-to-one with the related insurance contracts groups.

Insurance contracts

Reinsurance held

Ins

Gr

AIn

Gr

BIn

s G

r C

Re

Gr

XR

e G

r Y


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Introduction to IFRS 17Reinsurance recognition


Reinsurance recognition

There are different reinsurance contracts held recognition rules comparing to the related insurance contract recognition.

An entity shall recognise a group of insurance contracts it issues from theearliest of the following:

a) the beginning of the coverage period of the group of contracts;

b) the date when the first payment from a policyholder in the group becomes due; and

c) for a group of onerous contracts, when the group becomes onerous

Proportional reinsurance

At the beginning of the coverage period of the group of reinsurance contracts held or at the initial recognition of any underlying contract, whicheveris the later;

Non-proportional reinsurance

From the beginning of the coverage period of the group of reinsurance contracts held


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Introduction to IFRS 17Reinsurance risk adjustment

LiabilitiesAssets

Insu

ran

ce c

on

trac

ts

Re

insu

ran

ce c

on

trac

ts h

eld

LiabilitiesAssets

RA RA

RARA

Insurance contracts risk adjustment has a credit balance i.e. it reduces the insurance assets and increases the insurance liabilities

Insurance contracts risk adjustment has a debit balance i.e. it increases the insurance assets and reduces the insurance liabilities.


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Introduction to IFRS 17IFRS 17 Reporting

IFRS 17 Reporting


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Expected cash flows 0 1 2 Total

Premiums 1000 - - 1000

Claims & expenses - (300) (300) (600)

Acquisition costs - - - -

Total 1000 (300) (300) 400

Actual cash flows 0 1 2 Total

Premiums 1000 - - 1000

Claims & expenses - (300) (300) (600)


Total 1000 (300) (300) 400

Income statement 1 2 Total

Expected claims & expenses 300 300 600

Release of the CSM 200 200 400

Acquisition costs experience adj. - - -

Premiums experience adj. - - -

Acquisition costs recognition - - -

Insurance revenue 500 500 1000

Actual claims and expenses (300) (300) (600)

Acquisition cost recognition - - -

Loss component recognition - - -

Loss component run-off - - -

Insurance service costs (300) (300) (600)

Profit or loss 200 200 400

CSM 400 200 - n/a

Loss component - - - n/a

Example 1 - profitable; no variances

Introduction to IFRS 17IFRS 17 Reporting – Example 1

42


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Premiums 1000 - - 1000

Claims & expenses - (300) (300) (600)

Acquisition costs (200) - - (200)

Total 800 (300) (300) 200


Premiums 1000 - - 1000

Claims & expenses - (300) (300) (600)


Total 800 (300) (300) 200






Acquisition costs recognition 100 100 200



Acquisition cost recognition (100) (100) (200)





CSM 200 100 - n/a


Example 2 - profitable, no variances, acquisition costs recognition


43


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Premiums 1000 - - 1000

Claims & expenses - (600) (600) (1200)


Total 1000 (600) (600) (200)


Premiums 1000 - - 1000

Claims & expenses - (600) (600) (1200)


Total 1000 (600) (600) (200)


Expected claims & expenses (*) 500 500 1000

Release of the CSM - - -







Loss component recognition (200) - -

Loss component run-off 100 100 200


Profit or loss (200) - (200)

CSM - - - n/a

Loss component (200) (100) - n/a

Example 3 - onerous at recognition and onerous subsequently, no variances


(*) less the loss component run-off

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Premiums 1000 - - 1000

Claims & expenses - (300) (300) (600)


Total 1000 (300) (300) 400


Premiums 1000 - - 1000

Claims & expenses - (500) (300) (800)


Total 1000 (500) (300) 200













Profit or loss - 200 200

CSM 400 200 - n/a


Example 4 – profitable; claims experience adjustment in year 1


45


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Premiums 1000 - - 1000

Claims & expenses - (300) (300) (600)


Total 1000 (300) (300) 400


Premiums 1000 - - 1000

Claims & expenses - (300) (400) (700)


Total 1000 (300) (400) 300














CSM 400 150 - n/a


Example 5 - profitable; change in claims estimates in year 1


Expected cash flows 2 Total

Premiums - -

Claims & expenses (400) (400)

Acquisition costs - -

Total (400) (400)

46


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Premiums 1000 - - 1000

Claims & expenses - (400) (400) (800)


Total 1000 (400) (400) 200


Premiums 1000 - - 1000

Claims & expenses - (400) (700) (1100)


Total 1000 (400) (700) (100)


Expected claims & expenses (*) 400 600 1000

Release of the CSM - - -







Loss component recognition (100) - -

Loss component run-off - 100 -


Profit or loss (100) - (100)

CSM 200 - - n/a

Loss component - 100 - n/a

Example 6 - profitable at recognition, onerous subsequently; change in claims estimates in year 1


Expected cash flows 2 Total

Premiums - -

Claims & expenses (700) (700)

Acquisition costs - -

Total (700) (700)

(*) less the loss component run-off

47


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Premiums 1000 - - 1000

Claims & expenses - (300) (300) (600)


Total 1000 (300) (300) 400


Premiums 1000 200 - 1200

Claims & expenses - (300) (300) (600)


Total 1000 (100) (300) 600





Premiums experience adj. 200 - -









CSM 400 200 - n/a


Example 7 - profitable; premium experience adjustment in year 1


48


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Premiums 1000 - - 1000

Claims & expenses - (300) (300) (600)


Total 800 (300) (300) 200


Premiums 1000 - - 1000

Claims & expenses - (300) (300) (600)

Acquisition costs (200) (100) - (300)

Total 800 (400) (300) 100




Acquisition costs experience adj. (100) - (100)


Acquisition costs recognition 200 100 300



Acquisition cost recognition (200) (100) (300)




Profit or loss - 100 100

CSM 200 100 - n/a


Example 8 - profitable, acquisition costs experience adjustment in year 1


49


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Introduction to IFRS 17Balance Sheet – IFRS 4 vs IFRS 17

Balance Sheet

Financial assets

Deferred acquisition costs

Premiums receivable

Reinsurance assets

Other assets

Total assets

Insurance liabilities

Unearned premium

Other liabilities

Equity

Total liabilities and equity

Explicit deferred acquisition costs asset

Reinsurance in assets position netted with reinsurance in liabilities position

Insurance contracts in liabilities position netted with insurance contracts in assets position

IFRS 4 BS

Balance Sheet

Financial assets

Reinsurance assets

Other assets

Total assets


Other liabilities

Equity

Total liabilities and equity No explicit deferred acquisition costs asset

Groups of insurance and reinsurance contacts in an asset potions presented separately from that in an a liability position

IFRS 17 BS


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Introduction to IFRS 17Income Statement – IFRS 4 vs IFRS 17

Income Statement

Gross premium

Premium ceded to reinsurers

Investment income

Total Income

Gross claims and benefits

Claims ceded to reinsurers

Change In insurance contract liab.

Expenses

Acquisition costs

Total expenses

Profit before tax

Premiums are cash based and include deposit components

Confusing adjustment that incorporates multiple factors

Claims include repayments of deposit components

IFRS 4 P&L

Income Statement

Insurance revenue

Incurred claims

Insurance contracts expenses

Acquisition costs

Result on reinsurance

Insurance service expenses

Insurance service result

Investment income

Insurance financial expenses

Net financial result

Profit before tax

Revenue excludes deposit components and reflects provision of services

Separation of insurance and financial result

Reinsurance result is shown separately

IFRS 17 P&L


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52

Introduction to IFRS 17Measurement - VFA

MeasurementVariable Fee Approach (VFA)


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53

Introduction to IFRS 17VFA overview

Fair value of underlying

assets

Risk Adjustment

CSMInsurance liabilities

Share of FV of underlying

assets

Fulfilment CF that do not vary

on returns

Variable Fee

Insurance with Direct Participation Features

Policyholder participates in a share of a clearly identified pool of underlying items;

Policyholder gets a substantial share of the fair value returns on the underlying items;

Change in the amounts to be paid to the policyholder vary with the change in fair value of the underlying items.

Fulfilment Cash Flows

VFA


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54

Introduction to IFRS 17VFA CSM

Fair value of underlying

assets

Risk Adjustment

CSM[closing]


CSM[opening]

Entity’s share in the FV change

Change in future estimates

CSM[closing]

Release to revenue

Share of FV of underlying

assets

Fulfilment CF that do not vary

on returns

P&L CSM CSM CSM/P&L


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55

Introduction to IFRS 17VFA - Differences comparing to the GM

General Model Variable Fee Approach

Accreting interest on the CSM Interest accreted, the related financial cost recognised in the income statement

No interest accretion on the CSM

Fulfilment cash flows PV of Cash Flows + Risk Adjustment Investment Component + Variable Fee + Risk Adjustment

Time value of money, variances in estimates of financial variables

Financial cost/income recognised in the income statement

1) Not related to the investment component : allocated to the CSM except it is subject to qualified hedging

2) Related to the investment component: financial cost/income recognized in the income statement

Measurement of the variances in estimates of non-financial variables

Locked-in discount rates Current discount rates

Coverage period i.e. the period over with the CSM is amortised

Insurance services Insurance and investment services

Area


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56

Introduction to IFRS 17VFA – Risk Mitigation

Risk mitigation option not applied

Risk mitigation option applied

P&

Lim

pac

t

100

Var

iab

le F

ee (100) CSM

Financialcosts

0

Var

iab

le F

ee

h

ed

gin

g 100Financialincome

Financialincome


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57

Introduction to IFRS 17VFA - Example [1]

Single premium 1,000

Policy term 3 years

AMC 5%

Death benefit 150%

Maturity benefit 100%

Surrender value 100%

• Single premium UL with a death benefit

• Policy term: 3 years

• Maturity benefit: fund value

• Surrender value: fund value

• Death benefit: 1.5% of the fund value

• Asset Management Charge (AMC): 5%

Product description

Expenses 10

Rete of return on assets 10%

Risk free discount rate 3%

Probability of death 1%

Lapses 20%

Assumptions

• Risk Adjustment assumed to be zero

• No estimate or experience variances

• Contract is not onerous

• AMC and expenses at the beginning of the year,

all other cash flows at the end of the year

• Credit (liabilities and incomes) shown with minus

• Debits (assets and expenses) shown with plus

• No hedging qualifying as a risk mitigation under VFA

• One coverage unit delivered each year

• Future coverage units calculated on discounted basis


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Assets – Inv. Comp. 1 2 3

Opening b/ce 1,000.0 836.0 698.9

AMC (50.0) (41.8) (34.9) Bank acc.

Investment return 95.0 79.4 66.4 Financial income

Lapses (209.0) (174.7) (146.1) Liab. - Inv. Comp.

Maturity - - (584.3) Liab. - Inv. Comp.

Closing b/ce 836.0 698.9 -

Variable Fee Approach General Model

Assets – Inv. Comp. 1 2 3

Opening b/ce 1,000.0 836.0 698.9

AMC (50.0) (41.8) (34.9) Bank account

Investment return 95.0 79.4 66.4 Financial income

Lapses (209.0) (174.7) (146.1) Fulfilment CF

Maturity - - (584.3) Fulfilment CF

Closing b/ce 836.0 698.9 -

Death benefit 15.7 13.1 11.0

Expenses 10.0 10.0 10.0

Death benefit 15.7 13.1 11.0

Expenses 10.0 10.0 10.0

Initial Fulfilment CF 1 2 3 Total

AMC (discounted @10%) 50.0 38.0 28.9 116.9

Death benefit (discounted @10%) (14.3) (10.8) (8.2) (33.3)

Expenses (discounted @3%) (10.0) (9.7) (9.4) (29.1)

Variable Fee 54.4

Investment component (1,000.0)

Insurance liability (945.6)

Initial Fulfilment CF 1 2 3 Total

Death benefit (discounted @10%) (14.3) (10.8) (8.2) (33.3)

Lapses (discounted @10%) (190.0) (144.4) (109.7) (444.1)

Maturity (discounted @10%) - - (439.0) (439.0)

Expenses (discounted @3%) (10.0) (9.7) (9.4) (29.1)

Insurance liability (945.6)


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Liability – Inv. Comp. 1 2 3

Opening b/ca (1,000.0) (836.0) (698.9)

AMC 50.0 41.8 34.9 Variable Fee

Financial costs (95.0) (79.4) (66.4) Financial costs

Lapses 209.0 174.7 146.1 Assets - Inv. Comp.

Maturity - - 584.3 Assets - Inv. Comp.

Closing b/ce (836.0) (698.9) -


Fulfilment CF 1 2 3

Opening balance 54.4 (803.1) (683.9)

Premium (1,000) - - Assets

Death benefit 15.7 13.1 11.0 Revenue

Expenses 10.0 10.0 10.0 Revenue

Lapses - surrender value 209.0 174.7 146.1 Assets

Maturity benefit 0.0 0.0 584.3 Assets

Discounting unwind (92.2) (78.6) (67.4) Financial costs

Closing b/ce (803.1) (683.9) -

Variable Fee 1 2 3

Opening balance 54.4 32.9 15.0

AMC (50.0) (41.8) (34.9) Liab. - Inv. Comp.

Death benefit 15.7 13.1 11.0 Revenue

Expenses 10.0 10.0 10.0 Revenue

Share of FV changes 2.8 0.8 (1.0) CSM

Closing b/ce 32.9 15.0 -

Inv. Comp. + Var. Fee (803.1) (683.9) -


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60


CSM 1 2 3

Opening balance (54.4) (37.6) (18.9)

Share of FV change (2.8) (0.8) 1.0 Variable Fee

Release to P&L 19.6 19.5 17.9 Revenue

Closing b/ce (37.6) (18.9) -


CSM 1 2 3

Opening balance (54.4) (36.8) (18.7)

Interest (1.6) (1.1) (0.6) Financial cost

Release to P&L 19.2 19.2 19.2 Revenue

Closing b/ce (36.8) (18.7) -

Coverage Units 1 2 3

Coverage Units (CU) 1.00 1.00 1.00

CU - discounted @3% 0.97 0.94 0.92 A

CU - disc. cumulative 2.83 1.86 0.92 B

Release to P&L 0.34 0.51 1.00 A/B

Coverage Units 1 2 3

Coverage Units (CU) 1.00 1.00 1.00

CU - discounted @3% 0.97 0.94 0.92 A

CU - disc. cumulative 2.83 1.86 0.92 B

Release to P&L 0.34 0.51 1.00 A/B


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Income Statement 1 2 3

Death benefit (15.7) (13.1) (11.0) Variable fee

Expenses (10.0) (10.0) (10.0) Variable fee

CMS amortisation (19.6) (19.5) (17.9) CSM

Revenue (45.3) (42.6) (38.9)

Death benefit 15.7 13.1 11.0 Bank acc

Expenses 10.0 10.0 10.0 Bank acc

Insurance service cost 25.7 23.1 21.0

Financial income (95.0) (79.4) (66.4) Assets - Inv. Comp.

Financial costs 95.0 79.4 66.4 Liab - Inv. Comp.

Unwind of discount - - - -

Interest on CSM - - - -

Financial result - - -

Gross result (19.6) (19.5) (17.9)

Income Statement 1 2 3

Death benefit (15.7) (13.1) (11.0) Fulfilment CF

Expenses (10.0) (10.0) (10.0) Fulfilment CF

CMS amortisation (19.2) (19.2) (19.2) CSM

Revenue (44.9) (42.3) (40.2)

Death benefit 15.7 13.1 11.0 Bank acc

Expenses 10.0 10.0 10.0 Bank acc

Insurance service cost 25.7 23.1 21.0

Financial income (95.0) (79.4) (66.4) Assets

Financial costs - - -

Unwind of discount 92.2 78.6 67.4 Fulfilment CF

Interest on CSM 1.6 1.1 0.6 CSM

Financial result (1.1) 0.3 1.6

Gross result (20.4) (18.9) (17.7)


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62

Introduction to IFRS 17Measurement - PAA

MeasurementPremium Allocation Approach (PAA)


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63

Introduction to IFRS 17PAA eligibility criteria

The PAA measurement of the LFRC does not differ materially

from the GM measurement

orThe Coverage period of

each contract in the group is one year or lessThe criterion is not met if an entity

expects significant variability in the fulfilment cash flows

PAA or not PAA,that is the question

at in

cep

tio

n

Materiality assessment

Comparison to the GM

Variability assessment

1

2

3


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64

Introduction to IFRS 17PAA eligibility – Materiality Assessment

Materiality assessment1

IFRS Materiality Definition (IAS 1) - effective 1 Jan 2020

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.

The primary users of general purpose financial reporting are present and potential investors, lenders and other creditors, who use that information to make decisions about buying, selling or holding equity or debt instruments, providing or settling loans or other forms of credit, or exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources.

Typical materiality thresholds:

0.5 - 1%

Revenue

5 - 10%

Gross Profit

1 - 2%

Total Assets


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65

Introduction to IFRS 17PAA eligibility – Comparison to the GM [1]

Comparison to the GM [1]2

Factors driving the PAA and GM difference

Premiums: single or regular

Contract duration

Discount rates

Ultimate loss

Risk adjustment

Risk distribution

Single premium contracts have significantly smaller differences

The shorter duration and lower discount rate the smaller the difference

The higher UL and RA and the bigger the difference

The better PAA and CSM run-off patterns are aligned the smaller the diff.

Level of premiums Materiality is an absolute concept i.e. big relative diff. may be still immaterial


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66

Introduction to IFRS 17PAA eligibility – Comparison to the GM [2]

Comparison to the GM [2]2

Possible practical ways to assess materiality of the PAA and GM diff

Exact method Simplified method

Excel calculation

Inputs: Single/regular; level of premiums, duration, discount rates, ultimate loss, risk adjustment, risk distribution

Calculation: projection of LFRC under PAA and GM

Output: PAA and GM diff

Decision tables

• Separate table for single and regular premiums

• Separate tables for small, medium and large groups in terms of premiums

• Assume duration and discount rates on prudent level e.g. discount 4%, duration 3 years

• Decision table for different level of UL and RA


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67

Introduction to IFRS 17PAA eligibility – Variability significance assessment

Variability significance assessment3

UL

Years

Standard deviation = 10m GBP

Standard deviation = 3m GBP

Example of the variability significance criterion

If the UL standard deviation over the last 5 years is greater than 5m GBP then the variability is significant.


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68

Introduction to IFRS 17PAA initial measurement

Init

ial m

eas

ure

me

nt

Premiumreceived

Pre-recog.acq. CF

Insurance liability

Acquisition cash flows Initial

acquisitioncosts

Acquisition costs deductions not applicable if the entity opted to recognise acquisition costs directly in the P&L

BankInsurance

assetsBank

Insurance liability


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69

Introduction to IFRS 17PAA subsequent measurement

Sub

seq

ue

nt

me

asu

rem

en

t

Insurance liabilities[opening]

Acquisition cash flows

Insurance libilities[closing]

Opening balance

Premiumsreceived

Acquisition costs CF

Acquisitioncosts

Acquisition cost recognition

Accreted interest

Premiums Interest Release to revenue

Release to revenue

Closing balance

Investment comp.

Investment component

1 2 3 4 5 6

Bank acc.(BS)

Bank acc.(BS)

Financial cost (P&L)

Acquisition costs (P&L)

Fin. Assets(BS)

Revenue(P&L)


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Premiums received

Actual premiums cash flows, in particular the amount does not include premiums receivable

Acquisitions cash flows

(A)

Interest (B) Interest accreted at the locked-in interest rate

Acquisition costs recognition

(A)Systematic recognition of the initial acquisition cash flows as well as the cost of subsequent acquisition cash flows

Investmentcomponent

(C) Investment component paid or transferred to the liability for incurred claims

Release torevenue

Amount recognised as insurnce revenue for insurnce coverage provided in the period. Release pro rata temporis or in proportion to risk.

70

Introduction to IFRS 17PAA subsequent measurement [2]

2

3

4

5

6

1

(A) - Not applicable if the entity opted to recognize acquisition cash flows as expenses when it incurs those costs

(B) - Optional if the time between providing each part of the coverage and the related premium due date is no more than a year

(C) - Investment component is the amount that an insurance contract requires entity to repay to a policyholder even if an insurance event does not occur


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71

Introduction to IFRS 17Onerous contracts test [1]

Facts and circumstances

Major changes in cost

allocation

Major shifts in economic environment

Intentional pricing strategy leading to the

lossLocal GAAP, SII or MI combined loss ratio greater than

100%

Change in the regulatory

environment

Onerous contracts test

Comparison of the PAA measurement of the LFRC with the measurement based on the fulfilment cash flows.

Events triggering the test

Onerous contracts test should be done if the facts and circumstances indicate that the group of contracts is onerous.

PAA measurement of onerous contracts

The PAA measurement of onerous contracts should include the unexpired risk adjustment resulting from the test.


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72

Introduction to IFRS 17Onerous contracts test [2]

IFRS 4

IFRS 17

Facts and circumstances

indicate that the group is onerous

N/a

No

Yes

At the group recognition date

Onerous contracts test

At the reporting date

No Yes

No No

Yes Yes

LAT Reserve / URR

GM measurement

Impacts grouping

May impact the recognition date


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73

Introduction to IFRS 17PAA measurement summary summary

PPA Liability Estimate

Unexpired Risk(Remaining Coverage)

Liability for Incurred Claims(Past Coverage)

LossComponent

Insurance Liability

Non-Loss Component

Future cashflows

Disc.

RA

PAA

Me

asu

rem

ent

Fulf

ilme

nt

Cas

h F

low

s


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74

Introduction to IFRS 17Non-life insurance fulfilment CF example

Co

mb

ined

LR

Expected value of the Combined Loss Ratio

Combined Loss Ratio at the confidence levelcorresponding to the adopted risk adjustment methodology

Claims and expenses (including acquisition costs calculated on

discounted basis)

Including premiums receivable

An example of general insurance fulfilment

cash flows calculation

UnearnedPremium[ ] Combined

Loss Ratio[ ]RiskAdjustment

Present Value of Premiums CF[ ]Fulfilment

Cash Flow[ ]


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75

Introduction to IFRS 17Onerous contracts at recognition – PAA vs GM

GM

PAA

GM vs PAA for onerous contracts at recognition

Cal

cula

tio

n o

f th

e C

SM

Cas

h f

low

s p

roje

ctio

n

Ris

k ad

just

men

t

Acq

. co

sts

op

tio

n (

59

a)

Cla

ims

dis

c.

op

tio

n 5

9b

Inve

st c

om

p.

op

t. (

56

, 57

b)

If PAA options are not used then the PAA liability measurement is not simpler than under the GM

Required disclosures under the PAA are simpler comparing to the GM


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76

Introduction to IFRS 17PAA – Differences comparing to the GM

General Model Premium Allocation ApproachArea

Scope LFRC and LIC LFRC and LIC (LIC measured at the FCF value)

ApplicationAll except contracts with DirectParticipation Features (DPF)

Non-DPF contracts with the insurancecoverage no more than a year

Initial measurement PVCF + RA + CSM Premiums less initial acquisition costs

Subsequent measurement PVCF + RA + CSM Recurrent formula (see slides 64-67)

Cash flow projections Yes No (except for the LC and LIC)

Risk adjustment Yes No (except for the LC and LIC)

CSM Yes (if non-onerous and insurance issued) No

Immediate acquisition costs recognition option

No Yes

RevenueIn line with insurance service measuredwith claims, expenses and coverage units

Pro rata temporis or in proportion to the risk release

Onerous contract test No Yes (depending on facts and circumstances)


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77

Introduction to IFRS 17PAA - Example [1]

Single premium 1,000

Initial acquisition CF 120

Pre-recognition acquisition CF 80

Claims - projected 600

Claims - actual 500

Expenses - projected 100

Expenses - actual 150

Risk free discount rate 3%

Investment component -

• Single premium one year accident insurance

• Uniform risk distribution over the insurance coverage period

• Coverage period starts on the first day of the financial year

• All acquisition costs are paid on day one

• The entity opted to accrete interest on the PAA liability

• The entity opted to recognise acquisition costs over the coverage period



Premium Allocation Approach General Model

Initial measurement FCF CSM Bank DAC

Premium - (1,000.0) 1,000.0

Initial acquisition CF - 120.0 (120.0)

Pre-recognition acquisition CF - 80.0 - (80.0)

PV of projected claims (582.5) 582.5 -

PV of projected exp. (97.1) 97.1 -

Total (679.6) (120.4) 880.0 (80.0)

Initial measurement Ins. liab. Bank DAC

Premiums received (1,000.0) 1,000.0

Initial acquisition costs 120.0 (120.0)

Pre-recognition acquisition CF 80.0 - (80.0)

Total (800.0) 880.0 (80.0)


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Insurnce liability

Opening b/ca (800.0)

Interest (24.0) Financial costs

Amortisation of acquisition costs (200.0) Ins. service costs

Release to revenue 1,024.0 Revenue

Closing b/ce -

Fulfilment Cash Flows

Opening b/ce (679.6)

Unwind of discount (20.4) Financial costs

Claims - projected 600.0 Revenue

Expenses - projected 100.0 Revenue

Closing b/ce -

CSM

Opening b/ce (120.4)

Interest (3.6) Financial cost

Release to revenue 124.0 Revenue

Closing b/ce -


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Income Statement

Revenue (1,024.0) Insurance liability

Claims - actual 500.0 Bank/LIC

Expenses - actual 150.0 Bank/LIC

Acquisition costs 200.0 Insurance liability

Insurance service cost 850.0

Financial costs 24.0 Insurance liability

Unwind on discount 0.0

Interest accreted on CSM 0.0

Financial insurance income 24.0

Gross result (150.0)

Income Statement

Claims - projected (600.0) Fulfilment cash flows

Expenses - projected (100.0) Fulfilment cash flows

Acquisition costs (200.0) Ins. service costs

CMS amortisation (124.0) CSM

Revenue (1,024.0)

Death benefit 500.0 Claims reserve

Expenses 150.0 Liabilities

Acquisition costs 200.0 Revenue

Insurance service cost 850.0

Financial costs 0.0

Discounting unwind 20.4 Fulfilment cashflows

Interest accreted on CSM 3.6 CSM

Financial insurance income 24.0

Gross result (150.0)


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80

Introduction to IFRS 17Onerous contracts

Onerous Contracts


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Contract is profitable because the expected losses are lower than the expected premiums.

81

Introduction to IFRS 17Onerous contract concept

Expected Loss Expected Premiums Exp Loss + Risk Adj.

A B

A

Contract is profitable because the expected losses are lower than the expected premiums.

B

Example of a profitable insurance contract that at the same time is onerous under IFRS 17


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82

Introduction to IFRS 17Loss component - Initial measurement

PV of Expenses

PV ofClaims

PV of premiums

Acquisitioncosts

Risk Adj.Loss

Component

The loss component determines the amounts that are presented in P&L as reversals of losses on onerous groups and are consequently excluded from revenue. (Art 49)

Claims, expenses and the risk adjustment movement related to the current service (CERA) have to be allocated to the LC and the LFRC excluding LC in systematic way. (Art 50, 51)

CERA - Claims, Expenses, Risk Adjustment

Acquisition cost should not be allocated to the loss componentas they are fully recognised in revenue (Art B125 and Art 51)

Premiums are not accounted through income statement therefore cannot be allocated to the loss component (Art 51 Art B123)


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83

Introduction to IFRS 17Loss component - Example [1]

• 3-year insurance

• Premiums 70 per year, paid at the beginning of the year

• Claims 40 per year, paid at the end of the year

• Expenses 10 per year, paid at the end of the year

• Acquisition costs 90, paid at inception

• Recognised evenly over the insurnce period

• CERA movement allocated to the LC in proportion to

LC/CERA at the beginning of the year

Cash flows 0 1 2 3 Total

Premiums 70.0 70.0 70.0 - 210.0

Claims - (40.0) (40.0) (40.0) (120.0)

Expenses - (10.0) (10.0) (10.0) (30.0)

Acq. Costs (90.0) - - - (90.0)

Total (20.0) 20.0 20.0 (50.0) (30.0)

Initial accounting FCF CSM Bank P&L

Initial premium - (70.0) 70.0 -

Future premiums 140.0 (140.0) - -

Claims (120.0) 120.0 - -

Expenses (30.0) 30.0 - -

Acq. Costs - 90.0 (90.0) -

Initial loss - (30.0) - 30.0

Total (10.0) 0.0 (20.0) 30.0

• No experience variances

• No changes in estimates in the first version of the example

• Claims and expenses estimates for the year 3 changed

From 50 (40+10) to 10 (5+5) in the second version of the example

• Risk margin ignored

• Discounting ignored




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Loss component 0 1 2 3

LC (30.0) (20.0) (10.0) -

CSM - - - -

CERA (150.0) (100.0) (50.0) -

LC/CERA 20.0% 20.0% 20.0% -

Income statement 1 2 3 Total

Claims (32.0) (32.0) (32.0) (96.0) Claims x (1-LC/CERA)

Expenses (8.0) (8.0) (8.0) (24.0) Expenses x (1-LC/CERA)

Acq. Cost (30.0) (30.0) (30.0) (90.0) Acq. Costs/3

CSM amortisation - - - -

Revenue (70.0) (70.0) (70.0) (210.0)

Claims 40.0 40.0 40.0 120.0

Expenes 10.0 10.0 10.0 30.0

Acq. Coss 30.0 30.0 30.0 90.0

Initial loss 30.0 - - 30.0

Reversal of losses (10.0) (10.0) (10.0) (30.0) (Claims+Expenses) x LC/CERA

Insurnce service cost 100.0 70.0 70.0 240.0

Result 30.0 - - 30.0

First version of the example

No changes in estimates


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85


Loss component 0 1 2 3

LC (30.0) (20.0) - -

CSM - - 30.0 -

CERA (150.0) (100.0) (50.0) -

LC/CERA 20.0% 20.0% - -

Income statement 1 2 3 Total

Claims (32.0) (32.0) (5.0) (69.0)

Expenses (8.0) (8.0) (5.0) (21.0)

Acq. Cost (30.0) (30.0) (30.0) (90.0)

CSM amortisation - - (30.0) (30.0)

Revenue (70.0) (70.0) (70.0) (210.0)

Claims 40.0 40.0 5.0 85.0

Expenes 10.0 10.0 5.0 25.0

Acq. Coss 30.0 30.0 30.0 90.0

Initial loss 30.0 - - 30.0

Reversal of losses (10.0) (20.0) - (30.0)

Insurnce service cost 100.0 60.0 40.0 200.0

Result 30.0 (10.0) (30.0) (10.0)

Second version of the example

Claims and expenses estimate for the year 3 changedfrom 50 (40+10) to 10 (5+5)

Impacted elements market in yellow

As a result of the positive estimate variance of 40, the remaining LC has been reduce to 0 and the CSM of 30 has been set up


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86

Introduction to IFRS 17Acquisition costs

Acquisition Costs


3Blocks®

PVFC

Acq.

costs

CSM

Result Revenue Costs

The CSM mechanism on its own

does not guarantee that:

• Revenue includes the portion of

premiums covering acq. costs

• Service costs include acq. costs

incurred by an entity

Introduction to IFRS 17Acquisition costs recognition in P&L

Revenue

Costs

Result

100

(100)

-

87


3Blocks®

Pre-recognition

acq. cost cash flows

Post-recognition

acq. cost cash flows

Recognised in the balance

sheet as an insurance asset

(pre-recognition acq. cf)

Recognised as a

reduction to the CSM

(all acq. cash flows)

Systematic recognition of

acquisition cost in P&L

(all acq. cash flows)

Introduction to IFRS 17Acquisition costs recognition in BS

88


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Allocation of non sales or underwriting related overheads (e.g. IT, management, accounting costs)

Allocation of non-incremental sales and underwriting costs (e.g. Marketing costs and u/w department salaries.

Option A

Incremental sales and underwriting costs (e.g. commissions, costs of medical test and inspections)

Option B Option CAcquisition cash flows

Cash flows arising from the costs of selling, underwriting and starting a group of insurance contracts that are directly attributable to the portfolio of insurance contracts to which the group belongs. Such cash flows include cash flows that are not directly attributable to individual contracts or groups of insurance contracts within the portfolio.

Introduction to IFRS 17Acquisition cash flows definition

IFRS 17 acquisition cash flow definition is not restricted to incremental cost of selling or underwriting

89


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Pre-recognition acquisition cost cash flows

Acquisition cost cash flows upon recognition

Cr Dr

Dr Cr

Future projected acquisition costs cash flows Cr Dr

Income Statement

Re

ven

ue

Acc

ou

nt

Incu

rre

dC

laim

s

Incu

rre

dEx

pe

nse

s

Balance Sheet

Fulf

ilme

nt

Cas

h F

low

s

CSM

Ban

k A

cco

un

t

Insu

ran

ceA

sse

t

Acq

uis

itio

n

Exp

en

ses

Pre-recognition acquisition cost cash flows Dr Cr

Pre-recognition period

Upon recognition

Post-recognition

Systematic recognition of acquisition costs

Expected acquisition cost cash flows - current service

Acquisition costs – changes in estimates

Cr Dr

CrDr

D/C C/D

Expected acquisition cost cash flows - future service Dr Cr

Acquisition costs experience adjustment - current service D/C D/C

Actual acquisition cost cash flows - current service DrCr

Actual acquisition cost cash flows - future service Dr Cr

Experience adjustmentcurrent service

Experience adjustmentfuture service

(Art B96a, Art B113a)

Introduction to IFRS 17Acquisition cost accounting

90


3Blocks®

91

Introduction to IFRS 17Full retrospective approach

Full Retrospective Approach


3Blocks®

92

Introduction to IFRS 17Transitional provisions - Introduction

2019 2020 2021 2022

First IFRS 17Fin. Stat.

Effective DateInitial Application

TransitionDate

IAS 8 Article 19(b)

Modified Retrospective Approach1

Fair Value Approach2

IAS 8 Article 19(b)Changes an accounting policy upon initial application of a Standard or an Interpretation that does not include specific transitional provisions applying to that change, or changes an accounting policy voluntarily, it shall apply the change retrospectively

CSM Transitional Provisions:


3Blocks®

93

Introduction to IFRS 17Application of transitional provisions

2010-2021

FV Approach

A B C

Modified RetrospectiveFullRet.

D E F

P2

P3

P1

1990-2009 P2

P3

P1

1970-1989 P2

P3

P1

XXXX-XXXX

Different generations may be covered by different sets of transitional provisions

P2 P3P1

Different portfolios may be covered by different sets of transitional provisions

B CA

There may be different sets of modifications within the given transitional approach


3Blocks®

94

Introduction to IFRS 17Full retrospective approach steps

Ass

ets

Risk Adj.

CSM

Equity

Other Liab.

IFRS 17

C

B

A

Oth

er A

sset

s

Equity

Other Liab.

IFRS 4

C

B

Derecognize any existing balances that would not exist had IFRS 17 always applied

For example DAC, DIR, VOBA

1

Identify, recognize and measure each group of insurance contracts as if IFRS 17 had always applied

2

Recognize any resulting net difference in equity

3

DAC


3Blocks®

95

Introduction to IFRS 17Modified retrospective approach

Modified Retrospective Approach


3Blocks®

96

Introduction to IFRS 17Modified retrospective approach - Introduction

CSMA B

D E

Risk Adjustment

C

F

CashflowsDiscount Rates

6416

= 41 The objective of the modified retrospective approach

is to achieve the closest outcome to retrospective application possible without undue cost or effort

• Use of the actual cashflows vs projected cashflows

• Ins. contracts identification and classification date

• Cohorts with duration exceeding 1 year

• Use the Risk Adjustment at the Transition Date adjusted for estimated Risk Adjustment releases

• Approximate discount rates curve vs exact calculation

• Two methods to determine the approximate discount rates curve

• Contracts without DPF: calculation of cumulative effect of CSM movements

• Contracts with DPF: calculation based on the fair value at the transition date


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97

Introduction to IFRS 17Cashflows modification

FULL

Ret

rosp

ect

ive

A

pp

roac

hM

OD

IFIE

DR

etro

spe

ctiv

e

Ap

pro

ach

Projection

ProjectionActual

Transitiondate or earlier

Transitiondate or earlier


3Blocks®

98

Introduction to IFRS 17Risk adjustment modification

FULL

Ret

rosp

ect

ive

A

pp

roac

hM

OD

IFIE

D R

etro

spe

ctiv

e

Ap

pro

ach

Transition date or earlier

Transition date or earlier

Estimated releases of the Risk Adjustment

Transition date

Transition date


3Blocks®

99

Introduction to IFRS 17Discount rates modification

T-1

T-2

T-3

IFRS 17 yield curve [A]

Observable yield curve [B]

Average A-B spread [C]

Average [A]-[B] spreadBased on T-1, T-2, T-3

Use observable curve yield curve if it approximates well IFRS 17 yield curve

Use observable yield curve adjusted for the average spread in relation to the IFRS 17

yield curve

Yield curve B adj. for C


3Blocks®

100

Introduction to IFRS 17CSM modification – Contracts without DPF

CSM0(Initial)

Accreted interest

CSM0Release to Revenue

[CU Provided]

[CU Provided] + [CU Remaining]CSM0 x

CSMT(Transition)

Coverage Units provided since the inception date

Coverage Units remaining at the transition dateCSM0 x { [1+r(0,1)] x [1+r(0,2)] x …. x [1+r(0,T)] -1 }

CSM0 x { [1+r(T,1)] x [1+r(T,2)] x …. x [1+r(T,T)] -1 }

or

allowed if the cohorts modification applied


3Blocks®

101

Introduction to IFRS 17CSM modification – Contracts with DPF

Fair Value of underlying items

Fulfillment Cashflows

Charges to the policyholder prior to the transition(including amounts deducted from underlying items)

Payments made prior to transition thatwould not have varied with the underlying items

Estimated reduction in the Risk Adjustmentprior to the transition

CSM at the Inception Date

CSM that relates to the period before the transition date

CSM at the Transition Date

Deduct

Add

Deduct

Deduct

Deduct


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102

Introduction to IFRS 17MRA - other modifications

Identification of insurance groups

Default Treatment Modified Retrospective Approach

Determined attransition date

Size of cohorts 1 year or less Cohorts can be bigger than 1 year

Determined at initial recognition date

No cohort simplifi-cation

Cohort simplifi-cation

Assessment against the VFA criteria

Identification of discretionary cash flows

Locked-in discount rates

OCI options

initial recognition date Determined at transition date

Calculated retrospectively i.e. at each reporting date

At nil or in case of contracts with DPF on cumulative basis calculated at the transition date

OCI options

At nil if financial assumptions changes have a substantial effect on the benefits

PAA: Systematic allocation based on the discount rates at transition date instead of claim date

Calculated retrospectively i.e. at each reporting date

For contract with DPF equal to amount recognised in OCI on underlying assets


3Blocks®

103

Introduction to IFRS 17Fair value approach

Fair Value Approach


3Blocks®

104

Introduction to IFRS 17Fair value approach - Introduction

FairValue

PV of Future Cashflows

Risk Adj.

CSM

Fair Value

Fulfillment Cashflows

CSM CSM or Loss Component at the Transition Date calculated as the difference between the fair value of a group of insurance contracts and the fulfilment cash flows

FairValue

PV of Future Cashflows

Risk Adj.Loss

Comp.


3Blocks®Introduction to IFRS 17FVA - Insurance contracts issued

FV

PV

CF RA

Loss

TP

FV

PV

CF

RA

Loss

TP

FV

PV

CF

RA

Loss

TP

FV

PV

CF

RA

CSM

TP

FV

PV

CF

RA

CSM

TPFV

PV

CF

RA

CSM

TP

For insurance contracts issued: RARisk Adjustment has always credit (liability) balance

CSMCSM has always credit (liability) balance

105


3Blocks®

106

Introduction to IFRS 17FVA - Reinsurance contracts held

FV

PV

CF

RA

CSM

Re FV

PV

CF

RA

CSM Re

FV

PV

CF

RA

CSM

Re

FVP

VC

F

RA

CSM

Re

FV

PV

CF

RA

CSM

Re

FV

PV

CF

RA

CSM

Re

For reinsurance contracts held: RARisk Adjustment has always debit (asset) balance

CSM CSM may have both credit (liability) or debit (asset) balance

CSM


3Blocks®

107

Introduction to IFRS 17FVA - Other modifications

Identification of insurance groups

Default Treatment FV Approach Modification

Determined attransition date

Size of cohorts Cohorts should be 1 year or less Cohorts can be bigger than 1 year

locked-in discount rate determination

Determined at initial recognition date

OCI option applicationCalculated retrospectively i.e. at each

reporting date

At nil or in case of contracts with DPF on cumulative basis calculated

at the transition date

PAA claims discount rates Determined at claim incurred date

Assessment against the VFA criteria

Identification of discretionary cash flows


3Blocks®

108

Introduction to IFRS 17Implementation considerations

Implementation considerations


3Blocks®

Metho-dology

Systems

Data Processes

IFRS 17 Target Operating Model

Implementation from the process perspective

Process 1

Process 2

Process 3

Process 4

Process

Imp

lem

enti

ng

syst

ems/

too

lsto

su

pp

ort

th

e p

roce

ss

Sou

rcin

g d

ata

Ensu

rin

g th

e p

roce

ss c

om

plie

s w

ith

th

e m

eth

od

olo

gy

Introduction to IFRS 17 IFRS 17 Target operating model


3Blocks®

System D

System C

System A

System B

Department 1 Department 2 Department 3 Department 4

Process P6Process P5

Process P4

Process P3

Process P2

Process P1

Introduction to IFRS 17IFRS 17 High level solution design


3Blocks®

111

Methodology

▪ Consider implications of gap analysis and identify which areas are most important

▪ Deep dive into specific aspects of methodology

▪ Identify points of decision (IFRS 17 leaves room for decision)

Impact assessment

▪ Build prototypes models for all major products

▪ Perform financial impact assessment

▪ Select options

▪ Prepare position papers / accounting policies

▪ Consider operational impacts

Solution design

▪ Ensure availability of data

▪ Decide on appropriate external system or decide on internal system

▪ Review processes to identify impacts from IFRS

Implementationand testing

▪ Implement IT solution

▪ Check the data flow from the source till reporting result

▪ Perform dry run calculations

Introduction to IFRS 17Implementation approach


3Blocks®

112

Introduction to IFRS 17 Solution design process

Methodologyteam

Methodology papers

Impactassess. team

Impactassessment

Solutiondesign team

Solution architecture

Consultation with the auditor

Methodology committee

Methodology approval

Systems

Data

Processes

Solution design

Solution design committee

Solution design decisions

Business requirements documents(needed if the solution design leaders do have sufficient understanding of the requirements)

High level solution design


3Blocks®

113

Introduction to IFRS 17 Teams

Met

ho

do

logy

team

Actuaries

Accounting specialists

Business analysis

Project management and governance

Representatives of different operating entitiesInte

rnal

Exte

rnal

Acc

ou

nti

ng

team

Pro

toty

pin

g an

d

imp

act

asse

ssm

en

ts

Tran

siti

on

al

CSM

Cas

h f

low

san

d C

SM

Pre

miu

mA

lloca

tio

n

An

alys

is o

f m

ove

me

nt

Ris

kad

just

me

nt

Dis

cou

nt

rate

s

Test

ing

IT specialists

Testers


3Blocks®

114

Introduction to IFRS 17Project governance

Set goals and objectives for the IFRS 17 programme

Approves the budgets and makes project strategic

decisions (e.g. selection of the CSM solution)

Review the progress and technical content of the

programme

Escalates issues to the relevant bodies: Management

Board, Audit Committee, Risk/Capital Committee

Steering Committee

Monitor and control the management of IFRS 17

methodology deliverables

Review and challenge methodology proposals (e.g. use

of the OCI option,

The Methodology Committee has the methodology

decision making powers, approves proposed accounting

policies and methods

Methodology Committee

Working groups are set up across the programme to

concentrate on specific topics (e.g. actuarial working

group, accounting working group)

Working groups do not have decision making powers

but they act as “think tanks” to apprise the proposed

solutions before they are passed to the Methodology or

Solution Design Committee

Working Groups

Monitor and control the management of IFRS 17

solution design deliverables

The Solution Design Committee has the solution design

decision making powers, approves proposed IFRS 17

solution design papers)

If required escalates the strategic solution design

decisions to the Steering Committee

Solution Design Committee


3Blocks®

115

Introduction to IFRS 17IFRS 17 methodology sources

IFRS 17standard

IASB meetings papers

Illustrativeexamples

IFRS 17TRG papers

IndustryIFRS 17 publications

IFRS 4 Solvency II

Industry IFRS 17 groups

Basis for conclusions

Consultations with advisors


3Blocks®

116

Introduction to IFRS 17Methodology development

Methodology Paper

Impact Assessment

Design Authority

Auditor’s Review

Position Paper

Deals with interpretation questions

Flagging potential interpretation issues

Approves the proposed methodology

- Build prototypes modelsfor all major products

- Perform financial impactassessment for tested elements and options

Sets out methodology for a given area taking into account conclusions form the position paper issues


3Blocks®

117

Introduction to IFRS 17Impacts

OCI option

Acquisition cost immediate

recognition option

Coverage Units

Risk Adjustment Method and calibration

Discount Rates method and calibration

Expense assumption

methodologyJustification of the

divergence from rules on materiality

grounds

Transitional methods (FRA,

MRA, FVA)

Different options available within the

transitional methods

Profits Revenue

EquityCosts

IFR

S 1

7

imp

acts

IFR

S 1

7

imp

acts


3Blocks®

118

Introduction to IFRS 17Prototype models

Using simple Excel spreadsheet with formulas (ensures visibility and

traceability)

For typical / average policy

Using standard assumptions

Prototype models

Major cashflows

Draft balance sheet and income statements

Liability and CSM calculations

To facilitate impact analysis

To perform financial impact assessment for options allowed under IFRS 17

To trigger discussion on accounting treatment

For education purposes (enhance understaning of IFRS 17)

How theyare built?

What do theycalculate?

Why use them?


3Blocks®

119

Introduction to IFRS 17Products matrix

Product matrix

Line of business / product

IFRS 17 portfolio

Solvency II HRG

Ins. / Invesr. with DPF / Re. held

Contract boundary

Coverage period

IFRS 17 model: GM, VFA, PAA

Transitional CSM: FRA, MRA, FVA

Profitability profilePortfolio

Pro

fita

bili

ty

Firs

t st

ep

an

d f

ou

nd

atio

n o

fth

e IF

RS

17

imp

lem

en

tati

on


3Blocks®

120

Introduction to IFRS 17Data flow - without a central warehouse


Process P4

Process P3

Process P2

Process P1

Process without the central data warehouse


3Blocks®

121

Introduction to IFRS 17Data flow - with a central warehouse


Process P4

Process P3

Process P1

Process P2

Process with the central data warehouse

DataWarehouse


3Blocks®Introduction to IFRS 17Processes

Processes with high impact from

IFRS 17

Processes with low impact from

IFRS 17

Reporting

Budgeting, planning and forecasting

External communication

Risk management

Pricing and product development

Reinsurance strategy

Internal control and internal audit

HR

• Budgeting and planning needs to be done according to IFRS 17 metrics

• External communication of financial results will be more complex

• Materiality thresholds for internal control processes need to be redefined

• Reinsurance impact on income statement willbe different

• Risk management metrics based on equity or profits need to be adjusted

• Product requirements such as payback period and IRR need to be modified

• Incentives schemes based on new metrics

• IFRS 17 requires new reporting process


3Blocks®

123

Introduction to IFRS 17IFRS 17 vs Solvency II

IFRS 17 vs Solvency II


3Blocks®

124

Introduction to IFRS 17Solvency II and IFRS 17 – Differences [1]

Solvency II IFRS 17

Goal Capital adequacy and risk management Show financial position and result for the reporting period

Scope Recognition, measurement, presentation and disclosure of insurance liabilities

Assets and liabilities, own funds, capital requirements

Contracts covered (Re)insurance contracts issued, Reinsurance contracts held, investments with DPF

All contracts giving rise to asset or liabilities

Geographical coverage All insurance and reinsurance companies in the world reporting under IFRS

EEA i.e. the European Union plus Iceland, Liechtenstein and Norway

Acquisition cost Recognized in systematic way over the insurance period

Recognized immediately

Discounting Risk free rate with adjustments: matching adj., volatility adj., discount rate transitional

Risk free rate plus illiquidity adjustment

Initial gain Recognized immediately in P&L Initial gain recognized gradually over the insurance coverage period


3Blocks®Introduction to IFRS 17Solvency II and IFRS 17 – Differences [2]

Solvency II IFRS 17

Contract end Similar as SII however only insurance and financial risk considered

Unilateral right to terminate contract, amend premiums or benefits

Short-term contracts Simplification allowed for short term contractsNo special treatment of short-term contracts

Contract beginning Earlier of the coverage period, first premium due, the group becomes onerous

Earlier of the coverage period and policy date

Risk Adjustment Cost of Capital method, applied only to the insurance liabilities

No method prescribed; RA applied to both insurance liabilities and reinsurance held

Unbundling Not required Distinct derivative, investment or service components should be unbundled

Grouping Groups based on portfolio, profitability and underwriting period

Homogeneous Risk Groups

Expenses Cashflow models include only expenses that relate directly to the ins. contract fulfilment

Cashflow models include overhead expenses

125


3Blocks®Introduction to IFRS 17Solvency II and IFRS 17 – Differences [3]

Solvency II IFRS 17

Transition Possibility to apply transitional measures on the TPs or TPs discount rates

Possible simplifications related to the transitional CSM

Effective date 1 January 2022 with an earlier implementation option

1 January 2016

Reinsurance modeling Reinsurance held and the related insurance contract are modelled independently

Reinsurance modelling mirrors the related insurance contract calculations

Disclosures Disclosures focused on explaining the financial position and result for the period

Disclosures focused on the solvency position and risk management (QRT, SFCR, ORSA)

Contracts with DPF Does not regulate the country specific elements, IFRS are principle based

“Surplus Funds” defined in the UK regulations excluded from the TPs

126


3Blocks®

127

Introduction to IFRS 17Solvency II vs IFRS 17 – Balance Sheet

Best Estimate Liability

Assets Risk Margin

Other Liabilities

MCR

Best Estimate Liability

AssetsRisk

Adjustment


Shareholder equity

Other Liabilities

Free Surplus

Technical Provisions

SCR

Own Funds

Technical Provisions

Solvency II IFRS 17 Spot the difference


3Blocks®

128

Introduction to IFRS 17Wrap-up

Wrap-up


3Blocks®

129

Introduction to IFRS 17Thank you

Pawel WozniakDirector

[email protected]. +44 7492 750133London [UK]

Agnieszka HupertManager

[email protected]. +48 79305 4440Warsaw [Poland]


3Blocks®

130

Introduction to IFRS 17Appendix

Appendix


3Blocks®

131

Introduction to IFRS 17Unbundling

Embedded derivatives

Investment components

Service component

• Separate an embedded derivative if it is not closely related and a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative;

• Account for the separated embedded derivative under IFRS 9 (FVTPL)

• Separate a distinct investment component

• The component is distinct if it is not highly interrelated and could be sold separately in the same market

• The component is highly interrelated if it cannot be measured without considering the other and the policyholder is unable to benefit from only one component.

• Account for the separated investment component under IFRS 9 (FVTPL, FVTOCI, Amortised Costs)

• Separate a distinct service component i.e. promise to transfer goods or non-insurance services to a policyholder.

• The component is distinct if it is not highly interrelated and a policyholder can benefit from the good or service on its own.

• Account for the separated service component under IFRS 15 (allocate revenue to the service component and recognize it when the service is rendered)

Fin

anci

al

Inc/

Exp

Fi

nan

cial

Inc/

Exp

or

Oth

er

Co

mp

. In

com

eR

eve

nu

e

IFR

S 9

IFR

S 9

IFR

S 1

5

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