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INTRODUCTIONTO

IFRS 17

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CONTENTS

« After more than 20 years of discussions, IASB (International Accounting Standard Board) released IFRS 17 on the 18th May 2017. This standard replaces IFRS 4 and will be applied from 1st January 2021 with retrospective application as of 2020. However, most insurance companies want to be ready for dry running in 2019. IFRS 17 is the first comprehensive and actual international IFRS Standard establishing the accounting for insurance contracts. IFRS 17 increases transparency and comparability between insurers and introduces consistent accounting for all insurance contracts based on a current measurement model. This revolution in the measurement of insurance contract liabilities and in disclosure will be sensibly aligned with the adoption of IFRS 9, financial instruments. The impacts will be major for insurance companies, both for the actuarial modelling and reserving fields and also for the production of accounts. Therefore, the implementation of IFRS 17 in an insurance company will have an impact on several actuarial departments and in particular on modelling, reserving and data management. »

Christelle Bernhard, ConsultantKevin Poulard, Consultant& Marie-Cécile Verstappen, Senior consultant

02INTRODUCTION

04IFRS 17 OVERVIEW

06BUILDING BLOCKAPPROACH

08PREMIUM ALLOCATION APPROACH

10GLOSSARY

11IFRS 17 JARGON

VARIABLE FEEAPPROACH

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01INTRODUCTIONIFRS 17 TIMELINE

WHO IS CONCERNED?• IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts.• This new standard has to be applied to all insurance and reinsurance contracts separately (issued or held).• This norm is principle based and its implementation will impact several actuarial sectors and in particular Modeling, Reserving, Accounting and Data Management.

• IFRS 17 is an international norm. For European countries, the norm is mandatory for listed companies. • European companies seem to be more prepared thanks to the previous implementation of Solvency II.

SOLVENCY II VS IFRS 17SOLVENCY 2

SCOPE

APPROACH

PROFIT

RISK MARGIN

GROUP OF CONTRACTS

TECHNICALPROVISIONS

CALCULATION

IFRS 17

European International

Prescriptive Principle based

Separating by homogenous risk groups (HRG)

Grouping by year of issue and pro�tability

(separation between onerous and non onerous contracts)

Recognized immediatelyin own funds

Amortization during the life of the group

of contracts (No initial gain or loss recognition)

Cost of capital 6% Method has to be chosen by the company

Best estimate approach

Project on insurance accounting approved

1997

IFRS 4 Phase 1 issued

2004

IASB (International Accounting Standard

Board) has released the new accounting norm for insurance contracts named IFRS 17 (IFRS 4

Phase 2)

18th May 2017

Production of comparatives

1st January2020

Go live

1st January 2021

02 03

However, you should not

underestimate IFRS 17 implementation

cost…

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02IFRS 17OVERVIEWGOALS

Increase transparency and

comparability between insurers.

Increase the understanding of

the contracts.

Produce financial statement &

disclosure on a current measurement

model

LEVEL OF AGGREGATION• At inception, when insurance contracts are recognized, Insurance contracts will be aggregated into groups.

• Once a group is formed, it cannot be modified.• After initial recognition, calculations will be performed at the group level for the subsequent measurements and disclosures.

Portfolio: Group composed of contracts with similar risksAnnual cohort1

At initial recognition, groups of contracts should be disaggregated into group that are:

• Onerous (FCFInitial Recognition<0) • Profitable, with no significant risk of becoming onerous (FCFInitial Recognition>Trigger)• Profitable, with significant possibility of becoming onerous (0≤ FCFInitial Recognition ≤Trigger)

1An Entity shall not include contracts issued more than one year appart in the same group - §22 IFRS 17 May 2017

LIFE OF A GROUPOF INSURANCE CONTRACTS

Initialrecognition

Reporting date N

End of coverage

period

Reporting date N-1 Reporting date N+1

Claim 1Reported

Claim 2Not yet reported

Claim 3Not yet occured

Claim 4Reported

after closingdate

Liability for incurred claims1 Liability for remaining coverage

FCF related to claims incurred (reported or not) not yet paid

Insurance contract liability

FCF related to future services + CSM remaining

t

MEASUREMENTAPPROACHES

Building Block Approach• General Model• Default model for insurance/reinsurance contracts

Premium Allocation Approach• Simplification of the BBA for insurance/reinsurance contracts• Can be used for contracts with coverage period less than 1 year – Typically non-life insurance contracts

Variable Fee Approach• Mandatory for contracts with discretionary participation features

3

1If claims are paid after the coverage period end, the group will not be extinct. For the reporting date following the end of the coverage period, the Insurance contract liability will be divided as follows:

• The Liability for Remaining coverage will be 0.• The Liability for Incurred claims component is calculated based on the PV of the estimate of future CF (Claims paid). Therefore, this component will be different than 0.

BBA PAA VFA

04 05

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03BUILDING BLOCK APPROACH

INITIAL RECOGNITIONCash

In�owsCash

Out�ows

Time Valueof Money

CSM

Primes

Sinistres,frais Taux

d’actualisation

Risk Adjustment

Relatif aux risquesnon �nanciers

Ou

Ful�lment Cash Flows (FCF)

The Contractual Service Margin represents unearned profit of a contract.

In consequence, at initial recognition:• If Gain: CSM is written• If Loss (Onerous contracts): Amount of Loss recognized in the P&L and CSM=0CSM is calculated for a group of insurance contracts.

SUBSEQUENTMEASUREMENT

1Accounting policy choice – For a given period, insurance finance income or expenses could be:• Recognized entirely in the P&L• Disaggregated between:

• P&L for Insurance finance income or expenses calculated by using discount rates locked in at inception • OCI for changes in discount rates

2The allocation of the CSM in the P&L is calculated based on the number of coverage units provided during the period

OtherComprehensive

Income(OCI)

FCF CSM

Past and Current Services:Release of Risk adjustment

Changes in future CF

Future services:Changes in the Risk adjustment

related to future servicesChanges in future CF

Adjust CSM

Financial risk assumptions:Time value of money

KEY COMPONENTS

Changes incurrent estimates

Interest ratesaccretion

Pro�t and Loss (P&L)

– Insurance service result

1

CSM allocation2

06 07

One key idea behind IFRS 17 is that insurers are not allowed to recognize as

profit the gain estimated at initial recognition.

MEASUREMENT MODELPresent Value of

Future Cash FlowsFul�lment

Cash Flows

Unearned Pro�t (Contractual Service Margin)

Insurance Obligations(Insurance Contract Liabilities

Reported on the Balance Sheet)

Adjustment forNon-Financial Risk

+ =

+ =

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Liability for Remaining

Coverage at Inception

Premiumsreceived

at inception

Insurance acquisition CF

paid at inception1 Derecognition of

pre-coveragecash �ows2

(+/-)

Or

04PREMIUMALLOCATION

COMPARISON WITH THE GENERAL MODEL

INITIAL RECOGNITIONOF THE LRC

SUBSEQUENTMEASUREMENT OF THE LRC

APPROACH

• The Premium Allocation Approach is a simplification of the General Model. It can be applied if the 2 following conditions are met:

• Short-term coverage insurance contract (coverage period less than 1 year).• No significant variability in the FCF related to the LRC measurement.

• This simplified model will impact the insurance contract liability calculations:

• The Liability for Remaining Coverage will ba approximated and the CSM and RA components will not be computed1.• The Liability for Incurred Claims will be computed in the same way than the BBA.

BBA

LIABILITY FORREMAINING COVERAGE

LIABILITY FOR INCURRED CLAIMS

PAA

Estimate of future CFTime Value of Money

Risk AdjsutmentCSM

Unearned Premiums(Time Value of Money)2

Estimate of future CFTime Value of Money

Risk Adjustment

Estimate of future CF(Time Value of Money)3

Risk Adjustment

1Unless Onerous contracts that must be measured using the BBA2If the entity expects that the time between providing each part of the coverage and the related premium due date is more than a year, it should adjust the carrying amount of the LRC to reflect the TVM – §56 IFRS 17 May 20173If cash flows related to incurred claims are expected to be paid or received in more than a year from the claims are incurred, the entity is required to adjust future cash flows for the TVM – §59(b) IFRS17 May 2017

Liability forRemainingCoverage

(EoP)

Liability forRemainingCoverage

(BoP)

Premiumsreceived

during theperiod

(+)

Insuranceacquisition

CF paidduring the

period3(-)

Insurancerevenue for

coverageprovided

(-)Investmentcomponent

paid ortransferred

(-)

Accretion ofinterest

(+)

Amortizationof the

insuranceacquisition

CF3(+)

4

5

1Accounting policy choice: Insurance acquisition cash flows could be recognized as expenses when it occurs if the coverage period is no more than a year. In this case, this component will not appear in the LRC measurement – §59(a) IFRS 17 May 20172Related to the fact that an entity should recognize an asset or liability for insurance acquisition cash flows that it pays or receives before the group is recognized – §27 IFRS 17 May 20173Accounting policy choice: Insurance acquisition cash flows could be recognized as expenses when it occurs if the coverage period is no more than a year. In this case, this component will not appear in the LRC measurement – §59(a) IFRS 17 May 20174If cash flows related to incurred claims are expected to be paid or received in more than a year from the claims are incurred, the entity is required to adjust future cash flows for the TVM – §59(b) IFRS17 May 20175Insurance revenue for the period is equal to the expected premium received allocated to each period of the coverage – §B126 IFRS 17 May 2017 :

• On the basis of the passage of time.• On the expected timing of incurred insurance service expenses if the expected pattern of release of risk differs from passage of time (Ex: contracts with seasonal effects linked to hurricans).

08 09

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06GLOSSARY• BBA: Building Block Approach – the main measurement model under IFRS17.• VFA: Variable Fee Approach - mandatory approach for contracts with direct participation features.• PAA: Premium Allocation Approach – simplification of the BBA which can be used for contracts with less than 1 year coverage period.• CSM: Contractual service margin: the amount of liability held on top of the best estimate liability and risk adjustment to eliminate any day one profits.• Risk Adjustment: The amount required by entities to bear the uncertainty about the amount and

timing of the cash flows arising from non-financial risk.• CF: Cash flows.•eFCF : Fulf i lment Cash Flows: Present value of the cash flows + Risk adjustment for non-financial risks.• TVM: Time value of money.• LIC: Liability for Incurred Claims.•eLRC : L iabi l i t y for remaining coverage.• P&L: Profit & Loss.• OCI: Other Comprehensive Income.• Onerous Contract: A contract that is expected to generate loss; the CSM of these contracts is equal to zero.• BoP: Beginning of Period.• EoP: End of Period.

10 11

05VARIABLE FEEAPPROACH

• The Variable Fee Approach is a modification of the General Model at the level of the calculations of the CSM.• It must be applied to insurance contracts with direct participation features1.

• In these insurance contracts , the entity has an obligation to pay to the policyholder an amount equal to the share of the returns from the underlying items minus an insurer’s fee.• Changes to the insurer’s fee adjust the CSM.

07IFRS 17JARGON

• IFRS 1 7 Insurance Contracts introduces fundamental changes to insurance accounting for some insurers .

• In the issue of The Essentials n°4 of September 2017, IFRS Foundation has translated the existing terminology and metrics into the language of IFRS 17 to help investors adapt to the changes. (http://www.ifrs.org/investor-centre/the-essentials/).

Insurance revenueInsurance revenue under IFRS 17 will be similar

to earned premiums for non-life business.However, insurance revenue will be provided for allcontracts, including life and participating contracts.

Operating pro�t subtotals are not de�ned in IFRS 17 (or in other IFRS Standards), but are likely

to refer to the sum of the insurance service result plus the net �nancial result.

The amounts presented in the net �nancial result will be affected by whether and to what

extent a company presents gains and losses in Other Comprehensive Income.

Insurance service resultplus net �nancial result

EXISTINGMETRICSEXISTINGMETRICS

EQUIVALENTIFRS 17 MEASURE

IMPACT OF IFRS 17

Earned premiums

Operating pro�t

1ie insurance contracts meeting the following conditions at initial recognition:• the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items;• the entity expects to pay to the policyholder an amount equal to a substantial share of the returns from the underlying items; and• a substantial proportion of the cash flows the entity expects to pay to the policyholder should be expected to vary with cash flows from the underlying items.

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13

Contractual servicemargin—CSM

The CSM of new business determined under IFRS 17represents the unearned profit on in-force business.The roll forward of the CSM will provide informationabout the amount of CSM added by new contracts

written in the period.

Prior-year claims adjustments are required to beseparately disclosed as a component

of the insurance contract liability roll forward.Experience adjustmentsand change in estimates

EXISTINGMETRICSEXISTINGMETRICS

EQUIVALENTIFRS 17 MEASURE

IMPACT OF IFRS 17

New business profit

Claims adjustments—non-life

UPR will be included in the overall insurance liability in the balance sheet and be separately identified

as the ‘liability for remaining coverage’ inthe notes with a detailed roll forward provided.

Investors will be able to analyse the LRC by components—present value of cash flows,

adjustment for risk and CSM.

Liability for remainingcoverage—LRC

Unearned premiumreserves—UPR

Claim or loss reserves will be included in the overall insurance contract liability

on the balance sheet, and separately identified as ‘liability for incurred claims’ in the notes,

with a detailed roll forward. The liability equals the probability-weighted expected

cash outflows plus explicit adjustment for risk.Discounting will be applied if material.

Liability for incurredclaims—LICClaim or loss reserves

Equivalent to the CSM portion ofthe liability under IFRS 17, although the measurement

principles differ.

Contractual servicemargin—CSMValue in force—VIF

DAC will not be presented as anasset under IFRS 17. Contract acquisition costs areincluded in insurance contract fulfilment cash flowsand are therefore reflected in the overall insurance

contract liability without being identified as a separatecomponent in the balance sheet (although the allocated

acquisition cost expense is reported separately in theincome statement).

Deferred acquisitioncosts—DAC

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