Example: tourism industry

Introduction to IFRS 17 - 3Blocks

www.3blocks.co Introduction to IFRS 17 - 4 Mar 2018 3Blocks ® 4 Introduction to IFRS 17 What is wrong with IFRS 4 IFRS 4 allows for a wide range of insurance liabilities modelling methods

Tags:

  Insurance, Introduction, Ifrs, Introduction to ifrs 17

Information

Domain:

Source:

Link to this page:

Please notify us if you found a problem with this document:

Other abuse

Text of Introduction to IFRS 17 - 3Blocks

Introduction to IFRS 17Pawel Wozniak, Agnieszka Hupert11 March 20183Blocks Introduction to IFRS 17 -4 Mar 2Introduction to IFRS 17AgendaBackground ........................................ .....3Building Blocks ........................................ 8Premium Allocation ...............................21Variabl e Fee ........................................ ....25Reporting ........................................ .........28Onerous Contracts ................................41Retros pective Value Approach ..............................48Mod. Retrospective Approach .............58Unbundling ........................................ ......66IFRS 17 vs Solvency II ...........................68Example ........................................ .........73Wrap-up ........................................ ...........80StandardIllustrative ExamplesBasis for ConclusionsIntroduction to IFRS 17 -4 Mar 3Introduction to IFRS 17BackgroundBackgroundIntroduction to IFRS 17 -4 Mar 4Introduction to IFRS 17What is wrong with IFRS 4IFRS 4 allows for a wide range of insurance liabilities modelling methods that can be applied as long as they satisfy the Liability Adequacy of comparability between countriesLack of comparability between companiesDifferent levels of safety embedded in insurance liabilities calculationsValuation of insurance liabilities does not have to be cash flow basedDiscounting is not always required, typicallynon-life TPs valued on undiscounted basisResults may be distorted by not adequately deferred acquisition expensesIFRS 4IFRS 17Phase I (2005)Phase II (2021)Insurance Contracts IFRSIntroduction to IFRS 17 -4 Mar 5Introduction to IFRS 17Timeline2017. . .2019202020212022First Exposure DraftSecond Exposure DraftIFRS 17 publicationTransitiondateEffective dateInitial applicationFirst IFRS 17fin. statements201020132018Drafting the new standardImplementationIFRS 17 reportingRetrospective implementation. . .Introduction to IFRS 17 -4 Mar 6Introduction to IFRS 17Measurementmodels overviewBuilding BlocksVariable FeePremium AllocationDefault approachContracts linked to underlying assetsSimilar to unearned premium reserveShort term contracts (1 year), pre-claim periodMethodOverviewApplicationRisk adjusted present value of future cash flows plus service marginEqual to underlying assetsBBAVFAPAAIncurred claims, Endowments,Term, Whole LifeUnit Links,Unitized With Profits1-year non-life, health or life insuranceExamplesIntroduction to IFRS 17 -4 Mar 7Introduction to IFRS 17Level of aggregationOnerous at initial recognitionCategory not applicable to the initial recognition no significant possibility of becoming onerousRemaining contracts [2] Profitability (*)[3] Underwriting periodInsurance Portfolio Subject to similar risks Managed together Within the same product line[1] Portfolio Contracts issued more than one year apart should not be included in the same group. [Cohorts]Insurance contracts have to be grouped across three dimensions:Groups established at initial recognition and their composition should not be changedGroups may be smaller that that prescribed quarterly instead of yearly cohorts, different groups for different levels for profitability, Sub-portfoliosRecognition and measurement applied at the insurance contracts group level.(*)-for reinsurance contracts held the reference to the onerous should be replaced with the net gain -onerous contract group may be identified by measuring the set of contracts instead of on the individual basis-regulatory pricing restrictions ( Gender Directive) driven profitability differentiation may be ignored Introduction to IFRS 17 -4 Mar 8Introduction to IFRS 17MeasurementMeasurementBuilding Blocks Approach (BBA)Introduction to IFRS 17 -4 Mar 9Introduction to IFRS 17Building BlocksTechnical ProvisionsFuture cash flowsTime valueof moneyRisk AdjustmentContractual Service MarginFulfilment CashflowsCSMBuilding Blocks Approach is a default IFRS 17 insurance liabilities measurement method The sameapproach for the initial and subsequent measurementInitial and subsequent measurement methods are different + for inflows - for outflows + or - dep. on the CF sign & struc + , Risk Adj. increases the TP + , CSMincreases the TP Sign convention:Introduction to IFRS 17 -4 Mar 10Introduction to IFRS 17Building Blocks -CashflowsTechnical ProvisionsFuture cash flowsTime valueof moneyRisk AdjustmentContractualService MarginBest estimate of cashflowsReassessed at each reporting dateAssumptions based on experienceReflect conditions existing at the measurement dateWithin boundary of the contractUnbundle distinct components: investments, derivatives or serviceCan be done at portfolio level and allocated to insurance groups012345Best estimatecash flowsExpensesClaimsAcquisitionPremiumRec ognitionThe earliest of the following beginning of the coverage period date when the first premium becomes due when the group becomes onerousCashflow boundary Ability to reassess the risk and change the premiums or benefits Possibility to do the reassessment at the portfolio levelIntroduction to IFRS 17 -4 Mar 11Introduction to IFRS 17BuildingBlocks Discounting [1]Technical ProvisionsFuture cash flowsTime valueof moneyRisk AdjustmentContractualServiceMarginExpect ed Losses (Probability of Default)Unexpected Losses (Cost of Downgrade)Liquidity PremiumGov. bonds curveRisk free curve0%1%2%3%4%5%6%7%8%012345TopDownBott om upIns. cashflows are not directly linked to assetsBottom-upTop-downRisk free+Liquidity premiumGov. BondsDefault Adjustment-Cost of Downgrade-Ins. cashflows directly linkedto assetsYield on the underlying assetsAdj. yield on the underlying assetsB74(b) Cash flows that vary based on the returns on any financial underlying items shall be: discounted using rates that reflect that variability; or adjusted for the effect of that variability and discounted at a rate that reflects the adjustment to IFRS 17 -4 Mar 12Introduction to IFRS 17BuildingBlocks Discounting [2]Technical ProvisionsFuture cash flowsTime valueof moneyRisk AdjustmentContractualService Margin-+Liquidity PremiumSwap rate curve=Gov. bonds curveCredit Risk SwapManufactured credit risk free bond constructed by combining a government bond and Credit Risk SwapInterest Rate Swap rate represent a risk free reference rate that excludes both credit and liquidity risk Negative Basis method:Liquidity PremiumProbability of defaultCost of DowngradeInterest Rate SpreadExpected lossesUnexpected lossesIntroduction to IFRS 17 -4 Mar 13Introduction to IFRS 17BuildingBlocks Discounting [3]Technical ProvisionsFuture cash flowsTime valueof moneyRisk AdjustmentContractualService MarginBottom-upapproachTop-downapproachL iquid 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 paidThe swap yield curve appropriate to the currency of the related cash swap yield curve plus the liquidity swap yield curve plus some portion of the liquidity Annuities, Single P. Endowments, Unit LinksGovernment Bonds curve less credit risk (Prob. of Default and Cost of Downgrade)No surrender riskSome surrender riskSubstantial surrender riskExamples Surrender risk Other liquidityindicators [Swap Rate] + [Liq Prem][Swap Rate] + F x [Liq Prem][Swap Rate][GovBond Rate] -[PD] -[CoD]Top-Down = Bottom-UpTop-Down Bottom-UpIntroduction to IFRS 17 -4 Mar 14Introduction to IFRS 17Building Blocks Risk Adjustment [1]Technical ProvisionsFuture cash flowsTime valueof moneyRiskAdjustmentContractualServiceMar ginLiabilitiesAssetsInsurance contractsReinsurance contracts heldLiabilitiesAssetsRARARARACompensatio n for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial the risk being transferred by the holder of the group of reinsurance contracts to the issuer of those to IFRS 17 -4 Mar 15Introduction to IFRS 17Building Blocks Risk Adjustment [1]Technical ProvisionsFuture cash flowsTime valueof moneyRiskAdjustmentContractualServiceMar ginRisk Adjustment calculation method not specified in the standard but it should follow the fallowing principles:-longer duration-higher severity-wider distribution-less is knownHigherriskGreater Risk Adjustment0%2%4%6%8%10%12%14%16%18%MeanC onditional Tail ExpectationValue at RiskConfidence level based methodsIntroduction to IFRS 17 -4 Mar 16Introduction to IFRS 17Building Blocks Risk Adjustment [2]Technical ProvisionsFuture cash flowsTime valueof moneyRiskAdjustmentContractualServiceMar ginCost of Capital methodProjection of SCR for non-hedgablerisk excluding the reins. risk mitigation effectsxCoCrateRisk Adjustment to Tech. of SCR for non-hedgableriskxCoCrateRisk Adjustment to Reins. Recoverables=Risk Adjustment to Tech. AdjustmentCost of Capital = SCR x [CoCRate]Risk Adjustment = Discounted Cost of Capital at risk free rateIntroduction to IFRS 17 -4 Mar 17Introduction to IFRS 17BuildingBlocks CSM -Initialmeasurement[1]Technical ProvisionsFuture cash flowsTime valueof moneyRiskAdjustmentContractualServiceMar ginRecognise Day 1 gainas the measurementDACRecogniseDay 1 lossin P& (*)(*) In some special cases discounting may work in the other direction. For example for single premium products, at the inception discounted cashflow will be greater than undiscounted cashflows. Introduction to IFRS 17 -4 Mar 18Introduction to IFRS 17BuildingBlocks CSM -Initialmeasurement[2]Technical ProvisionsFuture cash flowsTime valueof moneyRiskAdjustmentContractualServiceMar ginInitial measurementCSMInsurance contractsReinsurance contracts heldDay 1Gain(CSM)Day 1LossP&LCSMDay 1Gain(CSM)Day 1Loss(CSM)CSMDay 1 Gain recognised in the BS as the CSM. Day 1 Loss recognised as an expense in the Income Day 1 Gains and Day 1 Loss recognised in the BS as the to IFRS 17 -4 Mar 19Introduction to IFRS 17BuildingBlocks CSM -SubsequentmeasurementTechnical ProvisionsFuture cash flowsTime valueof moneyRiskAdjustmentContractualServiceMar ginSubsequent measurementInterest accreteat the locked-indiscount rate Future fulfilment cashflows estimate variance measured at locked-indiscount rate CSM cannot be negativeRelease to revenue in proportion to coverage units number of policies in-forceContractual Service MarginCSM[opening]DiscountRelease to revenueCSM[closing]Opening balanceAccretedinterestRelease to revenueEstimates varianceFulfilment CF variancesClosingbalance(*)(*) see the comment on the slide 16 Introduction to IFRS 17 -4 Mar 20Introduction to IFRS 17BuildingBlocks CSM -SubsequentmeasurementTechnical ProvisionsFuture cash flowsTime valueof moneyRiskAdjustmentContractualServiceMar ginSubsequent measurementInterest accreteat the locked-indiscount rateFuture fulfilment cashflows estimate variance measured at locked-indiscount rateRelease to revenue in proportion to coverage units number of policies in-forceContractual Service MarginCSM[opening]DiscountRelease to revenueCSM[closing]Opening balanceAccretedinterestRelease to revenueEstimates varianceFulfilment CF variancesClosingbalanceNew contractsAdditions to the groupThe effect of any new contracts added to the group in case the group has not be closed yet.(*)(*) see the comment on the slide 16 Introduction to IFRS 17 -4 Mar 21Introduction to IFRS 17MeasurementMeasurementPremium Allocation Approach (PAA)Introduction to IFRS 17 -4 Mar 22Introduction to IFRS 17Premium Allocation Initial measurementPremium Allocation ApproachNo cashflow projection requiredNo calculation of the RA and CSMBBA default, PAA optionalAllowed if:-is a reasonable approximation of BBA-coverage period is one year or lessPPA Liability EstimateFuture cashflowsDiscountingRA Building BlocksPremium Allocation CSMPremium receivedAcquisition costsDACTechnical ProvisionsInitial measurementIntroduction to IFRS 17 -4 Mar 23Introduction to IFRS 17Premium Allocation Subsequent measurement [1]Subsequent measurementPPA Liability EstimateUnexpired Risk(Remaining Coverage)Liability for Incurred Claims(Past Coverage) LossComponent Insurance LiabilityNon-Loss Component Future MeasurementFulfilment CashflowsDiscounting not required if the settlement is expected in no more than 1 year Introduction to IFRS 17 -4 Mar 24Introduction to IFRS 17Premium Allocation Subsequent measurement [2]Subsequent measurementTP[opening]Acquisition cashflowsTP[closing]Opening balancePremiumsreceivedAcquisition exp. CFDAC of DACAccreted interestPremiumsInterestRelease to revenueRelease to revenueClosing balance Accreting the interest depends on materiality of financing component Interest accrete at the discount rate at the inception Release to revenue in proportion to coverage units Includes revenue corresponding to the DAC amortisation. DAC amortisation recognised as acquisition expense At the same the corresponding revenue is releasedInvestment componentInvestment component The amounts that an insurance contract requires the entity to repay to a policyholder even if an insured event does not to IFRS 17 -4 Mar 25Introduction to IFRS 17MeasurementMeasurementVariable Fee Approach (VFA)Introduction to IFRS 17 -4 Mar 26Introduction to IFRS 17Variable Fee ApproachFair value of underlying assetsRisk AdjustmentCSMTechnical ProvisionsShare of FV of underlying assetsFulfilment CF that do not vary on returns Variable FeeVariable Fee ApproachClearly identified pool of underlying itemsSubstantial portion of cashflows will vary with changes in the fair value of the underlying assetsThe policyholder will receive a substantial share of the returns from the underlying assetsInitial measurementThe same as under the BBASubsequent measurementIntroduction to IFRS 17 -4 Mar 27Introduction to IFRS 17Variable Fee ApproachFair value of underlying assetsRisk AdjustmentCSMTechnical ProvisionsCSM[opening] Entity s share in the FV changeChange in future estimates CSM[closing]Release to revenue Share of FV of underlying assetsFulfilment CF that do not vary on returns P&LCSMBBA rulesCSM/P&LBBA rulesCSM/P&LIntroduction to IFRS 17 -4 Mar 28Introduction to IFRS 17ReportingReportingIntroduction to IFRS 17 -4 Mar 29Introduction to IFRS 17Building Blocks Initial CSMIncome StatementRevenueAccountIncurredClaimsInc urredExpensesOperatingInc/ExpFinancialIn c/ExpOCIOCIBalance SheetFulfilment CashflowsCSMBank AccountDeferredCostsAccrualsAcquisition expensesInitial acq. cost before the TP recognitionDerecognition of the initial DAC assetCrDrDrCrInitial CSMClaims future cashflowsExpenses future cashflowsCrDrCrDrRisk AdjustmentCrDrPremiums future cashflowsDrCrThe CSM cannot have the debit balance so in case of the initial loss the balance should be debited to Operating Costs in Income Statement instead of being recognised in the Balance on initial recognitionDrCr[A][B][A]An entity shall recognise DAC asset for any insurance acquisition cash flows relating to a group of issued insurance contracts that the entity pays or receives before the group is recognised. An entity shall derecognise this DAC asset when the group of insurance contracts to which this DAC relates is recognised.[B]Initial accounting for the CSMAcquisition cost future cashflowsCrDrIntroduction to IFRS 17 -4 Mar 30Introduction to IFRS 17Building Blocks Revenue & RA [1]Claims -ProjectedExpenses -ProjectedCSM Release to RevenueRevenue DAC -AmortizationIncome StatementRevenueAccountIncurredClaimsInc urredExpensesOperatingInc/ExpFinancialIn c/ExpCrCrCrCrDrOCIOCIBalance SheetFulfilment CashflowsCSMBank AccountDeferredCostsDrDrDrAccrualsRisk Adjustment Release to RevenueCrDrAcquisition expensesAcquisition Cost Systematic RecognitionCrDrB125, BC179 An entity shall determine insurance revenue related to insurance acquisition cash flows by allocating the portion of the premiums that relate to recovering those cash flows to each reporting period in a systematic way on the basis of the passage of time. An entity shall recognise the same amount as insurance service Adjustment Change of EstimateD/CC/DRAUnlike other elements of revenue, release of the risk adjustment to revenue includes discount unwinding effect. Similarly release of the Risk Adjustment to the CSM also includes the discount unwinding effects.[D][C][D][C]Revenue under the BBAIntroduction to IFRS 17 -4 Mar 31Introduction to IFRS 17Building Blocks Revenue & RA [2]Insurance liability recognition date Part 1 : DACPart 2 : Projected Acquisition CostsInitial MeasurementCSMDACDrCrCSMFulfilment CashflowsDrCrSubsequent MeasurementAcq. Costs (P&L)Revenue (P&L)DrCrFulfilment CashflowsRevenue (P&L)DrCrAcq. Costs (P&L)Cash at BankDrCrAcquisition CostsCashflowsAccounting for Acquisition CostsIntroduction to IFRS 17 -4 Mar 32Introduction to IFRS 17Building Blocks Premiums and Acquisition CostsProjectedActualFuture Periods Current Period CSMP&LPremiums and Acquisition CostsIntroduction to IFRS 17 -4 Mar 33Introduction to IFRS 17Building Blocks PremiumIncome StatementRevenueAccountIncurredClaimsInc urredExpensesOperatingInc/ExpFinancialIn c/ExpOCIOCIBalance SheetFulfilment CashflowsCSMBank AccountDeferredCostsAccrualsProjectedPre miums -Current ServiceActualPremiums Current ServiceProjectedPremiums Future Service PremiumsActualPremiums Future ServiceDrCrCrDrCrDrCrDrD/CD/CFuture Premiums Changes in EstimatesAcquisition expensesB123(a)(i) states that insurance revenue excludes changes in the liabilityresulting from premiums received cashflow. Consequently premium variances related to the current period cannot be included in revenue but should be recognized as operating income or (a) stipulates that the experience adjustments arising from premiums received in the period that relate to future service, adjusts the CSM.[E][E][F][F]Premiums under the BBAIntroduction to IFRS 17 -4 Mar 34Introduction to IFRS 17Building Blocks Acquisition costsActualAcquisition Costs Current ServiceAcquisition Cost Accrual Current ServiceAcquisition Costs Acquisition Costs Changes in EstimatesDrDrCrD/CC/DCrProjectedAcquisit ion Costs Future ServiceDrCrActualAcquisition Costs Future ServiceDrCrIncome StatementRevenueAccountIncurredClaimsInc urredExpensesOperatingInc/ExpFinancialIn c/ExpOCIOCIBalance SheetFulfilment CashflowsCSMBank AccountDeferredCostsAccrualsAcquisition expenses DAC amortization -Current ServiceCrDrProjectedAcquisition Costs -Current ServiceCrDr[L]If there are some acquisition expense that should recognized in the period but has not been paid the entity should follow thestandard accounting rules for expenses by accruing for them to ensure completeness of expenses in the given period.[L][M]B96(a) stipulates that the experience adjustments arising from the acquisition expenses paid in the period that relate to future service, adjust the CSM.[M]Acquisition Costs under the BBAIntroduction to IFRS 17 -4 Mar 35Introduction to IFRS 17Building Blocks ExpensesPaidExpenses Current ServiceOther Paid Expense Future ServiceExpenses Accrual. Current ServiceExpenses Expenses Changes in EstimatesDrDrDrCrCrDrD/CC/DDrCrProjected Expenses Future Service DrCrPaidExpenses Future ServiceDrCrIncome StatementRevenueAccountIncurredClaimsInc urredExpensesOperatingInc/ExpFinancialIn c/ExpOCIOCIBalance SheetFulfilment CashflowsCSMBank AccountDeferredCostsAccrualsAcquisition expensesB96(a) stipulates that the experience adjustments arising from the premium based expenses paid in the period that relate to future service, adjust the CSM.[J][J][I]If there are some operating expenses that should recognized in the period but has not been paid the entity should follow the standard accounting rules for expenses by accruing for them to ensure completeness of expenses in the given period.[I][K]If there are some operating expenses paid in the period that do no fall under article B96(a) but relate to future period. They should follow the standard accounting rules by being deferred to ensure that expense recognized in the period are not overstated.[K]Expenses under the BBAIntroduction to IFRS 17 -4 Mar 36Introduction to IFRS 17Building Blocks ClaimsDrDrC/DCrCrD/CD/CC/DClaims PaidClaims Incurred but not PaidIncurredclaims -Changes in EstimatesClaimsFutureclaims Changes in EstimatesIncome StatementRevenueAccountIncurredClaimsInc urredExpensesOperatingInc/ExpFinancialIn c/ExpOCIOCIBalance SheetFulfilment CashflowsCSMBank AccountDeferredCostsAccrualsAcquisition expenses[G]40(b) stipulates that the liability for incurred claims is measured at the related fulfilment cash flows value regardless whether the underlying contract have been initially measured under the PPA or not. [G][H]Changes in future claims estimate represent the change is future fulfilment cashflows estimates and adjust the CSM in accordancewith the Article 44 (c) [H]Accounting under the BBAIntroduction to IFRS 17 -4 Mar 37Introduction to IFRS 17Building Blocks InterestIncome StatementRevenueAccountIncurredClaimsInc urredExpensesOperatingInc/ExpFinancialIn c/ExpOCIOCIBalance SheetFulfilment CashflowsCSMBank AccountDeferredCostsAccrualsAcquisition expensesInterest on fulfillment CF Income StatementInterestInterest on fulfillment CF -OCI D/CC/DInterest on CSM at locked-in rateD/CC/DCrDr[N][N]Changes in financial assumptions do not have a substantial effect on the amounts paid to policyholdersDiscount rates determined at the date of initial recognition of a group of locked-in rateDiscount rates that allocate the remaining revised expected finance income or expenses over the remaining duration of the group of contracts at a constant rate; Changes in financial assumptions do have a substantial effect on the amounts paid to policyholdersT=0PV0(CurrCurve)=PV0(5%)T= 1PV1(CurrCurve) = PV1(3%)P&L :PV1(5%) -PV0(5%)OCI :PV1(3%) -PV1(5%) T=2PV2(CurrCurve) = PV2(1%)P&L :PV2(3%) -PV1(3%)OCI :PV2(1%) -PV2(3%) Interest under the BBAIntroduction to IFRS 17 -4 Mar 38Introduction to IFRS 17InterestFulfilment CashflowsInterest accreted on the CSMCurrent discount rates Locked-in rateChanges to the CSMInterest accreted under PAAPortion recognized in P&LChanges in financial assumptions do not have a substantial effect on the amounts paid to policyholdersLocked-In rateSystematic allocation rateChanges in financial assumptions do have a substantial effect on the amounts paid to policyholdersRate at the claim incurred dateIncurred claims under PPALocked-in rateLocked-in rateAccounting for insurance finance expenses and income Based on the weighted-averagediscount rates over the period that contracts in the group are issuedIntroduction to IFRS 17 -4 Mar 39Introduction to IFRS 17Income StatementIns. service resultOthOpresultNet financialresultIncome Statement layout based on the sources of incomethat have to be separated:-Insurance Service Result-Financial Result-Other Operating ResultIntroduction to IFRS 17 -4 Mar 40Introduction to IFRS 17Balance SheetAssetsLiabilitiesReinsurance recoverablesXPolicyholders debtorsXPolicyholders loansXReinsurance commissionXValue of business acquiredXUnearned premium reserveXMathematical reserveXUnit LinksXClaims reserveXAssetsLiabilitiesReinsurance contracts assetsXInsurance contracts assetsXInsurance contracts liabilitiesXReinsurance contracts liabilitiesXBEFOREAFTERLiability Experience and subrogationsXPresentation driven by the unit of accounting (insurance contacts group)Introduction to IFRS 17 -4 Mar 41Introduction to IFRS 17Onerous contractsOnerous ContractsIntroduction to IFRS 17 -4 Mar 42Introduction to IFRS 17Onerous contractsCash comp-onentDACCashinflowsCash outflowsRisk outflowsRisk comp-onentSplit between loss and non-loss componentIncome StatementReversal of losses on onerous contractsRevenueIntroduction to IFRS 17 -4 Mar 43Introduction to IFRS 17Full retrospective approachFull Retrospective ApproachIntroduction to IFRS 17 -4 Mar 44Introduction to IFRS 17Transitional provisions -Introduction2018201920202021First IFRS 17Fin. DateInitial ApplicationTransitionDateIAS 8 Article 19(b)Modified Retrospective Approach1Fair Value Approach2IAS 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 retrospectivelyCSM Transitional Provisions:Introduction to IFRS 17 -4 Mar 45Introduction to IFRS 17Application of transitional provisions2010-2021FV ApproachABCModified generations may be covered by different sets of transitional provisionsP2P3P1Different portfolios may be covered by different sets of transitional provisionsBCAThere may be different sets of modifications within the given transitional approachIntroduction to IFRS 17 -4 Mar 46Introduction to IFRS 17Historical values calculationsTechnical ProvisionsFuture cash flowsTime valueof moneyRisk AdjustmentContractual Service MarginFulfilment CashflowsCSMRecurrence formulaPast periods calculationsFulfilment cashflows estimate varianceCalculation of cashflows at each reporting date Determination of discount rates at each reporting date Risk margin calculationat each reporting date Introduction to IFRS 17 -4 Mar 47Introduction to IFRS 17Full retrospective approach stepsAssetsRisk 17CBAOther AssetsEquityOther 4CBDerecognize any existing balances that would not exist had IFRS 17 always appliedFor example-Non pre-recognition acq. costs related DAC asset-Unbundling of investment components-Reinsurance assets/liabilities presentation1Identify, recognize and measure each group of insurance contracts as if IFRS 17 had always applied2Recognize any resulting net difference in equity3DACIntroduction to IFRS 17 -4 Mar 48Introduction to IFRS 17Fair value approachFair Value ApproachIntroduction to IFRS 17 -4 Mar 49Introduction to IFRS 17Fair value conceptEstimating Fair Value with MCEV approachPVFPPresent Value of Future ProfitsTVOGTime Value of Options & GuaranteesFCRCFrictional Cost of Required capitalCRNHRCost of Residual Non-HedgeableRisksFair value of insurance liabilities can be estimated as the TP adjusted for VIF (Value in Force)VIFFair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction(not forced) in the principal (or most advantageous) market at the measurement date under current market conditions (iean exit price) regardless of whether that price is directly observable or estimated using another valuation techniqueFair Value Definition (IFRS 13, Art 24) IFRS 13 Art 47 floor deposit not applicable for IFRS 17 measurement (IFRS 17, Art C20)The fair value of a financial liability with a demand feature (ega demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paidIntroduction to IFRS 17 -4 Mar 50Introduction to IFRS 17Fulfilment Cashflows vs Fair ValueFulfillment CashflowsFair ValueOutside contact boundary if the entity has the practical ability to reassess the risks of the particular policyholder and, as a result, can set a price or level of benefits that fully reflects those risks Includes renewals even when the a has an ability to reassess the risk or terminate the contract Different types of risk taken into account it does not have to be a policyholder riskContract Boundaries Insurance cashflows directly linked to assets discounted using the yield of the related assets Insurance cashflows not linked directly to assets discounted using the discount rates determined with the top-down or bottom up approach Risk Neutral orReal Word discount rates No distinction between cashflows directly linked to asset and not directly linked to assets No prescribed methods to determine discount ratesDiscountRatesNot taken into accountIncluded in the valuation FCRC No prescribed method for the RA calculation Only non-financial risk covered by the RA No prescribed level of risk to be covered Cost of capital method, no CoCrate is prescribed All residual non-hedgeablerisk covered by the CRNHR Diversification effects to be taken into account Risk Adjustment(CRNHR)Introduction to IFRS 17 -4 Mar 51Introduction to IFRS 17Fair value approach -IntroductionFairValuePV of Future CashflowsRisk ValueFulfillment Cashflows CSMCSM 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 flowsFairValuePV of Future CashflowsRisk to IFRS 17 -4 Mar 52Introduction to IFRS 17VFA -Insurance contracts issuedFVPVCFRALossTPFVPVCFRALossTPFVPVCF RACSMTPFVPVCFRACSMTPFVPVCFRALossTPRARisk Adjustment has always credit balanceCSMCSM has always credit balanceFor insurance contracts issued:Introduction to IFRS 17 -4 Mar 53Introduction to IFRS 17FVA -Reinsurance contracts heldFVPVCFRACSMReFVPVCFRACSMReFVPVCFRACS MReFVPVCFRACSMReFVPVCFRACSMReRARisk Adjustment has always debit balanceCSMCSM may have both credit or debit balanceFor reinsurance contracts held:CSMIntroduction to IFRS 17 -4 Mar 54Introduction to IFRS 17Accounting for the fair value approach [1]Balance SheetFulfilment CashflowsCSMClaims future cashflowsExpenses future cashflowsCrDrCrDrRisk AdjustmentCrDrPremiums future cashflowsDrCrFair ValueCrAcquisition cost future cashflowsCrDrEquityDrIFRS 4 Technical ProvisionsDrCrFVPVCFRACSMIFRS 17 TPIFRS 4 TP/DACEqIntroduction to IFRS 17 -4 Mar 55Introduction to IFRS 17Accounting for the fair value approach [2]Balance SheetFulfilment CashflowsCSMClaims future cashflowsExpenses future cashflowsCrDrCrDrRisk AdjustmentCrDrPremiums future cashflowsDrCrFair ValueCrAcquisition cost future cashflowsCrDrEquityDrIFRS 4 Technical ProvisionsDrCrLoss componentCrDrFVPVCFRALossIFRS 17 TPIFRS 4TP/DACEqIntroduction to IFRS 17 -4 Mar 56Introduction to IFRS 17 DAC under the fair value approachExpected claims paymentsExpected expenses paymentsCSM amortization DAC amortizationIncome StatementRevenueAccountCrCrCrCrDrBalance SheetFulfilment CashflowsCSMDrDrDrRisk Adjustment release to revenueCrDrAcquisition CostsRelease of acquisition cost to revenueCrDrThis element does not exist under the fair value approachbecause past acquisition costs and the related revenue has been already reflected in the FV measurement and recognized in equityRevenue ComponentsTreatment of the implicit/quasi DACunder the FV ApproachIntroduction to IFRS 17 -4 Mar 57Introduction to IFRS 17FVA -Other modificationsIdentification ofinsurance groupsDefault Treatment FV Approach Modification Determined at the transition dateSize of cohortsContract issued within 1-year or lessCohorts can cover periods exceeding 1-year locked-in Discount RateDetermined at the insurance groupinitial recognition dateDetermined at the insurance groupinitial recognition dateDetermined at the transition dateDiscount rates variances recognisedin OCICalculated at each reporting dateCumulative effect calculatedat the transition dateInterest recognized in P&L (PPA claims incurred)Based on discount rates determined at the claims incurred dateBased on discount rates determined at the transition dateIntroduction to IFRS 17 -4 Mar 58Introduction to IFRS 17Modified retrospective approachModified Retrospective ApproachIntroduction to IFRS 17 -4 Mar 59Introduction to IFRS 17MRA -IntroductionCSMABDERisk AdjustmentCFCashflowsDiscount Rates6416=41The 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 Introduction to IFRS 17 -4 Mar 60Introduction to IFRS 17MRA -Cashflows modificationFULLRetrospective ApproachMODIFIEDRetrospective ApproachProjectionProjectionActualTransi tiondate or earlierTransitiondate or earlierIntroduction to IFRS 17 -4 Mar 61Introduction to IFRS 17MRA -Risk margin modificationFULL Retrospective ApproachMODIFIED Retrospective ApproachTransition date or earlierTransition date or earlierEstimated releases of the Risk AdjustmentTransition date Transition date Introduction to IFRS 17 -4 Mar 62Introduction to IFRS 17MRA -Discount rates modificationT-1T-2T-3IFRS 17 yield curve [A]Observable yield curve [B]Average A-B spread [C]Average [A]-[B] spreadBased on T-1, T-2, T-3Use 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 CIntroduction to IFRS 17 -4 Mar 63Introduction to IFRS 17MRA -CSM modification Contracts without DPFCSM0(Initial)Accreted interestCSM0Release to Revenue[CU Provided][CU Provided] + [CU Remaining]CSM0 xCSMT(Transition)Coverage Units provided since the inception dateCoverage Units remaining at the transition dateCSM0x { [1+r(0,1)] x [1+r(0,2)] x .... x [1+r(0,T)] -1 } CSM0x { [1+r(T,1)] x [1+r(T,2)] x .... x [1+r(T,T)] -1 } or allowed if the cohorts modification applied Introduction to IFRS 17 -4 Mar 64Introduction to IFRS 17MRA -CSM modification Contracts with DPFFair Value of underlying itemsFulfillment CashflowsCharges 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 itemsEstimated reduction in the Risk Adjustmentprior to the transitionCSM at the Inception DateCSM that relates to the period before the transition dateCSM at the Transition DateDeductAddDeductDeductDeductIntroduct ion to IFRS 17 -4 Mar 65Introduction to IFRS 17MRA -Other modificationsCohorts size can exceed1-year periodInsurance groups identification at transition date locked-in discount rates at the inception date (no cohorts simp.)OCI option calculationat transition dateContract classification at transition date locked-in discount rates at the transition date (cohorts simplification)Modified RetrospectiveFair Value ApproachOCI option -possibility to set the OCI element at Nil (cohorts simplification)Some modifications are contingent on the application of the cohorts size optionDPF Cont.: Equal to amount recog. in OCI on underl. assets (cohorts simp.)Introduction to IFRS 17 -4 Mar 66Introduction to IFRS 17UnbundlingUnbundlingIntroduction to IFRS 17 -4 Mar 67Introduction to IFRS 17UnbundlingEmbedded derivativesInvestment componentsService 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 distinctinvestment component The component is distinct if it is not highly interrelatedand could be sold separatelyin the same market The component is highly interrelatedif 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 distinctservice component promise to transfer goods or non-insurance services to a policyholder. The component is distinct if it is not highly interrelatedand 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)Financial Inc/Exp Financial Inc/Exp orOther Comp. IncomeRevenueIFRS 9IFRS 9IFRS 15Introduction to IFRS 17 -4 Mar 68Introduction to IFRS 17IFRS4 Phase II vs Solvency IIIFRS 17 vs Solvency IIIntroduction to IFRS 17 -4 Mar 69Introduction to IFRS 17Solvency II and IFRS 17 Differences [1]Solvency IIIFRS 17GoalCapital Adequacy and Risk Management frameworkShow financial position and result for the reporting , measurement, presentation and disclosure of insurance liabilitiesAssets and liabilities, Own Funds, Capital RequirementsContracts covered(Re)insurance contracts issued, Reinsurance contracts held , investments with DPFAll contracts giving rise to asset or liabilitiesGeographical coverageAll insurance and reinsurance companies in the world reporting under the European Union plus Iceland, Liechtenstein and NorwayAcquisition costRecognized over the insurance service period Recognized immediatelyDiscountingRisk free rate with adjustments: matching adj., volatility adj., discount rate transitionalRisk free rate plus illiquidity adjustmentInitial gainRecognized (negative Technical Provisions allowed)Initial gain recognized over contract term (negative Technical Provisions not allowed)Introduction to IFRS 17 -4 Mar 70Introduction to IFRS 17Solvency II and IFRS 17 Differences [2]Solvency IIIFRS 17Contract endSimilar as SII plus possibility to make the risk reassessment of the portfolio levelUnilateral right to terminate contract, amend premiums or benefitsShort-term contractsSimplification allowed for short term contractsNo special treatment of short-term contractsContract beginningEarlier of coverage period, first premium due, the group becomes onerousThe date the insurance company becomes a party to the contractRisk AdjustmentCost of Capital method, applied to TPsNo method prescribed. Risk Adjustment applied to both TPs and reinsurance requiredDistinct derivative, investment or service components should be unbundledGroupingGroups based on portfolio, profitability and underwriting period Homogeneous Risk GroupsExpensesCashflow models include only expenses that relate directly to the ins. contract fulfilmentCashflows models include overhead expensesIntroduction to IFRS 17 -4 Mar 71Introduction to IFRS 17Solvency II and IFRS 17 Differences [3]Solvency IIIFRS 17TransitionPossibility to apply transitional measures on TP or TP discount ratesPossible simplifications in relation to the CSM on existing date1 January 2021 with an earlier implementation option1 January 2016Reinsurance modelingReinsurance held and the related direct contract are modelled independently Reinsurance modelling mirrors modelling of the direct contractFuture acquisition costsAcquisition cost including future acquisition cost recognized in a systematic way Future acquisition cost included in the cashflow projection modelsDisclosuresDisclosures focused on explain the result for the period and the financial position Disclosures focused on the solvency position and risk management (QRT, SFCR, ORSA) Contracts with DPFDoes not regulate the country specific elements, IFRS are principle based Surplus Funds defined the UK regulations excluded from the TPsIntroduction to IFRS 17 -4 Mar 72Introduction to IFRS 17Solvency II vs IFRS 17 Balance SheetBest Estimate LiabilityAssetsRisk MarginOther LiabilitiesMCRBest Estimate LiabilityAssetsRisk AdjustmentContractual Service MarginShareholder equityOther LiabilitiesFree SurplusTechnical ProvisionsSCROwn FundsTechnical ProvisionsSolvency IIIFRS 17Spot the differenceIntroduction to IFRS 17 -4 Mar 73Introduction to IFRS 17ExampleExampleIntroduction to IFRS 17 -4 Mar 74Introduction to IFRS 17Example -AssumptionsPolicy Assumptions5 year term insuranceSingle premium 100EURSum assured 10,000EURNon-market assumptionsMortality rate annuallyLapse rate 0%Expense assumptionsAcquisition expenses 10%of premiumMaintenance expenses per policy -5EURMarket assumptionsDiscount rate 2%Portfolio of 1000 policies:-120-100-80-60-40-2002040012345 Thousand EURBest estimatecash flowsExpensesClaimsAcquisitionPremiumTer m Insurance with Single PremiumIntroduction to IFRS 17 -4 Mar 75Introduction to IFRS 17Example Base scenario0510152012345ThousandEURImpact of Service Marginon Profit & LossProfit or loss (withoutContractual servicemargin)The CSM eliminates Day 1 gain and smooths the EURProfit &LosselementsProfit or lossService Margin releaseRisk Adjustment releaaseInvestment result-40-20020406080012345Thousands EURLiabilityLiabilityBELRisk adjustmentService MarginIntroduction to IFRS 17 -4 Mar 0510152025303540End of Year3Cash flowsInterestRelease of RiskadjustmentRelease of Contractualservice marginEnd of Year4ThousandEURBalance Sheet Liability movement76Introduction to IFRS 17Example Base scenarioProfit or loss impactIntroduction to IFRS 17 -4 Mar 77Introduction to IFRS 17Example Shock scenario 1-8-6-4-2024612345ThousandEURImpact of shock scenario on Profit &LossProfit or loss (shock)Profit or loss (base)Shock scenario: negative mortality variance in year 2(no change in future cash flows).Small decrease of liability due to portfolio size variance hits P&L in 2nd EURProfit &Loss elementsProfit or lossService Margin releaseRisk Adjustment releaseInvestment result-40-20020406080100012345Thousands EURLiabilityLiabilityBELRisk AdjustmentService MarginIntroduction to IFRS 17 -4 Mar 78Introduction to IFRS 17Example Shock scenario of shock scenario on Profit or lossProfit or loss (shock)Profit or loss (base)Shock scenario: increase of mortality by 30% for future cash flows at the end of year of BEL compensated by decrease of Contractual Service margin no change in total of 3rd, 4th, 5th year profit due to decreased releases of contractual service EURProfit &Loss elementsProfit or lossService Margin releaseRisk Adjustment releaseInvestment result-40-20020406080012345Thousands EURLiabilityLiabilityBELRisk AdjustmentService MarginIntroduction to IFRS 17 -4 Mar 79Introduction to IFRS 17Example Shock scenario 3-101234512345ThousandEURImpact of shock scenario on Profit or lossProfit or loss (shock)Profit or loss (base)Shock scenario: increase of mortality by 50% for future cash flows at the end of year of BEL not fully compensated by decrease of service margin (cap). Negative impact on P&L in year of 3rd, 4th, 5th year profit due to decreased releases of Contractual service EURLiabilityBalance Sheet LiabilityBELRisk AdjustmentService EURProfit or loss elementsProfit or lossService Margin releaseRisk Adjustment releaseInvestment resultIntroduction to IFRS 17 -4 Mar 80Introduction to IFRS 17Wrap-upWrap-upIntroduction to IFRS 17 -4 Mar 81Introduction to IFRS 17Questions & AnswersWhat s that?That s the CSMIntroduction to IFRS 17 -4 Mar 82Introduction to IFRS 17Thank youPawel +44 7492 750133London [UK]Agnieszka +48 79305 4440Warsaw [Poland]

Related search queries