BANCASSURANCE IAS Insurance Project: Life Roma, 20 Novembre 2003 Assicurazioni Generali – Life Department – Dario Zuppi
BANCASSURANCE
IAS Insurance Project: LifeRoma, 20 Novembre 2003
Assicurazioni Generali – Life Department – Dario Zuppi
2
IAS Insurance Project: Life
� IAS 39: Financial Instruments
� Phase I for a Life Insurance Contract
� Investment Contract w/o DPF: Liabilities at Amortised Cost
� Investment Contract w/o DPF: Liabilities at Fair value
Agenda Part One
3
IAS Insurance Project: Life
� IAS 39: Financial Instruments
� Phase I for a Life Insurance Contract
� Investment Contract w/o DPF: Liabilities at Amortised Cost
� Investment Contract w/o DPF: Liabilities at Fair value
Agenda Part One
4
1. Held for Trading
2. Held to Maturity
3. Loans & Receivables
4. Available for Sale
Definitions and ClassificationCategories of Financial Instruments - Assets
Fair Value - Changes in P&L
Amortised Cost
Fair Value - Changes only in BS
Amortised Cost
Measurement
5
Categories of Financial Instruments - Liabilities
1. Held for trading“An entity is permitted to measure any financial liability at fair value, with changes in fair value recognised in profit or loss, by designating it at initial recognition as held for trading.”
2. Other
Definitions and Classification
Measurement: Fair Value - Changes in P&L
Measurement: Amortised Cost
6
IAS Insurance Project: Life
� IAS 39: Financial Instruments
� Phase I for a Life Insurance Contract
� Investment Contract w/o DPF: Liabilities at Amortised Cost
� Investment Contract w/o DPF: Liabilities at Fair value
Agenda Part One
7
Phase 1 Phase 1 Phase 1 Phase 1 –––– Insurance ContractInsurance ContractInsurance ContractInsurance Contract---- Example Description -
� Product: 10-year annual premium Endowment with Profit Sharing equal to 80% of return on GESAV fund
� Asset: ZCB with maturity equal to maturity date of Endowment
Italian GAAP:Liability: Italian GAAP
Asset: Included in GESAV fund and classified “Durevole”
Phase 1:Liability: Italian GAAP (No unbundling/separation of components)
Asset: Available For Sale and Trading
8
Phase 1 Phase 1 Phase 1 Phase 1 –––– Insurance ContractInsurance ContractInsurance ContractInsurance Contract
- Actual Experience equal to Best Estimate -
� Interest rates (at issue):Risk Free Rate Corporate ZCB Rate
– Year 1 5% 5.6%– Year 2 5% 5.6%– Year 3 5% 5.6%– ... ... ...
� Italian GAAP vs Phase 1 with Assets classified AFSAvailable for Sale: Fair Value / Changes only in Balance Sheet
9
Balance SheetAssets Liabilities
Premiums 1.162 284 0 Profits Fund∆ Reserves -1.014 -730 ProfitInvest. Income 18 0 Rev.ReservePayments -12 1.014 PH LiabilityExp./Commissions -885 0 Def. PH Liab.
Net Profit -730 284 284
Profit & Loss AccountBalance SheetAssets Liabilities
Premiums 1.162 284 0 Profits Fund∆ Reserves -1.014 -730 ProfitInvest. Income 18Payments -12 1.014 PH LiabilityExp./Commissions -885
Net Profit -730 284 284
Profit & Loss Account
Italian Gaap
Balance SheetAssets Liabilities
Premiums 1.153 1.409 -730 Profits Fund∆ Reserves -1.024 101 ProfitInvest. Income 78 0 Rev.ReservePayments -13 2.038 PH LiabilityExp./Commissions -93 0 Def. PH Liab.
Net Profit 101 1.409 1.409
Profit & Loss Account
Phase 1: AFS
Balance SheetAssets Liabilities
Premiums 1.153 1.409 -730 Profits Fund∆ Reserves -1.024 101 ProfitInvest. Income 78Payments -13 2.038 PH LiabilityExp./Commissions -93
Net Profit 101 1.409 1.409
Profit & Loss Account
Year1
Year2
Assets classified Trading: same as classified AFS
10
Phase 1 Phase 1 Phase 1 Phase 1 –––– Insurance ContractInsurance ContractInsurance ContractInsurance Contract
- Changes in market interest rates -
� Change in market interest rates during year 2:– RFR (4.4%) and Corporate ZCB (5.0%) expected in all future years;
� Italian GAAP vs Phase 1 w Assets classified AFS
� Phase 1: Assets classified AFS vs Assets classified Trading
11
Balance SheetAssets Liabilities
Premiums 1.153 1.409 -730 Profits Fund∆ Reserves -1.024 101 ProfitInvest. Income 78Payments -13 2.038 PH LiabilityExp./Commissions -93
Net Profit 101 1.409 1.409
Profit & Loss Account Balance SheetAssets Liabilities
Premiums 1.153 1.475 -730 Profits Fund∆ Reserves -1.024 101 ProfitInvest. Income 78 13 Rev.ReservePayments -13 2.038 PH LiabilityExp./Commissions -93 53 Def. PH Liab.
Net Profit 101 1.475 1.475
Profit & Loss Account Balance SheetAssets Liabilities
Premiums 1.153 1.475 -730 Profits Fund∆ Reserves -1.024 114 ProfitInvest. Income 144 0 Rev.ReservePayments -13 2.038 PH LiabilityExp./Commissions -93 53 Def. PH Liab.∆ Def PH Liability -53Net Profit 114 1.475 1.475
Profit & Loss Account
Italian Gaap Phase 1: AFS
Year1
Year2
Balance SheetAssets Liabilities
Premiums 1.162 284 0 Profits Fund∆ Reserves -1.014 -730 ProfitInvest. Income 18Payments -12 1.014 PH LiabilityExp./Commissions -885
Net Profit -730 284 284
Profit & Loss Account Balance SheetAssets Liabilities
Premiums 1.162 284 0 Profits Fund∆ Reserves -1.014 -730 ProfitInvest. Income 18 0 Rev.ReservePayments -12 1.014 PH LiabilityExp./Commissions -885 0 Def. PH Liab.
Net Profit -730 284 284
Profit & Loss Account
Phase 1: Trading
Balance SheetAssets Liabilities
Premiums 1.162 284 0 Profits Fund∆ Reserves -1.014 -730 ProfitInvest. Income 18 0 Rev.ReservePayments -12 1.014 PH LiabilityExp./Commissions -885 0 Def. PH Liab.∆ Def PH Liability 0Net Profit -730 284 284
Profit & Loss Account
12
Phase 1 Phase 1 Phase 1 Phase 1 –––– Insurance ContractInsurance ContractInsurance ContractInsurance Contract
- Changes in market interest rates -
� P&L and/or NAV Volatility
� HTM and Tainting Rule
� Deferred Policyholder Liability (and US-GAAP Shadow Accounting)
� Taxes imply UGL split into 3 components:– Revaluation Reserve– Deferred Policyholder Liability– Deferred Taxes
13
IAS Insurance Project: Life
� IAS 39: Financial Instruments
� Phase I for a Life Insurance Contract
� Investment Contract w/o DPF: Liabilities at Amortised Cost
� Investment Contract w/o DPF: Liabilities at Fair value
Agenda Part One
14
Amortised CostAmortised CostAmortised CostAmortised Cost---- Liability Measurement for Investment Contracts -
� AC based on Effective Interest Method to amortised difference between:– Initial Amount (Net Premium + some FEL – some AC);– Maturity amount;– Also allowing for expected prepayment pattern and write-downs.
� Effective Interest Rate, i.e. internal rate of return of expected cash flows (Initial Amount, expected prepayments, maturity amount).
� AC: initial amount capitalised at EIR less expected payments.
� AC: does not reflect changes in the interest rates but
� AC: takes into account surrender changes
15
Amortised Cost MethodEIR
5,60%
CF ACw/o surrender/death
9.401 - - - - - - - - -
16.211-
9.401 9.928
10.484 11.071 11.691 12.345 13.037 13.767 14.538 15.352
0
EIR5,54%
CF ACw surrender/death
9.401 309- 317- 326- 335- 345- 355- 366- 379- 391-
12.031-
9.401 9.613 9.828
10.046 10.268 10.491 10.717 10.945 11.172 11.400
0
16
Amortised Cost MethodEIR
5,54%
CF ACw surrender/death
9.401 309- 317- 326- 335- 345- 355- 366- 379- 391-
12.031-
9.401 9.613 9.828
10.046 10.268 10.491 10.717 10.945 11.172 11.400
0
EIR5,93%
9.103 309- 317- 326- 335- 345- 355- 366- 379- 391-
12.031-
9.103 9.334 9.570 9.812
10.059 10.310 10.567 10.827 11.091 11.358
0
298 279 258 235 209 181 151 117 81 42 0
CF ACw surrender/death/expenses Expenses Deferral
SameforFront End Load
17
� Product: 10-year ZCB Contract - with maturity equal to net single premium capitalised at guaranteed rate (5.6%) and penalty in case of surrender
� Asset: ZCB (5.6%), maturity equal to maturity date of investment contract
� Italian GAAP (individual accounts on which taxes are based):– Liability: Italian GAAP (incl. management reserve)– Asset: classified “Durevole”
� Phase 1 (consolidated accounts while taxes on individual):– Liability: Amortised Cost – Asset: Available For Sale
Phase 1 Phase 1 Phase 1 Phase 1 –––– Investment ContractInvestment ContractInvestment ContractInvestment Contract---- Example Description -
Assumption:FEL = Acquisition Cost
Italian Mgt Reserve is Acceptable
18
Investment ContractInvestment ContractInvestment ContractInvestment Contract
- Actual Experience equal to Best Estimate -
� Interest rates (at issue):
Risk Free Rate Corporate ZCB Rate– Year 1 5% 5.6%– Year 2 5% 5.6%– Year 3 5% 5.6%– ... ... ...
� Italian GAAP vs Liabilities at Amortised Cost and Assets classified as Available for Sale
19
Italian Gaap Assets AFS / Liabilities AC
Year1
Year2
Balance SheetAssets Liabilities
Acq. Load Profit 0 9.898 0 Profits FundMGT. Load Profit 20 17 ProfitSurrender Profit 6 0 Rev.ReserveTech. Interest -526 9.881 PH LiabilityTech. Invest. Inc. 526 0 Def. TaxOther Invest. Inc. 0Taxes -9Net Profit 17 9.898 9.898
Balance SheetAssets Liabilities
Acq. Load Profit 0 10.098 17 Profits FundMGT. Load Profit 18 17 ProfitSurrender Profit 6 0 Rev.ReserveTech. Interest -538 10.065 PH LiabilityTech. Invest. Inc. 538 0 Def. TaxOther Invest. Inc. 1Taxes -9Net Profit 17 10.098 10.098
Profit & Loss Account
Profit & Loss AccountBalance SheetAssets Liabilities
Premiums 10.000 9.898 0 Profits Fund∆ Reserves -9.881 17 ProfitInvest. Income 543Payments -309 9.881 PH LiabilityAcq.Exp./Comm. -298Mgt Expenses -29Taxes -9Net Profit 17 9.898 9.898
Balance SheetAssets Liabilities
Premiums 0 10.098 17 Profits Fund∆ Reserves -184 17 ProfitInvest. Income 554Payments -317 10.065 PH LiabilityAcq.Exp./Comm. 0Mgt Expenses -28Taxes -9Net Profit 17 10.098 10.098
Profit & Loss Account
Profit & Loss Account
20
� Changes in market interest rates: same considerations as in the case of Life Insurance contract in Phase 1.
� Changes in Surrenders: Italian GAAP different from Amortised Cost...
Phase 1 Phase 1 Phase 1 Phase 1 –––– Investment ContractInvestment ContractInvestment ContractInvestment Contract---- Final Remarks -
21
9.401 309- 317- 229- 239- 249- 259- 272- 285- 299-
13.197-
Amortised Cost Method
w Surr/Deathw surrender/death/expenses/load
EIR5,54%
9.401 309- 317- 326- 335- 345- 355- 366- 379- 391-
12.031-
9.401 9.613 9.828
10.046 10.268 10.491 10.717 10.945 11.172 11.400
0
EIR5,54%
Impairment9.401 9.613
10.047 10.374 10.710 11.054 11.407 11.766 12.132 12.505
-
219
w. change in expected Surr. patternw surrender/death/expenses/load
� AC: takes into account surrender changes
22
IAS Insurance Project: Life
� IAS 39: Financial Instruments
� Phase I for a Life Insurance Contract
� Investment Contract w/o DPF: Liabilities at Amortised Cost
� Investment Contract w/o DPF: Liabilities at Fair value
Agenda Part One
23
Fair Value Accounting
� Present Value of projected cash flows
� Possibly stochastic, market consistent valuation of options and guarantees
� Assumptions: Economic (market) and Non-Economic (Entity-specific)– Discount Rate: derived from current yield curve
� Explicit margin in cash flows for insurance and expense risk– Explicit Risk Margins: Market Value Margin
� IAS hierarchy for determining fair value– Market value (MV)– MV of similar instruments– Discounted future cash flows
Fair value measurement
Applies to most insurance contracts
Main Implications for Reserving
24
Asset and liability approach
t Stat EV FV1 (1.816) 2.537 2.5372 579 107 533 790 101 1044 404 89 45 501 86 256 602 80 507 708 71 778 815 59 1069 923 43 13710 1.030 24 170
Profit Signature
Release of risk margin
Acquisitionexpenses
Immediate profit recognition
Comparison of Italian (‘Stat’), embedded value (‘EV’),and fair value (‘FV’) accounting
Board amendment
� No gain at inception unless “market evidence”
25
Investment ContractInvestment ContractInvestment ContractInvestment Contract- Liabilities = Fair Value -
� Deterministic Approach because no asymmetrical liability outcome
� Hence Fair Value equal to PV of future Cash Flows, where– Fees at mkt level, hence zero initial profit recognition (implied mgt exp
assumption: best estimate * 150%);– Surrender: according to best estimate;– Discount rate: current rate according to Insurer’s creditworthiness
(5.6% expected in all future years)
26
Balance SheetAssets Liabilities
Acq. Load Profit 0 9.898 0 Profits FundMGT. Load Profit 17 44 ProfitSurrender Profit 52 0 Rev.ReserveTech. Interest -526 9.839 PH LiabilityTech. Invest. Inc. 526 15 Def. TaxOther Invest. Inc. 0Taxes -24Net Profit 44 9.898 9.898
Balance SheetAssets Liabilities
Acq. Load Profit 0 10.098 44 Profits FundMGT. Load Profit 16 13 ProfitSurrender Profit 0 0 Rev.ReserveTech. Interest -538 10.029 PH LiabilityTech. Invest. Inc. 538 13 Def. TaxOther Invest. Inc. 3Taxes -7Net Profit 13 10.098 10.098
Profit & Loss Account
Profit & Loss Account
Assets Trading / Liabilities AC Assets Trading / Liabilities FV
Year1
Year2
Balance SheetAssets Liabilities
Acq. Load Profit 0 9.898 0 Profits FundMGT. Load Profit 20 17 ProfitSurrender Profit 6 0 Rev.ReserveTech. Interest -526 9.881 PH LiabilityTech. Invest. Inc. 526 0 Def. TaxOther Invest. Inc. 0Taxes -9Net Profit 17 9.898 9.898
Balance SheetAssets Liabilities
Acq. Load Profit 0 10.098 17 Profits FundMGT. Load Profit 18 17 ProfitSurrender Profit 6 0 Rev.ReserveTech. Interest -538 10.065 PH LiabilityTech. Invest. Inc. 538 0 Def. TaxOther Invest. Inc. 1Taxes -9Net Profit 17 10.098 10.098
Profit & Loss Account
Profit & Loss Account
27
Investment ContractInvestment ContractInvestment ContractInvestment Contract
- Changes in market interest rates -
� Change in market interest rates during year 1:– RFR (4.4%) / Corporate ZCB (5.0%) / Liability Discount Rate (5.0%)
� Change in market interest rates during year 2:– RFR (5%) / Corporate ZCB (5.6%) / Liability Discount Rate (5.6%)
� AC and Assets classified Trading vs Fair Value and Assets Trading
28
Assets Trading / Liabilities AC AssetsTrading / Liabilities FV
Balance Sheet Balance SheetAssets Liabilities Assets Liabilities
Acq. Load Profit 0 10.431 0 Profits Fund Acq. Load Profit 0 10.431 0 Profits FundMGT. Load Profit 36 367 Profit MGT. Load Profit 26 102 ProfitSurrender Profit 6 0 Rev.Reserve Surrender Profit 53 0 Rev.ReserveTech. Interest -526 9.881 PH Liability Tech. Interest -971 10.289 PH LiabilityTech. Invest. Inc. 1.049 183 Def. Tax Tech. Invest. Inc. 1.049 40 Def. TaxOther Invest. Inc. 0 Other Invest. Inc. 0Taxes -198 Taxes -55Net Profit 367 10.431 10.431 Net Profit 102 10.431 10.431
Balance Sheet Balance SheetAssets Liabilities Assets Liabilities
Acq. Load Profit 0 10.110 367 Profits Fund Acq. Load Profit 0 10.110 102 Profits FundMGT. Load Profit 4 -322 Profit MGT. Load Profit 9 -33 ProfitSurrender Profit 6 0 Rev.Reserve Surrender Profit 1 0 Rev.ReserveTech. Interest -538 10.065 PH Liability Tech. Interest -94 10.029 PH LiabilityTech. Invest. Inc. 32 0 Def. Tax Tech. Invest. Inc. 32 13 Def. TaxOther Invest. Inc. 0 Other Invest. Inc. 0Taxes 173 Taxes 18Net Profit -322 10.110 10.110 Net Profit -33 10.110 10.110
Profit & Loss Account Profit & Loss Account
Profit & Loss Account Profit & Loss Account
Year1
Year2
29
Mismatching
CF123456789
10
AssetCF
123456789
10
Liability5,60% 5,60%
-100,00,00,00,00,00,00,00,00,0
172,4
100,0-5,0-5,0-5,0-5,0-5,0-5,0-5,0-5,0
-111,8
5,0% 5,0%
Mkt Val Mkt Val-105,9 104,45,9 4,4
30
Balance SheetAssets Liabilities
Acq. Load Profit 0 10.750 0 Profits FundMGT. Load Profit 19 13 ProfitSurrender Profit 0 0 Rev.ReserveTech. Interest -1.049 10.735 PH LiabilityTech. Invest. Inc. 1.049 3 Def. TaxOther Invest. Inc. 0Taxes -7Net Profit 13 10.750 10.750
Balance SheetAssets Liabilities
Acq. Load Profit 0 10.751 13 Profits FundMGT. Load Profit 3 2 ProfitSurrender Profit 0 0 Rev.ReserveTech. Interest -34 10.736 PH LiabilityTech. Invest. Inc. 34 0 Def. TaxOther Invest. Inc. 0Taxes -1Net Profit 2 10.751 10.751
Profit & Loss Account
Profit & Loss Account
Balance SheetAssets Liabilities
Acq. Load Profit 10.431 0 Profits FundMGT. Load Profit 26 102 ProfitSurrender Profit 53 0 Rev.ReserveTech. Interest -971 10.289 PH LiabilityTech. Invest. Inc. 1.049 40 Def. TaxOther Invest. Inc. 0Taxes -55Net Profit 102 10.431 10.431
Balance SheetAssets Liabilities
Acq. Load Profit 10.110 102 Profits FundMGT. Load Profit 9 -33 ProfitSurrender Profit 1 0 Rev.ReserveTech. Interest -94 10.029 PH LiabilityTech. Invest. Inc. 32 13 Def. TaxOther Invest. Inc. 0Taxes 18Net Profit -33 10.110 10.110
Profit & Loss Account
Profit & Loss Account
Assets Trading / Liabilities FV Assets Trading / Liabilities FV
Year1
Year2
Without Surrender / Death