IFRS 17: “What to Expect When You’re Expecting' · Session 055 PD - IFRS 17: “What to Expect When You’re Expecting" Moderator: Kathleen Kelly Bachman, FSA, MAAA . Presenters:

Session 055 PD - IFRS 17: “What to Expect When You’re Expecting"

Moderator:

Kathleen Kelly Bachman, FSA, MAAA

Presenters: Kathleen Kelly Bachman, FSA, MAAA

Laura S. Gray, FSA, MAAA Tara J. P. Hansen, FSA, MAAA

Rebecca M. L. Rycroft, FSA, FCIA, MAAA

SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer

http://www.soa.org/legal/antitrust-disclaimer/

https://www.soa.org/legal/presentation-disclaimer/

2017 SOA Annual Meeting & ExhibitKATHY BACHMAN, FSA, MAAA – WILLIS TOWERS WATSONREBECCA RYCROFT, FSA, FCIA, MAAA – OLIVER WYMANTARA HANSEN, FSA, MAAA – EYLAURA GRAY, FSA, MAAA – KPMG

Session 55 – IFRS 17 – What to Expect When You’re Expecting

October 16, 2017

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WHAT TO EXPECT…A NEW ACCOUNTING STANDARD

KATHY BACHMAN

TARA HANSEN

LAURAGRAY

REBECCA RYCROFT

SOCIETY OF ACTUARIESAntitrust Compliance Guidelines

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Presentation Disclaimer

Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice.

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KATHY BACHMAN, FSA, MAAA – WILLIS TOWERS WATSON

willistowerswatson.com

2017 SOA Annual Meeting

IFRS 17 – What to Expect When You’re Expecting

October 16, 2017

Kathy Bachman, FSA, MAAA

© 2017 Willis Towers Watson. All rights reserved.


Agenda

Timeline

Definitions

Measurement Models

© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.7


The IFRS insurance contracts standard – 20 years in the making

Mandatory for annual periods beginning

on or after

1 January 2021

Opening balance sheet required as of

1 January 2020

Early adoption possible

The story so far – now the interesting part really starts

1997 Kick-off IASC starts the Insurance Contracts project

2002 May Insurance project split into Phase 1 and Phase 2

2004 March IFRS 4 Insurance contracts ‘Phase 1’ issued

2007 May Discussion Paper: Preliminary views

2010 July Exposure Draft Insurance Contracts

2013 July Re-Exposure Draft Insurance Contracts

2017 May Publication of IFRS 17 Insurance Contracts



Reasons for issuing the standard

Replaces IFRS 4

Comparability among companies across the globe

Difficult to reflect the long-term nature and complexity of insurance products

Hybrid insurance and investment contracts is challenging



Who is impacted?IFRS Preparers by region & world map

Preparers by region

EuropeAsia PacificCanadaAfrica, ME, LatAm



Scope

An entity shall apply IFRS 17 to:

Insurance contracts, including reinsurance contracts, it issues;

Reinsurance contracts it holds; and

Investment contracts with discretionary participation features it issues, provided the entity also issues insurance contracts.



Definitions

Insurance Contract

A contract under which an insurer accepts significant insurance risk by agreeing to compensate the policyholder if a specified uncertain future event (insured event) adversely affects the policyholder.

Investment Contract with discretionary participation features

A financial instrument that provides a particular investor with the contractual right to receive, as a supplement to an amount not subject to the discretion of the issuer, additional amounts:a) That are expected to be a significant portion of the total contractual benefits;b) The timing or amount of which are contractually at the discretion of the issuer; andc) That are contractually based on:

i. The returns on a specified pool of contracts or a specified type of contract;ii. Realized and/or unrealized investment returns on a specified pool of assets held by

the issuer; oriii. The profit or loss of the entity or fund that issues the contract.



Contract boundary

Contract boundary is the time period during which premiums are paid and the insurance coverage is in place The contract boundary ends when the insurer can reassess the risks of policyholder and reset the

premiums or level of benefits based on this new information. Examples:

Term insurance that automatically renews (no new underwriting) Term conversion to whole life (no new underwriting) Replacement policy where there is new underwriting

An entity shall not recognize as a liability/asset any amounts relating to expected premiums/claims outside the boundary of the insurance contract. Such amounts relate to future insurance contracts.



Onerous contracts

At the date of initial recognition, an insurance contract is onerous if:

fulfillment cash flows, plus any previously recognized acquisition

cash flows, plus any cash flows arising from the contract

at the date of initial recognition

in total are a net outflow.



Grouping of contracts

Each portfolio is then divided into three groups:

Contracts in each group need to be sub-divided into annual cohorts

Contracts initially to be split into “portfolios”, meaning contracts that are subject to similar risks and managed together.

Contracts that are onerous at initial recognition

Contracts that at initial recognition have no significant possibility of becoming onerous subsequently

The remaining contracts in the portfolio



IFRS 17 – The General Measurement ModelBuilding Block Approach (BBA)

Cash flows

Time value of money

Risk adjustment

Contractual service margin

Total Insurance Contract Liability

Fulfilment cash flows: Component representing the

risk-adjusted present value of future cash flows needed to fulfil the contract

Component representing unearned profit the insurer expects to earn

as it fulfils the contract



Expected defaultsResidual

credit risk

Discount rate

Discount rates – Alternative approaches

Expected reference rate

Illiquidity premium

Risk free rate

Bottom up Top down

No single method prescribed to assess discount rate

Should be consistent with observable current market prices for instruments with same characteristics as insurance liability

Exclude effect of own credit risk and other factors not relevant to liability

Illustrative



Premium Allocation Approach (PAA)

Simplified approach that can be applied if and only if: It is reasonably expected that such simplification would produce a measurement of the liability for

the remaining coverage that would not differ materially from the one that would be produced using the building block approach.

Coverage period is one year or less

Option to reflect acquisition costs as an expense when incurred or as an asset to be amortized over time

Liability = premiums received less acquisition costs Similar to unearned premium reserves

Discounting is not required so long as coverage period is one year or less



Reinsurance contracts held

Reinsurance contracts are divided into portfolios

An onerous reinsurance contract is one which has a net gain on initial recognition

Measurement Use consistent assumptions for the estimates of future cash flows of the reinsurance contracts and

the estimates of the future cash flows of the underlying contracts Include the effect of any risk of non-performance of the reinsurer, including the effects of collateral

and losses from disputes

Risk adjustment for non-financial risk represents the amount of risk being transferred



Reinsurance contracts (cont’d)Premium allocation approach

Simplified approach can be used as if, at inception of the group: Resulting measurement would not differ materially Coverage period of each contract in the group is one year or less



IFRS 17 – More complex than a fair value approach (MCEV, Solvency II)The principle based reporting standard is coming with little guidance & field testing. The standard document is comprised of 116 pages of text.

3. The “CSM” as anunknown animal

4. Accounting options for P&L smoothing

2. Measurement depends on the cash-flow characteristics

IncreasedComplexity

1. Granularity of measurementGrouping should ensure that cash-flows have similar sensitivity to key risks, but should not group contracts issued more than 1 year apart; 3 groups per ‘portfolio’

Required to eliminate Day 1 profit. Is it deferred profit, shock absorber or simply a balancing number?

Different approaches depending on direct participation features and asset cash dependency; simplified P&C approach

No methods prescribed to derive discount curves or risk adjustment. Accounting option to use OCI or not for a systematic split of investment result.

The implementation of IFRS 17 is open to many interpretations and judgment, and a wide range of practices may develop


REBECCA RYCROFT, FSA, FCIA, MAAA –OLIVER WYMAN

© Oliver Wyman

Rebecca Rycroft, FSA, FCIA, MAAA

THE GENERAL MODEL

24© Oliver Wyman

IFRS Insurance Contract Liability =

For contract types:• Long-term and whole life insurance, protection business• Life contingent annuities• Universal life• Reinsurance contracts • Par/non-par not qualifying for Variable Fee Approach

The basics of the General Model

PV of cash flows

(current)

Risk adjustment

(current)

Unearned profit

(non-current)

25© Oliver Wyman | NYC-ADM54201-001

General ModelDefault approach for most life insurance and longer duration Group or P&C contracts

Total insurance contract liability

Contractual Service Margin (CSM)

Risk Adjustment (RA)

Time value of money

Future cash flows

Probability weighted discounted future

cash flows

Fulfilment Cash flows:

risk-adjusted, probability-weighted

present value of future cash flows

needed to fulfill the contract

CSM eliminates Day 1 gain


Estimates of future cash flowsComponents

ESTIMATE OFFUTURE CASH

FLOWS

Use reasonable and supportable information available without undue cost or effort

Objective = Determine the expected value (mean) of possible outcomes≠ “most likely scenario” (mode)≠ “more likely than not scenario”≠ a “forecast”

Each scenario to include:• Amount and timing of CF’s (severity)• Probability of that outcome (frequency)• Include: tail events (catastrophes)

Objective and Scenario based

The entity shall:• Maximize use of observable inputs• NOT substitute internal estimates for

observable market data• IF (data not available and need to be

estimated)THEN: be as consistent to market as possible

Replicating Portfolio - An asset whose CF’s match exactly those of the insurance contracts in question

Observable inputs/Replicating Portfolio

Review and update estimates made at end of previous reporting period. Consider whether:• Updated estimates are “faithful”

representations• ∆’s to estimates “faithfully” represents ∆’s to

conditions

Regularly review and update estimatesEstimate separately:• Risk adjustment (non-financial risk)• Time value of money and financial risk adjustment

IF (Using fair value of replicating portfolio technique)THEN… exempt from explicit requirement

Explicit assumptions or Fair Value


Estimate of future cash flowsContract boundary

Inside boundary

• Insurer not able to “reassess” risk− “Reassess” means:

o Set a new price and/oro Re-underwrite

• Insurer required to provide coverage• Policyholder may renew

Include in measurement:Existing Insurance Contracts

Outside boundary

• Company no longer required to provide coverage

• Policyholder has no right of renewal

• Company has practical ability to “reassess” for the risk

Exclude from measurement:Future Insurance Contracts

“…Essence of a contract is that it binds one or both parties…” –BC160, excerpt


General Model Discount rates

A discount rate that adjusts future cash flows for the time value of money



Time value of money

Future cash flows

Per paragraph 36(a) discount rates shall reflect

1. Time value of money“Amount payable tomorrow has a value different from that of the same amount payable in 10 years’ time”

2. Characteristics of cash flowsAre cashflows dependent on:• underlying returns?• embedded options?

3. Liquidity characteristic of insurance contracts• Entity cannot be forced to make payments earlier than occurrence of insured events, or dates

specified in contract.


General ModelDiscount ratesIFRS 17 does not prescribe any particular discount rate estimation technique, but…

ESTIMATION CONSIDERATIONS

Maximize use of observable inputs• Reflect all reasonable and supportable info on

non-market variables− Without undue cost / effort− Both external and internal

• Discount rate shall not contradict available / relevant market data

• Non-market variable shall not contradict observable market variables

− Especially for longer durations, past the observable market

Exercise judgment

Reflect current market conditions - from the perspective of a market participant.

… in applying any estimation technique, the entity shall:


Reference portfolio rate 4.5%

Market risk premium for expected credit losses -1.0%

Market Risk premium for unexpected credit losses -0.5%

Insurance contract discount rate (Top-down) 3.0%

Difference between the two methods need not be reconciled

Insurance contract discount rate (Bottom-up) 2.5%

Illiquidity premium 0.5%

Risk free rate of return 2.0%

General Model Discount ratesTop-down vs. Bottom-up

For illustrative purposes only(Actual discount rates will have a term structure)

Source: IFRS: Example of investor handout on IFRS 17 Insurance Contracts, July 2017


Risk Adjustment will be separately disclosed, so separation of BE vs. RA is important

General Model Risk Adjustment

An explicit estimate of the effects of uncertainty about the amount and timing of future cash flows that arises from non-financial risk

• Compensation the entity would require to be indifferent between fulfilling a contract with a range of possible outcomes and fulfilling a contract with fixed cash flows of same expected value

• Determined at a level that reflects the degree of diversification benefit• Only insurance contract risks included:

– No asset default risk (in discount rate)– No asset-liability mismatch risk

• No prescribed approach (Confidence interval/CTE, Cost of capital, Stress testing)– Disclose confidence level



Time value of money

Future cash flows



Time value of money


General ModelRisk Adjustment

Risks are low frequency, high severity Risks are high frequency, low severity

Contracts have longer duration Contracts have shorter duration

Risks have wide probability distributions

Risks have narrower probability distributions

Less is known about the current estimate and trends

More is known about current estimate and trends

Emerging experience does not decrease uncertainty

Emerging experience decreases uncertainty

Higher when… Lower when...

Risk Adjustment

Is…


Need to track by “group”

General Model Contractual Service Margin

A margin that represents the unearned profit the insurer will recognize as it provides services under the insurance contract

• No front-ending of profit (front-ended loss for acquisition expenses not included) → balancing item becomes: – CSM, if positive– P&L, if negative (onerous contract)

• Contractual Service Margin cannot be negative– Must be tracked as notional “loss component”

Future cash flows



Time value of money


Initial recognition Reporting period Reporting date

Accretion of interest

Value of the new business

Changes in estimates that relate to future service

Recognition in P&L as insurance service is provided

Remaining unearned profit

Insurance finance expenses

Insurance revenue

Opening balance forgroup A

Closing balance forgroup A

CSMbalance

P&L

General Model Contractual Service Margin

P&L

CSMbalance

35© Oliver Wyman

A portfolio of insurance contracts are divided into groupsThe standard requires at least 3 groups to be considered

1 2 3A group of contracts that are onerous at initial recognition, if any;

A group of contracts that at initial recognition have no significant possibility of becoming onerous subsequently, if any;

A group of the remaining contracts in the portfolio, if any;

“Onerous” – an insurance contract is onerous at the date of initial recognition if the fulfilment cash flows allocated to the contract, any previously recognized acquisition cash flows and any cash flows arising from the contract at the date of initial recognition in total are a net outflow

General Model Unit of account (Level of aggregation)


Need to be able to allocate to contract level

Component Unit of account

• 3 groups per portfolio per year: a) onerous, b) profitable and unlikely to ever become onerous, c) other

• Objective to avoid commingling onerous contracts with profitable contracts, at issue and in future

• Same discount rate at issue (“locked-in” rate)

• Higher than portfolio (could be legal entity)

• Incorporate diversification benefits to the extent that the entity considers those benefits in setting the amount of compensation it requires to bear risk

• Portfolio = Insurance contracts that are subject to similar risks and managed together as a single pool

General Model Unit of account (Level of aggregation)



Probability weighted discounted future

cash flows

TARA HANSEN, FSA, MAAA – EY

Variable fee approachDiscount rates for discretionary par productsSeparating components under IFRSTara Hansen

Page 39

Variable fee approach

Page 40

► Variable fee approach can be used if three criteria are met:

► Contracts meeting these requirements are called direct participating contracts. Participating contracts that do not meet the above are called indirect participating contracts

Participating contracts

Will there be re-assessment after inception?What does ‘specifies’ mean, when is a pool ‘clearly identifiable’?When is a share ‘substantial’, how to apply an entity’s expectations?What is a ‘substantial portion’, how to evaluate the role of guarantees?

1

2

3

The entity expects to pay an amount equal to a substantial share of the returns from the underlying items

A substantial proportion of the expected payment should be expected to vary with the underlying items

The contract specifies a share in a clearly identifiable pool of underlying items (assets or other profit sources)

Page 41

IASB views the shareholder’s share in underlying items as a variable fee for investment-related services. Obligation under the contract to pay the policyholder an amount equal to the value of underlying items less a variable feeVariable fee = shareholder’s share less any expected cash flows that do not vary directly with the underlying items (e.g., expenses, Options & Guarantees)Variable fee approach:► Changes in the variable fee are not recognised immediately in other comprehensive income

but included in CSM unlocking► CSM updated for current interest rates and released on the basis of passage of time► Risk mitigation: option to report changes in embedded guarantees in PL if certain criteria and

documentation requirements are met► If the insurer holds underlying items and uses OCI for reporting changes in market interest

rates the P&L interest charge is equal to the P&L investment income on the underlying items.

Participating contracts (continued)

Page 42

► In March 2015, the IASB issued a series of simplified examples that give guidance on how to calculate a simplified variable fee in reality:

Direct participating contractsCalculating the variable fee

Variable fee| inception

plusthe shareholder's expected share of returns on the underlying items to which the insurance contracts with participation feature have a participation right

less any expected cash flows that do not vary directly with the underlying items (e.g., cost of guarantees, guaranteed minimum benefits and expenses).

Variable fee =

plusDelta of the FV in the underlying asset (promised by the contract)

less the Delta of the PV of the fulfillment cash flow

Page 43

Impact on hedging

► As a result of feedback from preparers, the Board decided to permit an entity to exclude some or all of the changes in the effect of financial risk on the entity’s share of the underlying items (i.e., unlocking of the CSM) if certain criteria are met, resulting in recognition of those effects in the income statement

► Criteria to be met to apply this option are:► A previously documented risk management objective and strategy ► The entity uses a derivative to mitigate the financial risk arising from the group of insurance

contracts► An economic offset exists between the group of insurance contracts and the derivative► Credit risk does not dominate the economic offset

Page 44

Variable fee approach worked example

Page 45

Product Description

Product Information

Initial premium $80,000

Issue date 4/17/2020

Issue age 51

Tax status Non-qualified contract

Benefit base Rollup at 5% simple interest for up to 20 years

Withdrawal rates Tiered by attained age

Surrender charge schedule

6% grading down to 0% over 6 years

Withdrawal statusGuaranteed withdrawals may begin after surrender charge period

Assumptions

Full surrenders

1% during surrender charge period

12% shock lapse

4% ultimate

Non-guaranteed partial withdrawals None assumed

Withdrawal efficiency 95% until AV=0

Withdrawal utilization

15% at duration 7

20% at duration 10

20% at duration 15

15% at duration 20

30% never withdraw

Variable annuity with a guaranteed minimum withdrawal benefit for life

Page 46

Hedging Program

Hedge target Economic liability

Delta 100% hedged with equity futures

Rho 100% hedged with swaps

Vega 100% hedged with variance swaps

► The asset side of the balance sheet must be considered to get a more complete picture of the impacts IFRS 17 will have for variable annuities in the US.

► Hedging programs are commonly used to manage market risk associated with variable annuity living benefits.

► The primary focus of VA hedging programs is typically minimizing the volatility of an economic liability, i.e. a liability that is measured consistently with the liabilities.

Page 47

► The following slides represent a simplified example to demonstrate the mechanics of the variable fee approach

► General assumptions and simplifications include the following:► Impact of discounting is not included ► Risk mitigation is 100% perfect ► Risk adjustment release is estimated ► No investment income or surplus assets reflected► Only certain years are included within the presentation

Assumptions and simplifications

Page 48

-

2,000

4,000

6,000

8,000

10,000

12,000

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

Present Value of Cash Flows (PVCF)

• Average present value across 1,000 scenarios

• Risk neutral with liquidity adjustment

Equities rally

Interest rates fall

Cash flow projection:► This presentation excludes the

valuation of the separate account itself, which is equal to market value

► Includes both cash inflows and outflows that relate directly to the fulfilment of the portfolio of contracts

► Incorporates all available information in an unbiased manner (including trends)

► Includes all cash flows within the contract boundary

► Perspective of the entity (provided that market variables are consistent with observable prices)

Cash flow discounting:► Curve is determined using the top-

down or bottom-up approach

Page 49

Risk Adjustment

PVCF

► This example sets the risk adjustment at time zero based on economic capital, and runs off proportionally to present value of claims

► No prescribed technique► Represents compensation that an

entity requires for bearing the uncertainty about the amount and timing of the cash flows that arise as the entity fulfils the insurance contract

► Reflects both favorable and unfavorable outcomes in a way that reflects the entity’s degree of risk aversion

► Conveys the degree of diversification benefit that is considered when determining the compensation for bearing uncertainty

-

2,000

4,000

6,000

8,000

10,000

12,000

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

RiskAdjustmentPVCF

Page 50

-

2,000

4,000

6,000

8,000

10,000

12,000

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

CSM

Risk Adjustment

PVCF


Time zero► At initial recognition, the CSM is the

net difference between the fulfilment cash flows, floored at zero

► The objective of the CSM is to report expected profitability from the contract over time, eliminating any day-one gain

► If CSM is floored at zero at inception, the insurance contract is onerous. Losses should be recognised in P&L immediately

Afterward► CSM accrues interest and is

amortized over time► CSM also offsets changes in PVCF

due to assumption changes or unexpected inforce changes

CSM floored at zero

Page 51

Net Liability

► The CSM absorbs some of the volatility in the fulfilment cash flows over time.

► The effectiveness of the CSM in absorbing liability-side volatility is limited due to flooring at zero.

-

2,000

4,000

6,000

8,000

10,000

12,000

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

CSM

Risk Adjustment

PVCF

Liability (unfloored)

Liability

If not for flooring, CSM would have absorbed

almost all volatility in the liability

Page 52

Balance Sheet

► When the PVCF increases, the CSM absorbs most of the increase. However, the hedges offset the full change to PVCF, leading to a net accounting gain.

► Conversely, when the PVCF decreases, the CSM increases to offset the decrease. However, the hedges offset the full change to PVCF, leading to a net accounting loss.

► This accounting noise is temporary, and will run off with the CSM over the life of the contract.

► This is a poor outcome.

(4,000)

(2,000)

-

2,000

4,000

6,000

8,000

10,000

12,000

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

LiabilityAssetsNet

Page 53

Income Statement

(2,000)

(1,500)

(1,000)

(500)

-

500

1,000

1,500

2,000

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

Risk adjustment release Release of CSM into income (unhedged) Impact of onerous loss

► Since the CSM is floored at zero, market movements that cannot be captured in the CSM become a direct hit to income until the CSM is “built back” to a positive number and the losses are recovered

► Due to the change in interest rates, the contract becomes onerous in 2023 and the resulting loss is presented through income. The onerous loss is recovered in 2024 and 2025 with the remaining recovery in 2026

► This simplified example assumes CSM is recovered at the beginning of the year in 2026 for the remaining CSM release

► Risk adjustment release is small throughout the years (difficult to see due to size of scale)

Page 54

-

2,000

4,000

6,000

8,000

10,000

12,000

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

CSM

Risk Adjustment

PVCF

CSM does not absorb PVCF Changes

CSM With Hedge Carve-out

CSM does not absorb PVCF Changes A company may choose not to recognize

changes in the CSM arising from changes in fulfilment cash flows if there exists a “previously documented risk management objective and strategy for using derivatives”:► The derivatives are used to mitigate

market risk in the fulfilment cash flows

► “An economic offset exists between the specified fulfilment cash flows and the derivative”

► “Credit risk does not dominate the economic offset”

Page 55

Liability With Hedge Carve-out

► Removing hedged changes from the CSM increases volatility of the net liability

► The liability is more sensitive to market impacts, which are managed through the hedging program

-

2,000

4,000

6,000

8,000

10,000

12,000

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

CSM

Risk Adjustment

PVCF

Liability withoutCarve-outLiability with Carve-out

Page 56

Balance Sheet With Hedge Carve-out

► Liability changes due to market risk are fully recognized in the liability and offset by changes in the hedging portfolio

► This example assumes a perfect offset; in reality there will be valuation differences between assets and liabilities, as well as basis risk

► Looking at the balance sheet holistically, removing hedged liability changes from the CSM results in a less volatile balance sheet

(4,000)

(2,000)

-

2,000

4,000

6,000

8,000

10,000

12,000

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

Liability withCarve-out

Assets

Net

Page 57

Income Statement With Hedging Carve-out

► This example assumes perfect risk management matching and no changes to the expected pattern of CSM release and risk adjustment release.

► Both CSM and risk adjustment releases tail off in later years with less coverage along with a shock lapse increasing release of risk adjustment in 2027.

► The hedged carve-out results in a smoother pattern of CSM release into the income statement.

-

20

40

60

80

100

120

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

Risk adjustment release Release of CSM into income (hedged)

Page 58

Discount rates for discretionary par products

Page 59

Accounting for participating contracts vs. non participating contracts

Continuum of insurance contracts

General model Variable fee modelMeasurement

General model – Effective yield Current period book yieldInterest expense

Type of contract Non-participating Indirect participating Direct participating

Differences General model Variable fee modelSubsequent measurement –Market variables

PL or OCI, following the general model CSM

Guarantees PL or OCI, following the general model CSM, if risk-mitigated PL

Accretion of interest on CSM Locked-in rate Current rate

Insurance investment expense Effective yield-based Current period book yield (if investments are held)

Page 60

Effective yield example

No demographic changes have occurred, so no CSM unlocking applies

If the locked in rate is used, there will be an immediate impact to income

-400

-300

-200

-100

0

100

200

300

1 2 3 4 5 6 7 8 9 10 11

Projected Cash Flows

Baseline

Revised

Indirect participating product priced to have profits of zero in each year (illustrative) Interest rates go down in the first year Crediting rates assumed to reduce slowly over time, producing lower cash flows

-20

0

20

40

60

1 2 3 4 5 6 7 8 9 10 11

Net Income

Baseline

Revised

Page 61

Effective yield example (continued)

Several options to adjusting the locked in rate were considered as illustrated here producing a more stable income emergence than simply using the locked-in rate

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%

0 1 2 3 4 5 6 7 8 9 10

Effective yield

Baseline Change in asset value

Change in CF Flat

Asset yield

-20

-10

0

10

20

30

40

50

1 2 3 4 5 6 7 8 9 10

Net income

Baseline Change in asset value

Change in CF Flat

Asset yield

Page 62

Separating components under IFRS

Page 63

Separating components

Accounting under IFRS 17

Accounting under IFRS 17, disaggregation for presentation in income statement notes



Insurancecomponents

Non-distinctinvestment components

Distinctinvestment

components

Embedded derivatives, which

are not closely related

Distinct performance obligation to provide

goods andservices

Separation

Disaggregation11 Disaggregation is the exclusion of an unseparated investment component from insurance contracts revenue

LAURA GRAY, FSA, MAAA – KPMG

Insurance Accounting

Change for IFRS 17Society of Actuaries – Annual meeting—October 2017

© 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.

AgendaTransitionPresentation and disclosurePotential impacts

66


Transition


Making the transition

68

Comparative information is restated

Limited ability to redesignate some financial assets on initial application


Full retrospective approach is required…

69

… but expedients can be used

Modified retrospective approach, if possible*

Fair value approach

Yes

No

Either

Is it impracticable to use a full retrospective approach?

Or

Full retrospective approach

A company can apply different approaches for different groups

*If reasonable and supportable information cannot be obtained to apply the this approach, the fair value approach is applied.


Modified retrospective approach

70

The objective is to use reasonable and supportable information that is available without undue cost or effort to achieve the closest possible outcome to full retrospective application.

Each modification is used only to the extent that an entity does not have reasonable and supportable information to apply a full retrospective approach.


Fair value approach

71

The CSM or loss component at the transition date is based on the difference between the fair value and the FCFs of the group at that date.

In determining how to identify groups, reasonable and supportable information is used:• Based on what an entity would have determined at the date of inception or

initial recognition; or• That is available at the transition date.

When identifying groups of insurance contracts, an entity may group contracts issued more than one year apart. However, it may divide groups into those issued within a year if it has reasonable and supportable information to make the division.


Presentation and disclosures


Presentation

73

Investment components are excluded from insurance revenue and service expenses

Entities can choose to present the effect of changes in discount rates and other financial risks in profit or loss or OCI to reduce volatility


Disclosures

74

Information should be disclosed at a level of granularity that helps users assess the effects contracts have on…

Financial position

Financial performance

Cash flows

New disclosures relate to expected profitability and attributes of new business


Level at which to disclose

75

The disclosures are made at a level necessary to satisfy the general disclosure objective.

Examples of the aggregation bases that may be appropriate are:

Type of contract(e.g. major

product lines)

Geographic areas(e.g. country or

region)

Reportable segments(as defined in IFRS 8 Operating Segments)


76

An entity presents separately:• Groups of insurance contracts that are

assets.• Groups of insurance contracts that are

liabilities.

Reinsurance contracts held assets and liabilities are presented separately, and separately from insurance contract assets and liabilities.

Statement of financial position


77

Investment components are excluded from insurance revenue and service expenses.

Entities can choose to present the effect of changes in discount rates and other financial risks in profit or loss or OCI to reduce volatility.

Separation of underwriting and finance results.

Statement of financial performance


78

What does it look like?IFRS 4

Premiums X

Investment income X

Incurred claims (X)

Change in insurance contract liabilities

(X)

Profit or loss X

Other comprehensive income X

Comprehensive income X

IFRS 17

Insurance revenue XIncurred service expenses (X)Insurance service result XInvestment result XInsurance finance expenses (X)Net finance result XProfit or loss XOther comprehensive income XComprehensive income X


79

Reflects the consideration an entity expects to be entitled in exchange for services.

As an entity provides services during the period, the liability for remaining coverage (LRC) decreases and is released in the form of revenue.

Insurance revenue


80

Insurance revenue is derived from the changes in the LRC for each reporting period, covering…

Recognizing insurance revenue

Expected insurance claims

and expenses

Risk adjustment for non-financial

riskCSM allocation Acquisition

cash flows

These items represent a company’s consideration for providing services.


Operational impacts & potential impacts


Operational issues

82

Fundamental operational challenges lie ahead and there isn’t much time

Actions to get started… Completing an initial assessmentReviewing contractsPlanning accounting policy decisionsDetermine needs for systems, processes and resources

Effective date


The changes could significantly affect insurers’…

83

Volatility of financial results and equity

Level of transparency about profit drivers

Equity levels

The magnitude of the accounting

change for life and non-life insurers will be different

Profitability patterns


Life insurers

84

Significant accounting changes are almost certain to occur under the new standardSources of complexity include…

Use of current estimates

Disaggregating changes in LRC

Tracking the CSM at a group level

Thank you© 2017 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

IFRS 17: “What to Expect When You’re Expecting' · Session 055 PD - IFRS 17: “What to Expect When You’re Expecting" Moderator: Kathleen Kelly Bachman, FSA, MAAA . Presenters:

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