International Accounting Standards Board © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. The views expressed in this presentation.

International Accounting Standards Board

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The views expressed in this presentation are those of the presenters, not necessarily those of the IASB .

Taking stockAs at 31 October 2011

A high level overview of progress on the insurance contracts project


2

Where we were:The proposals in the exposure draft

Cash flows

Time value of money

Risk adjustment

Residual margin

The amounts the insurer expects to collect from premiums and pay out for claims, benefits and expenses, estimated using up-to-date information

An adjustment that uses an interest rate to convert future cash flows into current amounts

An assessment of the uncertainty about the amount of future cash flows

Contract profit (reported over the life of the contract)

Total insurance

liability

Other matters: presentation, scope, unbundling and disclosure


Tentative decisions

• No gains at inception• Adjust prospectively for changes in estimates of cash flows

• Include independently measured and updated risk adjustment

• Adjust for time value of money using rate that reflects characteristics of liability

• Expected value considering all relevant information• Includes all direct costs incurred in acquiring the contracts

Where we are: high level overview 3

Cash flows

Time value of money

Risk adjustment

Residual margin


What we still need to do

• Complete remaining topics– Unbundling of non-insurance components

– Residual margin

– Presentation

– Short duration contracts

– Transition

• Assess whether any differences between IASB and FASB can be reconciled

• Review draft or re-expose

4


What’s changed since the ED: overview

Exposure draft Decisions so far

Definition and scope

No significant change from ED except financial guarantee contracts•To discuss investment DPF

Unbundling Some changes from ED. On-going discussions

Which cash flows, including acquisition costs

Minor changes in response to comment letters•Recognition point•Contract boundary•Acquisition costs

Discount rate Some changes in application. No change in principle

Risk adjustment Minor changes from ED. No change in principle

Residual margin On-going discussions: unlocking is a significant change from ED

5


What’s changed since the ED: overview (continued)

Exposure draft Decisions so far

Participating features

On-going discussions: minor change from ED

Short duration contracts

On-going discussions

Reinsurance On-going discussions: some changes from ED in response to comment letters

Presentation On-going discussions: some changes from ED in response to comment letters

Disclosures On-going discussions

Transition and effective date

To be discussed

6

International Accounting Standards Board


The views expressed in this presentation are those of the presenters, not necessarily those of the IASB .

Details

7


* Indicates change from ED proposals

Which cash flows? 8

Cash flows

Time value of money

Risk adjustment

Residual margin ED proposal Tentative decisions

Fulfilment cash flows

Expected value of cash flows incurred in fulfilling the contract, considering all relevant information

Confirm use of expected value

+ Add guidance that not all possible scenarios need to be identified and quantified

Acquisition costs*

Include only acquisition costs incremental at contract level

• Include all direct costs incurred in originating a portfolio of insurance contracts

* Indicates change from ED


Which cash flows? 9

Cash flows

Time value of money

Risk adjustment


Recognition point*

Recognise when insurer is bound or first exposed to risk from contract

• Recognise when coverage period begins

• Onerous test before then

Contract boundary*

Ends when insurer:•No longer required to provide coverage or•Can set price that fully reflects risk of particular policyholder

Confirm ED proposal

• Add clarification: risk can be assessed at portfolio level in some cases

Some details yet to be resolved



Time value of money 10

Cash flows

Time value of money

Risk adjustment


Discount rate

• Adjusts future cash flows for time value of money

• Reflects only the characteristics of the insurance contract liability

• Current and updated each reporting period

Confirm discount rate Do not prescribe method+ Add guidance:

• ‘Top-down’ and ‘bottom-up’ both acceptable

• Remove any factors that influence observable rates not relevant to the liability


Risk adjustment (IASB decisions) 11

Cash flows

Time value of money

Risk adjustment


Objective

• “The maximum amount the insurer would rationally pay to be relieved of the risk that the ultimate cash flows exceed those expected.”

• “The compensation the insurer requires to bear the risk that the ultimate cash flows could exceed those expected”

Risk adjustment vs composite margin

• Include explicit estimate of the effects of uncertainty about future cash flows.

Measurement of liability should include explicit risk adjustment

Techniques

• Restrict techniques that can be used to determine risk adjustment

• No restriction on techniques, as long as technique meets objective


Risk adjustment (IASB decisions) 12

Cash flows

Time value of money

Risk adjustment


Disclosure

• Disclose confidence level equivalent

• Included in disclosures of methods and inputs used to determine estimates

Confirmed requirement for confidence level disclosure

Confirm disclosures of methods and inputs to be consistent with those required for other estimates.

+ Add requirement to disclose effect of change in methods

To complete

? Whether to take account of diversification benefits


Residual margin (IASB decisions) 13

Cash flows

Time value of money

Risk adjustment


Gains at inception

• Include residual margin to eliminate gains at inception

Confirm no gain at inception

Residual margin after inception: unlocking*

• Residual margin locked-in at inception

• Adjust residual margin prospectively for changes in estimates of cash flows (unlocking)

• Do not unlock for risk adjustment


Residual margin (IASB decisions) 14

Cash flows

Time value of money

Risk adjustment


Residual margin after inception: allocation*

• Residual margin allocated over coverage period

Residual margin allocated:•Over coverage period•On a systemic basis that is consistent with the pattern of transfer of the services provided

To complete

? Whether changes in discount rate adjust residual margin or are recognised in profit or loss? Whether and how to address any accounting mismatches? Level of aggregation


15What do these decisions mean?

Cash flows

Time value of money

Risk adjustment

Residual marginA component representing the obligation to

provide services in fulfilling the contract

Total insurance

liability

A component representing the risk-adjusted present

value of cash flows needed to fulfill the contract


Guidance on applying building blocks 16

Cash flows

Time value of money

Risk adjustment

Residual margin ED proposals Status of discussions

Participating contracts(Some details to complete)

Discount rate reflects dependence of cash flows on specific assets

Cash flows adjusted to reflect the measurement basis of the items underlying participation*

Guarantees measured at current value

Reinsurance(Some details to complete)

Confirm insurer uses same estimates for reinsurance asset and underlying direct insurance liability

Gains arising from reinsurance contract recognised over contract term*

Losses arising from reinsurance contract recognised immediately if for past events, otherwise deferred*



How to present changes in the insurance contract liability

Tentative decisions

•Line items to show:• Premiums• Claims and expenses• Gross underwriting margin

?Exploring whether some changes should be presented in other comprehensive income

1717

Risk adjustment

Residual margin

Profit or loss

Net interest and investment

Investment income

Interest on insurance liability

Changes in estimates

Underwriting result

Experience adjustment

x

x

x

x

x

x

x

x

x

x

20XXED proposalsIncome statement

Underwriting margin


What does the insurance contracts standard apply to?

Tentative decisions Issues to be resolved

Scope • Confirm proposed definition of insurance contract

• Confirm most scope exceptions proposed in ED

• Financial guarantee contracts included if previously considered insurance

• Investment contracts with discretionary participation features

Unbundling Unbundle:•Embedded derivatives not closely related to host insurance contract•Using approach from revenue recognition for:

• Goods and services• Some explicit account

balances

• Allocation of fees and charges

• Remaining explicit account balances

• Permit or require• Prohibit when not permitted

or required

18


IASB and FASB: Key decisions in common

• Measurement of insurance contract using all cash flows expected to fulfil contract

• Cash flows discounted using a rate that reflects only the characteristics of the liability

• No gain at inception

• Presentation that shows information about key drivers of profitability, including volume information

19


IASB and FASB: Differences

• Differences so far– Acquisition costs

– Treatment of policyholder participation

– Explicit risk adjustment, therefore residual margin

– Scope – financial guarantee contracts

• Further possible differences– Other comprehensive income

– Short duration contracts

– Investment contracts with discretionary participation features

20


21Stay up to date

Where to find out more

• Sign up for our email alert

• www.ifrs.org

• go.ifrs.org/insurance_contracts

• Project staff:– Andrea Pryde, [email protected] – Rachel Knubley, [email protected] – Izabela Ruta, [email protected] – Leslie Vermaak, [email protected] – Joanna Yeoh, [email protected] – Matthias Zeitler, [email protected]

Resources

• IASB Update

• Meeting webcasts

• Project podcasts

• Investor resources

• Effects of board redeliberations on ED Insurance Contracts

• Project timetable

International Accounting Standards Board © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. The views expressed in this presentation.

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