IFRS 17: Features, Implications, and Guide for Insurers

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Explore the introduction, history, features, and implications of IFRS 17 on insurers through a comprehensive seminar guide. Learn about minimum criteria for grouping, contract recognition, measurement, presentation requirements, and more in this informative session held in Mumbai.

  • IFRS 17
  • Insurers
  • Seminar
  • Mumbai
  • Guide
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  1. 28th India Fellowship Seminar Topic: IFRS 17- Introduction, History, Features and Implications on Insurers Guide Name: Kamlesh Gupta Presenters Name: 1. Jimmy Jacob 2. Rohit Mall 3. Subhasree Nigamma 4. Nandan Nadkarni Date: November 10, 2017 Venue: Mumbai Indian Actuarial Profession Serving the Cause of Public Interest

  2. Coverage Aspects Paras Content 14-24 Minimum criteria for grouping Level of Aggregation 25-28 The contract recognition date Recognition Measurement ---Initial Measurement 32-38 Estimation of fulfilment cash flows and contractual service margin ---Subsequent Measurement 40-43 The measurement of subsequent carrying amount and the impact on P&L ---Onerous Contracts 47-52 Treatment of onerous contracts www.actuariesindia.org 2 Source: IFRS 17

  3. Coverage (Contd) Aspects Paras Content ---PAA approach 53-59 An alternate measurement approach ---Reinsurance Contracts held 60-69 Recognition and Measurement of Reinsurance contracts ---Investment Contracts with DPF 71 Modified requirements for these contracts 72-74 The conditions for modification and de- recognition Modification and Derecognition 78-87 Presentation Requirements Presentation 97-114 Disclosure requirements Disclosure www.actuariesindia.org 3 Source: IFRS 17

  4. Areas to be addressed Introduction and History Features Implications Three valuation methods Life Insurance Timelines and Scope Aggregation Level General Insurance History General Measurement Model Common Onerous Contracts www.actuariesindia.org 4

  5. Time Lines and Scope Disclosure of expected impacts of the issued but not yet effective standard Revised IFRS 9 classification from IFRS 17 implementation First IFRS 17- compliant financial statements 2017 2018 2019 2020 2021 2022 IFRS 17 start of comparative period IFRS 17 effective 1 January 2021 IFRS 17 issued IFRS 17 applies to: o Insurance and reinsurance contracts that an entity issues o Reinsurance contracts that it holds o Investment contracts with DPF (provided entity issues Insurance contracts) Applicable for annual periods starting on or after 1st Jan, 2021, comparative reporting through 2020 Early application permitted for entities that apply IFRS 9 and IFRS 15 www.actuariesindia.org 5 Source: EY IFRS 17 report

  6. History IFRS 4 permitted wide latitude in a/c practice Need for a common global insurance standard Hampered comparability of financial statements Some a/c practices under IFRS 4 did not reflect true financial position Non-marketability of an insurance contract posed measurement issues IFRS 17 focuses on transparency and consistency of accounting practice! www.actuariesindia.org 6 Source: IFRS 17

  7. Areas to be addressed Introduction and History Features Implications Three valuation methods Life Insurance Timelines and Scope Aggregation Level General Insurance History General Measurement Model Common Onerous Contracts www.actuariesindia.org 7

  8. Three valuation methods General Measurement (GM) Model (Building block Approach-BBA) Variable Fee Approach (VFA) PAA Approach Insurance Contracts (without Direct Participating feature) Short term contracts (< than 1 year) Direct Participating Contracts and Investment Contracts with DPF Stable cash flows Unearned profit over the coverage period Variant of GM model Simplified GM model Estimates of Future cash flows Long term Contract with Investment Component Similar to Unearned premium approach Long term contracts www.actuariesindia.org 8

  9. Level of Aggregation Contracts with similar risks to be grouped together Onerous contracts are loss making contracts! Minimum Grouping at inception Nature Duration Profitable and unlikely to be onerous Issue dates- Maximum one year apart Onerous Remaining Profitable and unlikely to be onerous ?? ..Judgment?? www.actuariesindia.org 9

  10. IFRS 17 and the valuation methods IFRS 17 Aim/Intention Focus on Profit drivers Three valuation methods General Measurement Model- Deviation from current practice?? www.actuariesindia.org 10

  11. General Measurement (GM) Model -Building Block approach (BBA) Liability for future coverage Unearned profit amortized over coverage period Contractual Service Margin(CSM) Eliminates gain at contract inception Liability for Incurred claims Risk For non-financial risks Risk Adjustment Adjustment + Probability weighted discounted EPV Probability weighted discounted EPV Best Estimate Liability at a liability discount rate Risk Adjustment + Probability weighted discounted EPV=Fulfilment Cash flows www.actuariesindia.org 11

  12. Subsequent Measurement- BBA P&L CSM Risk Adjustment Estimated cash flow changes OCI Risk Adjustment + Probability weighted discounted EPV Probability weighted discounted EPV P&L Release post this reassessment 1. Reassessment of fulfilment cash flows 2. Release through P&L/OCI www.actuariesindia.org 12

  13. BBA- CSM Impact of changes for future coverage P&L (CSM Release) CSM Risk Adjustment Estimated changes related to future service Probability weighted cash flows P&L Discount rate changes Other Comprehensive Income Why through CSM?? 13 www.actuariesindia.org

  14. GM Model- New components Liability for future coverage Unearned profit amortized over coverage period Contractual Service Margin(CSM) Eliminates gain at contract inception Liability for Incurred claims + Risk Risk Adjustment For non-financial risks Adjustment Risk adjustment /CSM at the portfolio level?? Judgment in allocation IFRS guidance for Risk Adjustment estimation Cash flow characteristics; Probability distribution of cash flows Confidence Interval Components to be tracked www.actuariesindia.org 14

  15. Key Aspects of GM Model Pricing equation CT5! Subsequent Measurement Initial Recognition ---Reevaluate the fulfilment cash flows ---P&L/OCI impact Quantifying the CSM Liability at inception is NIL. CSM ensures that the Income/Expense in NIL The change in cash flows impact either the CSM or the P&L/OCI Cash Flow Changes Flow through P&L Absorbed in Balance sheet(CSM) Flow to OCI www.actuariesindia.org 15

  16. General Measurement Model (BBA) -Illustration Insurance Contract (without Direct Participating Features) Values Comments Coverage period (years) 4 Total premium at inception(in Rs.) Initial acquisition cost (in Rs.) Expected claims and expenses (in Rs.) 1500 100 800 Incurred evenly over 4 years No lapse assumed Assumed even release Risk adjustment for non- financial risk (in Rs.) Discount rate 80 Negligible Actual Experience Same as expected & no assumption changes www.actuariesindia.org 16 Source: KPMG, July 2017

  17. GM Model (BBA) -Illustration (Contd..) Years Cash flow description Initial recognition 1 2 3 4 EPV of cash inflows 1500 Premium Expected claims and expenses (incl. acquisition EPV of cash outflows -900 -600 -400 -200 0 cost) Risk adjustment -80 -60 -40 -20 0 Non-fin risk adj Fulfilment cashflows 520 -660 -440 -220 0 Contractual service margin -520 -390 -260 -130 0 Insurance contract liability 0 -1050 -700 -350 0 www.actuariesindia.org 17 Source: KPMG, July 2017

  18. GM Model (BBA)-P&L Impact Change in liability for remaining coverage Years Opening balance Premiums received Acquisition cash flow Expected claims Risk adjustment recognised CSM allocation Closing balance 1 0 2 3 4 -1050 -700 -350 -1500 100 200 0 0 0 0 0 0 200 20 130 -700 200 20 130 -350 200 20 130 20 130 -1050 0 P &L impact Expected claims Risk adjustment recognised CSM allocation Revenue for services provided Revenue to cover acquisition cash flows Insurance revenue Service expenses Revenue to cover acquisition cash flows Insurance service expenses Insurance service result 1 2 3 4 200 20 130 350 25 375 -200 -25 -225 150 200 20 130 350 25 375 -200 -25 -225 150 200 20 130 350 25 375 -200 -25 -225 150 200 20 130 350 25 375 -200 -25 -225 150 www.actuariesindia.org 18 Source: KPMG, July 2017

  19. GM Model (BBA)-Balance Sheet Impact Balance Sheet Years 1 2 3 4 Asset 1500-100- 200= 1200 1200-200 = 1000-200 = 800-200 = Cash Liability and Equity Insurance contract Liability 1000 800 600 1050 700 350 0 Equity Total Liability and Equity 150 300 450 600 1200 1000 800 600 www.actuariesindia.org

  20. General Measurement Model- Macro Perspective (Contd..) CSM Risk Adjustme nt Estimate d changes related to future service Probability discounted cash flows Flow to Income/OCI Source: PWC, March 2, 2017 Balance sheet measurement www.actuariesindia.org 20

  21. General Measurement Model- Macro Perspective (Contd..) CSM CSM Release Risk Adjustme nt Release of Risk Adjustment Estimate d changes related to future service Interest on Insurance liability at inception rate (unwind of discount rate) Probability discounted cash flows Discount Rate changes (update current market rates) Changes in cash flows related to past and current service period Flow to Income/OCI Source: PWC, March 2, 2017 Balance sheet measurement www.actuariesindia.org 21

  22. General Measurement Model- Macro Perspective (Contd..) P&L CSM CSM Release (Underwriting Result) Risk Adjustme nt Release of Risk Adjustment P&L (Investment Result) Estimate d changes related to future service Interest on Insurance liability at inception rate (unwind of discount rate) Probability discounted cash flows Discount Rate changes (update current market rates) Changes in cash flows related to past and current service period Other Comprehensive Income (Equity) Flow to Income/OCI Source: PWC, March 2, 2017 Balance sheet measurement www.actuariesindia.org 22

  23. Onerous Contracts Definition When? CSM Impact Treatment Total fulfilment cash flows are a net outflow Loss making contracts Initial Recognition; or Subsequent Measurement Wipes out the CSM Immediate recognition of the liability P&L Management judgment to identify profitable contracts that could turn onerous! www.actuariesindia.org 23

  24. Areas to be addressed Introduction and History Features Implications Three valuation methods Life Insurance Timelines and Scope Aggregation Level General Insurance History General Measurement Model Common Onerous Contracts www.actuariesindia.org 24

  25. Life Insurers: Likely Impact on Segment Mix Business Mix for life Insurance Industry [for 6 months ended 30th Sep 2017 (FYP)] Category Individual Single Premium Individual Non-Single Premium Group Single Premium Group Non-Single Premium Group Yearly Renewable Premium Business Mix 14% 26% 57% 2% 2% Key Aspects IFRS 17 amends the way revenue is measured and disclosed. Likely to Impact Single premium mix; since it will not contribute to immediate top line growth Aggressive sale of ULIP/Group fund based products may not translate in to top line growth www.actuariesindia.org 25

  26. Life Insurers: Likely Impact on Segment Mix Key results disclosed in Income statement Underwriting result Net Interest and Investment income Profit/ Loss Total comprehensive income Key Performance indicators likely to change. Likely that Insurers will focus on more Profitable segments like Protection Products. www.actuariesindia.org 26

  27. Life Insurers: Measurement Approach for different Segments Measurement Approach Need for the Approach Types of contract (Illustrative list) Default model for all Insurance contracts. Term / Whole life / Endowment Long term health Other protection business Certain annuities Immediate annuities General Measurement Approach (Building Block Approach) Applicable for contracts without direct participating features. Simplified approach for Short term contracts Short term life contracts Premium Allocation Approach (PAA) To deal with Participating business, where payments to policy holders are linked to underlying items like assets. Variable Insurance contracts Unit linked contracts Variable fee approach (VFA) Applicable for contracts with direct participating feature. www.actuariesindia.org 27

  28. Variable fee Approach : Illustration Facts for ULIP contract Values Coverage period (years) 3 Single premium (payable at inception) (in Rs.) Number of Policies issued 150 100 Benefit payable -Account balance, if the policy holder survives -In case of death, higher of guaranteed death benefit of 170 or Account balance. One Policy holder will die at the end of each year. Expected claims Return on underlying assets (p.a.) Service charge levied by Insurer(p.a.) Risk free interest rate (p.a.) 10% 2% 6% Risk adjustment for non- financial risk 25 (12 to be recognized in profit statement in year 1) www.actuariesindia.org 28 Source: KPMG, July 2017

  29. Variable fee Approach : Illustration Estimate of CSM Estimate of Present value of cash inflows (100 Policies*150) Estimate of Present value of cash outflows 15,000 (14,180)* *Factors in the current discount rate as well the time value of guarantee in providing a minimum death benefit Risk adjustment Fulfillment cash flows CSM to be recognized (25) 795 (795) www.actuariesindia.org 29 Source: KPMG, July 2017

  30. Variable Fee Approach : Illustration Fair value of Underlying assets at end of year 1 Premium received on inception 15,000 Investment return at 10% 1,500 Annual charge [16,500 * 0.02] Payment for death [(16,500-330)*1/100] Fair value at end of year 1 (330) (162) 16,008 CSM at end of year 1 Opening balance (795) Company s share of change in fair value of underlying items (increase of 1500*.02) (30) Effect of time value of money and other financial risk (67) CSM before Allocation (892) CSM to be allocated for year 1(892*percentage of service provided in year 1) Percentage of service provided in Year 1: (100/(100+99+98)) =34%. 300 CSM at end of year 1 (592) www.actuariesindia.org 30 Source: KPMG, July 2017

  31. Variable fee Approach : Illustration Results for Year 1 Expected claims and other expenses (Guaranteed amount of 170 minus account balance of 162) 8 Changes to risk adjustment for the non-financial risk 12 CSM allocation during the period 300 Insurance Revenue 320 Insurance service expenses 8 Insurance service result 312 Investment income 1500 Insurance finance expenses (1500) Finance result 0 Profit 312 www.actuariesindia.org 31 Source: KPMG, July 2017

  32. Life Insurers: Acquisition cash flows IFRS 17 :Insurance Acquisition cash flows to be included in determining CSM on initial recognition. :Insurance Acquisition cash flows eventually affect profit or loss through the CSM release process (So in effect we defer acquisition cost). Current Practice : Expense all Acquisition cash flows at inception. Implication of implementing IFRS 17 :Smaller losses at inception (less year one strain) :Lower profit in Year 2 & later. www.actuariesindia.org 32

  33. Implications General Insurance Aspect Implication Expectation PAA Long tailed LoB application of PAA doubtful Method Cash flow Determination, risk adjustment Non availability Year wise High volatility more judgment Same implications as BBA approach Judgments Regarding Onerous Realised year after year Long term contracts may be affected Acquisition cost www.actuariesindia.org

  34. Implications-General Insurance Aspect Implication Different from current practice Not - (Paid + Changes in O/S & IBNR Claims) Recognition of incurred claims Review of Combined ratio, Incurred claims ratio required Key metrics Actuaries will have a greater role! www.actuariesindia.org

  35. Common Implications Cost/Data Aspect Implication By inception dates and nature (Onerous, profitable,etc) implies large storage requirements Aggregation (Grouping) Allocation methodology to be devised e.g could depend upon the number of contracts, coverage offered, etc. CSM/Risk Adjustment release An explicit adjustment; No specific IFRS guidance; Impact on comparability Confidence Interval Risk Adjustment www.actuariesindia.org

  36. Common Implications Cost/Data Aspect Implication E.g. CSM and Risk Adjustment Reconciliation Information on cash flows (Historical and Future), discount rates and risk adjustments for each contract group to be stored Cash flows Methodology to monitor circumstances indicating onerous contracts Adverse circumstances Facts andCircumstances for onerous under PAA e.g CSM margin at inception, sensitivity of cash flows to assumption changes etc. www.actuariesindia.org

  37. Common Implications Cost/Data Aspect Implication Two set of discount rates to be stored Discount rates New benchmarks to be developed; incentives around new KPIs Performance Appraisal Upgradation of legacy systems Data, Systems Human Talent New controls and increased interaction of actuaries and accountants Tax authorities and Regulators Indeterminate Impacts www.actuariesindia.org

  38. Common Implications Disclosures Disclosure Requirement Sensitivity to changes in risk exposure, claim development Insurance risk Exposure to risk, Policies and process to manage the risk Credit risk, Liquidity risk, Market risk More time and effort Working group by IRDA for reviewing and early adoption of IFRS 17 www.actuariesindia.org

  39. Thank you www.actuariesindia.org 39

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