Future of insurance reporting: preparing for the complexities of IFRS 17, Andreas Schröder
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Transcript of Future of insurance reporting: preparing for the complexities of IFRS 17, Andreas Schröder
13 October 2016
Future of insurance reporting
Disclaimer: The new insurance contract standard IFRS 17 is expected to be published in March 2017, the content of this
presentation relate to the current status of the discussions and its interpretation by the presenter.
It does not represent an official WTW opinion.
Preparing for the complexities of IFRS 17
Andreas Schröder
Financial and Insurance Reporting - Where are we now ?
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of domestic listed companies (listed by the Federation of
European and Asian Stock Exchanges at 31.12.2015)
report required IFRS figures80%
Listed companies that use IFRS Standards globally
of domestic listed companies (listed by World Federation of
Exchanges at 31.12.2015) report required IFRS figures.
(42% apply local standards from China, India, Japan & US)49%
of the largest
insurance groups in the
world report under IFRS12 of 20
Current IFRS insurance Accounting – IFRS 4 “Phase I” for
insurance contracts as a placeholder with many shortcomings
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Most relevant IFRS in
the insurance context
Content
IFRS 4
Insurance Contracts
IFRS 4 (Phase 1) makes limited improvements to
already existing accounting policies in respect of
measurement of insurance contracts. Disclosures
related to insurance contracts
IAS 39 Financial
Instruments: Recognition
and Measurement
Recognition criteria for financial instruments.
Classification of financial instruments and assigns
them to different valuation models
IAS 32 Financial
Instruments: Presentation
Prescribes principles how to present financial
instruments and for offsetting financial assets and
financial liabilities
IFRS 7 Financial
Instruments: Disclosures
Requires disclosures on significance of financial
instruments on an entity’s financial position and nature
and extent of risks arising from financial instruments
IAS 40 Investment
Property
Accounting treatment for investment property and
related disclosure
IAS 18
Revenue
Practical guidance on revenue recognition.
Identifies circumstances under revenue will be
recognised
IFRS 3 Business
combinations
Prescribes the financial reporting by an entity when it
undertakes a business combination (bringing together
of separate entities or businesses into one reporting
entity)
IFRS 9
IFRS 15
IFRS 17
little comparability between
insurance companies around
the world
usage of old or outdated
assumptions does not
provide useful financial
information
diversity and a lack of
transparency about profit
recognition patterns from
insurance contracts
IFRS 4 Phase 1 allows to apply
existing (local) accounting standards
Embedded Value has become a less important metric for the
Investment Community
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0
20
40
60
80
100
120
Analyst Fair Values for the Life Segment of a European Composite
FV EV
0%
10%
20%
30%
40%
IFRS book value Tangible bookvalue
Embedded value IFRS earnings Dividend yield Free cash flowyield
Which valuation approach will gain the most in popularity over the coming 12m?
Dec-09 May-10 Sep-10 May-11 Oct-11 Jun-12 Sep-12 Dec-12
FCF has replaced EV as a valuation tool amongst investors
Source: BofA Merrill Lynch Global Research and other analyst research.
European life insurance companies
no longer trade at a premium to EV . . .
Analyst fair values typically lie below EV
0.60x
1.00x
1.40x
1.80x
2.20x
2.60x
3.00x
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16
Pri
ce
/ E
nte
rpri
se
Va
lue
35%
47% 50% 52%59%
74%79%
86% 86%90%
96%100%103%
108%
117%122%
0%
20%
40%
60%
80%
100%
120%
140%
Delta
Llo
yd
. . . and many currently trade at a meaningful discount
Sto
reb
ran
d
AE
GO
N
Sw
iss L
ife
Ge
ne
rali
Ag
ea
s
AX
A
Se
cto
r A
ve
rag
e
Aviv
a
NN
Gro
up
Old
Mu
tua
l
Pru
de
ntia
l
Sta
nd
ard
Life
Alli
an
z
L&
G
ZIG
Metrics that matter more for Investors - Financial reports adapt
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Impact on IFRS results
One-off impact on book value less
important
Any impact on on-going earnings
is more important
Especially if it impacts expectations
about the dividend
Impact on solvency ratio
Especially if it impacts expectations
about the dividend
Impact on volatility of capital
Especially if it impacts expectations
about the dividend
Source: MuRe & Allianz analyst conferences 2016
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The IFRS insurance contracts standard
due process is finalizing in March
Mid 2004
IFRS 4 Insurance contracts ‘Phase I’
completed and interim Standard on
insurance contracts issued
1997 Kick-off IASC starts the Insurance Contracts
project. An Issues Paper was published
in November 1999 (DSOPs).
March 2017 Expected publication of IFRS 17
Insurance contracts
July 2013 Re-Exposure Draft Insurance Contracts
July 2010 Exposure Draft Insurance Contracts
May 2007 Discussion Paper: Preliminary views
May 2002 IASB agreed to split the insurance
project into a Phase 1 and Phase 2
IFRS 17
The new insurance standard IFRS 17 is expected for March 2017
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Final
insurance
contracts
standard
IT
platform
2016 2017
Start of actuarial
specifications and the
implementation
2018
Implementation
modification and
testing, assess impact
of IFRS 9 strategy
2019
Dry run 2017/8
IFRS 17 and publish
2018 IFRS 9 results
2020/2021
SII goes
Live
IFRS 9
Effective
IAS 39
and
IFRS 4
Option 1: Apply Overlay approach for IFRS P&L and
designated assets relating to insurance contracts
IFRS 9
and
IFRS 4
IFRS 9 +
new insurance
standard IFRS 17
Option 2: Apply Deferral approach of an IFRS 9 application but
only for entities where issuing insurance contracts is
predominant for the reporting entity – Option ceases 2021
IFRS 17
EffectiveDry
Run
Full
BS needed
Discussion of potential cooperation
and joint „IFRS-PoC“
2.Tests
YE171.Tests
YE16
Implementation
2020/2021 IFRS P&L and BS
according to full IFRS 9 and new
insurance contract standard IFRS 17
Timetable, implementation activities and IFRS 9 implementation options
Whereas SII Coverage ratios for groups may become resilient - the
IFRS 17 / IFRS 9 introduction will impose new challenges !
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Manage Budgets Manage increasing P&L Volatility
2012 2013
14 Mio. USD
50 Mio
Min.
Max.
25 Mio
Expected average
costs for IFRS 17 / 9
implementation have
increased within one
year up to more than
300%
The future
IFRS 17 P&L
will be unique, different
to the current IFRS 4
‘cost basis’ view, but
also different to SII
IFRS operating
profit & payout
ratios to be
challenged by
increased volatility
Efficiency GainStrategic Impact
Guaranteed Business Continuity
Implications on Processes
Free up staff
Synergies with SII
BAU - Centralize -
Automatize
Products mix, loading
structure disclosures /
approval
Strategic Asset
Allocation/Hedging
Finance/IT structure
IFRS 17 addresses the shortcoming of IFRS 4 Phase 1
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1.) Measurement approach on
Current assumptions
2.) Contractual Service margin (“CSM”)
calculated in t=0 to ensure no gain at
inception represents the profit for the
future services to be provided and should
be released accordingly
IFRS 17 versus Solvency II - Key differences
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IFRS 17 Solvency II
Scope Insurance contracts and Investment contracts
with DPF
All contracts regulated as insurance
issued by entity
CSM (day one gains) CSM eliminates day-one profit and defers over
coverage period
Day-one profit recognised
Acquisition costs Implicitly deferred via CSM Expense as incurred
Experience adjustments and
changes in assumptions
Unless negative, CSM unlocked for changes in
assumptions for future services
Recognised in period
Discount rates Determined by entity using top-down or
bottom-up approach
Prescribed risk-free rates plus
matching adjustment or volatility
adjustment
Risk margin Multiple approaches permitted subject to
disclosure of confidence level
Cost of capital approach
Unbundling investment
components
Investment contracts only unbundled if distinct;
however not included within revenue
No unbundling of investment or
service components
PAA Simplification for short-duration contracts for
pre-claims coverage
No distinction between long-duration
and short-duration contracts
Business combinations Additional recognition, measurement and
presentation requirements
No specific requirements
Disclosures Subject to minimum requirements, scope,
format and level of disaggregation required to
meet overall objectives at entity’s discretion
QRTs in prescribed format
IFRS 17 - Why is the effort bigger then for SII ?
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The principle based reporting standard is coming with little guidance & field testing
3.) The “CSM” as an
unknown animal
Profit for
future
services
4.) Accounting
options for P&L
smoothing No methods prescribed to derive
discount curves or risk adjustment.
Accounting option to use OCI or not for
a systematic split of investment result
2.) Measurement
depends on the Cash-
flow characteristicDifferent approaches depending
on direct participation features
and asset cash dependency;
simplified approach
In-
creased
Com-
plexity
1.) Granularity of
measurementGrouping should ensure that
cash flows have similar sensitivity
to key risks and similar duration
and contracts have similar
expected profitability
The resulting P&L is particularly different – Reporting Performance
will significantly change
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IFRS 4* New IFRS Standard Key changes
Premiums Insurance contract revenue Insurance contract revenue
excludes deposits
Revenue and expense are
recognised as earned or incurred
Insurance finance expense is
excluded from insurance service
result and is presented
(i) fully in P/L or
(ii) in P/L and OCI,
depending on accounting policy
Written premiums disclosed in the
notes
Investment income Incurred claims and expenses
Incurred claims and expenses Insurance service result
Change in insurance contract liabilities Investment income
Profit or loss Insurance finance expense
Net financial result
Profit or loss
Discount rate changes on insurance
liability (optional)
Total comprehensive income
Source: IASB Staff
* Common presentation in the statement of
comprehensive income applying IFRS 4
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Subsequent measurement and setting up the resulting
IFRS P&L will depend on contract type, accounting choices and become
extremely complex
1. Changes in CF estimates relating to future services adjust the CSM
2. All other expected cash flow changes go to P&L
3. Based on a cost or current view depending on accounting choice
4. If insurance investment expense is ‘cost view’, difference between
current and cost basis is presented in OCI
5. CSM unlocked for changes in the risk adjustment rel. to future services
6. Release for current and past services to P&L
Statement of Comprehensive Income
20XX
Insurance contract revenue X
Incurred claims and expense (X)
Insurance service result X
Investment income X
Insurance finance expense (X)
Net financial result X
Profit or Loss X
Discount rate changes on
insurance liability (optional) X
Total comprehensive income XX
Cash flows
Time value of
money
Risk adjustment
Contractual
service margin
1
2
3
4
5
Deterministic
cash-flows by Portfolio
Stochastic
cash-flows
You need controlled, stable
and robust deterministic
and stochastic cash-flow
projection models
6
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Willis Towers Watson solutions for IFRS 17
Towers Watson generic target picture for future IFRS using Unify
Life Cashflows
P&C Cashflows
Third Party
Cash-flow Tools
Admin
P&C
Admin
Life
Assets
ESG
Re-
Insur
ETL
ETL
ETL
Third Party
Data
Warehouse
Prepare and Store
Group financial
systems
MCEV /
NBV
Financial
Reporting
IFRS
Accounts
Ge
ne
ral L
ed
ger
Co
ns
olid
atio
n
S2 / QRT /
Regulator
…
…
Life
P&C
ETL
ETL
ETL
Local OE
systems
Pricing
data
Actual
claims
Actual
costs
Actual
premium
Cession
data
Pricing
data
Actual
claims
Actual
costs
Actual
premiumCession
data
S2 / IFRS Results
Input
Data
Conclusions and Actions
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New variant of economic valuation principles enters the arena
Measurement approach is based on current assumptions
Higher comparability: Profit pattern as services provided
IFRS 17 improves
the current Insurance
Reporting
Has no equivalent under SII
It combines an economic valuation with smoothing options
Will be complex to be set up and interpret
The IFRS 17 P&L
will be a “new & unknown”
To be able to manage required system-, business- and communication
challenges insurers should quickly get into the “project mode” for this
MEGA project as the future of insurance reporting starts in 2017
For further information please contact:
16
Andreas SchröderDirector
Risk and Financial Services
Habsburgerring 2
50674 Cologne
GermanyT: +49 221 8000 3460
M: +49 160 9090 3266
Confidentiality Statement
This document has been prepared for the
sole and exclusive use for participants of the
Czech Insurance Conference 2016,
Willis Towers Watson Czech Republic.
Distribution or disclosure of, or quotation
from, or reference to this document to any
other party, is prohibited without the prior
written consent by Willis Towers Watson
(“WTW”, “we” or “us”.)
© 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.
Roger GascoigneDirector
Risk Consulting and Software
Klimentská 1216/46
110 00 Praha 1
Czech RepublicT: +420 222 191 239
M:+420 602 313 408