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Transcript of International Accounting Standards Board © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH...
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
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
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© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
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© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
© 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 .
Details
7
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
* 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
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Which cash flows? 9
Cash flows
Time value of money
Risk adjustment
Residual margin ED proposal Tentative decisions
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
* Indicates change from ED proposals
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Time value of money 10
Cash flows
Time value of money
Risk adjustment
Residual margin ED proposal Tentative decisions
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
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Risk adjustment (IASB decisions) 11
Cash flows
Time value of money
Risk adjustment
Residual margin ED proposal Tentative decisions
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
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Risk adjustment (IASB decisions) 12
Cash flows
Time value of money
Risk adjustment
Residual margin ED proposal Tentative decisions
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
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Residual margin (IASB decisions) 13
Cash flows
Time value of money
Risk adjustment
Residual margin ED proposal Tentative decisions
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
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Residual margin (IASB decisions) 14
Cash flows
Time value of money
Risk adjustment
Residual margin ED proposal Tentative decisions
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
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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*
* Indicates change from ED proposals
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
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© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
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© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
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© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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