Introduction to IFRS 17 17.pdf · 3 Introduction to IFRS 17 Background Introduction. Introduction...
Transcript of Introduction to IFRS 17 17.pdf · 3 Introduction to IFRS 17 Background Introduction. Introduction...
Introduction to IFRS 17Pawel Wozniak, Agnieszka Hupert
June 2019
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Introduction to IFRS 17Table of content
Introduction ……………………………………… 3
General Model …………………………………. 10
Risk Adjustment ………….……………………. 19
Contractual Service Margin …...………….. 25
Reinsurance ………….............................. 39
IFRS 17 Reporting …………….................... 46
Variable Fee Approach …….................... 57
Premium Allocation Approach .............. 67
Onerous contracts …………………............. 84
Acquisition costs ................................... 88
OCI option …......................................... 98
Full Retrospective Approach ................ 105
Mod. Retrospective Approach ............. 109
Fair Value Approach ............................. 117
Implementation considerations ........... 122
IFRS 17 vs Solvency II …........................ 137
Appendices ........................................... 144
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Introduction to IFRS 17Background
Introduction
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Introduction to IFRS 17What is wrong with IFRS 4
IFRS 4 allows for a wide range of insurance liabilities modelling methods that can be applied as long as they satisfy the Liability Adequacy Test.
Lack of comparability between countries Lack of comparability between companiesDifferent levels of safety embedded in insurance liabilities calculations
Valuation of insurance liabilities does not have to be cash flow based
Discounting is not always required, typicallynon-life TPs valued on an undiscounted basis
Insurance liabilities may be calculated based on historical assumptions
IFRS 4 IFRS 17
Phase I (2005) Phase II (2022)
Insurance Contracts IFRS
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Introduction to IFRS 17Timeline
2017. . .
2019 2020 2021 2022
First Exposure Draft
Second Exposure Draft
IFRS 17 publication
Transitiondate
Effective dateInitial application
First IFRS 17fin. statements
2010 2013 2018
Drafting the new standard Implementation IFRS 17 reporting
. . . 2023
Third Exposure Draft
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Introduction to IFRS 17Measurement models overview [1]
GeneralModel (GM)
Variable FeeApproach (VFA)
Premium AllocationApproach (PAA)
Default approach Contracts linked to underlying assets
Similar to unearned premium reserve
Short term contracts (less than 1 year)
LFRC
Application
PVCF + RA + CSM(FV Assets) - (Var. Fee)
+ RA + CSM
Endowments, Terms,Annuities, Whole Life
Unit Links,With Profits
1-year non-life,health or life insuranceExamples
Insurance issuedReinsurance held Insurance issued
Insurance issuedReinsurance held
LIC PVCF + RA PVCF + RA PVCF + RA
PVCF - Present Value of Cash Flows
RA – Risk Adjustment
CSM - Contractual Service Margin
LFRC - Liability for Remaining Coverage
LIC - Liability for Incurred Claims
Ins/Reins
Non-onerousOnerous
Non-onerousOnerous
Non-onerous,Onerous(*)Onerousness
(*) measured using the fulfilment CF measurement
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Introduction to IFRS 17Measurement models overview [2]
IFRS 17 scope:
Insurance contracts
Reinsurance held
Investments with DPF
Insurance Risk
Discretionary Participation Features
No Discretionary Participation Features
VFA
Out of IFRS 17 scope
GM/PAA
Direct Participation
Features
No Direct Participation
Features
VFA
Investment contracts with Discretionary Participation Features (DPF)
No insurance Risk
Direct Participation
Features
No Direct Participation
Features
GM/PAA
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Introduction to IFRS 17Components of insurance liability
FulfilmentCash Flows
CSM
Liability for Remaining Coverage
(LFRC)
Liability for Incurred Claims(LIC)
Non-onerous contracts
Claimsincurred
Onerouscontracts
Loss Component
(LC)
LFRC excluding
the LC
Revenue Expenses Recognition of the loss component and reversals of the loss component recognition
*
*
Treatment of insurance liabilities’ movements recognised in the insurance result
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Introduction to IFRS 17Unit of account
CohortsContracts issued more than one year apart should not be included in the same group.
Insurance Portfolio• Subject to similar risks• Managed together• Within the same product line
Profitability• Onerous at initial recognition• At initial recognition no significant
possibility of becoming onerous• Remaining contracts
IFRS 17group
Groups established at initial recognition and their
composition should not be changed
Groups may be smaller that that prescribed above e.g.
quarterly instead of yearly cohorts
Onerous contract group may be identified by measuring
the set of contracts instead of on the individual basis
Regulatory pricing restrictions (e.g. Gender Directive)
driven profitability differentiation may be ignored
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Introduction to IFRS 17Measurement - GM
MeasurementGeneral Model (GM)
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Introduction to IFRS 17Overview
Insurance Liabilities
Future cash flows
Time valueof money
Risk Adjustment
Contractual Service Margin
Fulf
ilme
nt
Cas
h F
low
sC
SM
The General Model is a default IFRS 17 insurance liabilities measurement approach
The same approach for the initial and subsequent measurement
Initial and subsequent measurement methods are different
“+” for inflows
“-” for outflows
“+” or “-” dep. on
the CF sign & structure
“+”, Risk Adj.
increases the TP
“+”, CSM
increases the TP
Sign convention:
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Introduction to IFRS 17Cash flows
Insurance Liabilities
Future cash flows
Time valueof money
Risk Adjustment
ContractualService Margin
Best estimate of cash flows
Reassessed at each reporting date
Assumptions based on experience
Reflect conditions existing at the
measurement date
Within boundary of the contract
Unbundle distinct components:
investments, derivatives or service
Can be done at portfolio level and
allocated to insurance groups
0 1 2 3 4 5
Best estimate cash flows
Expenses Claims
Acquisition Premium
Recognition
The earliest of the following
• beginning of the coverage period
• date when the first premium becomes due
• when the group becomes onerous
Cashflow boundary
• Substantive right and obligations exists
• Ability to reassess the risk and change
the premiums or benefits
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Introduction to IFRS 17Discounting [1]
Insurance Liabilities
Future cash flows
Time valueof money
Risk Adjustment
ContractualServiceMargin
Insurance cash flows are not directly linked to assets
Insurance cashflows directly linkedto assets
Yield on theunderlying assets
Adj. yield on the underlying assets
Top-Down
Bottom-up
Assets reference portfolio rate
Duration mismatch adjustment
Credit Risk premium for expected losses (Probability of Default)
Credit risk premium for unexpected losses (Cost of Downgrade)
Top-down IFRS 17 discount rate
Bottom-up IFRS 17 discount rate
Liquidity premium
Swap rate (risk free rate)
5.5%
0.5%
-1.5%
-0.5%
4.0%
3.5%
1.5%
2.0%
Top-Down
Bottom-up
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Introduction to IFRS 17Discounting [2]
Insurance Liabilities
Future cash flows
Time valueof money
Risk Adjustment
ContractualService Margin
Bottom-upapproach
Top-downapproach
Liquid liabilitiesNot-liquid liabilities Semi-liquid liabilities
• Only u/w risks are longevity risk and expense risk
• Premiums have been paid
• No longevity risk• Mortality, longevity, morbidity, expense risk
• Not all premiums paid
The swap yield curve appropriate to the currency of the related cash flows.
The swap yield curve plus the liquidity premium.
The swap yield curve plus some portion of the liquidity premium.
e.g. Single premium Annuities e.g. Endowments, Terms e.g. Unit Links
Reference portfolio rate adjusted for mismatches and credit risk
No surrender risk Some surrender risk Substantial surrender risk
Examples
Surrender risk
Other liquidityindicators
[Swap Rate] + [Liq Prem] [Swap Rate] + F x [Liq Prem] [Swap Rate]
[Ref Portfolio rate] - [Mismatch adj.] - [Probability of Default] - [Cos of Downgrade]
Top-Down = Bottom-Up Top-Down ≠ Bottom-Up
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Introduction to IFRS 17Risk Adjustment
Insurance Liabilities
Future cash flows
Time valueof money
Risk Adjustment
Contractual Service Margin
Risk Adjustment calculation method not specified in the standard but it should follow the fallowing principles:
- longer duration- higher severity- wider distribution- less is known
Higher riskGreater Risk Adjustment
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%Mean
Conditional Tail Expectation
Value at Risk
Confidence level based methods
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Introduction to IFRS 17CSM initial measurement [1]
Insurance Liabilities
Future cash flows
Time valueof money
Risk Adjustment
Contractual Service Margin
Recognise Day 1 gain as the CSM
Futurecash flows
Discount
Risk Adj.
Init
ial m
eas
ure
me
nt Initial
cash flows
Pre-recogn.acq. CF
FCF FCF FCF FCF/BankInsurance
assetInsurance
liability
CSM
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Introduction to IFRS 17CSM initial measurement [2]
Insurance Liabilities
Future cash flows
Time valueof money
Risk Adjustment
Contractual Service Margin
Recognise Day 1 loss in the P&L
Futurecash flows
Discount
Risk Adj.
Init
ial m
eas
ure
me
nt
Pre-coverageacq. CF
FCF FCF FCF FCF/BankInsurance
assetInsurance
cost
Initialcash flows
Initial loss
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Introduction to IFRS 17CSM subsequent measurement
Insurance Liabilities
Future cash flows
Time valueof money
Risk Adjustment
Contractual Service Margin
Sub
seq
ue
nt
me
asu
rem
en
t
Interest accreteat the locked-indiscount rate
Future fulfilment cashflows estimate variance measured at locked-in discount rate
Release to revenue in proportion to coverage units e.g. number of policies in-force
Contractual Service Margin
CSM[opening]
Release to revenue
CSM[closing]
Opening balance
Accretedinterest
Release to revenue
Fulfilment CF variances
Closingbalance
Newcontracts
Additions to the group
The effect of any new contracts added to the group in case the group is not closed yet.
Interest Estimate variance
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Introduction to IFRS 17Risk Adjustment
Risk Adjustment
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Introduction to IFRS 17Confidence level techniques
vs
0%
5%
10%
15%
20%Mean
Conditional Tail Expectation (TVaR)
Value at Risk (VaR)
Confidence level techniques
Easy to communicate to users
Calculated with reference to a „confidence level”
Require calculating of risk profile (risk distribution)
Possibility to leverage Solvency II calculations
Value at Risk Conditional Tail Expectation
How bad is my loss going to be?What loss will not be exceeded (with high probability)?
If things get bed – what is my expected loss?
Focuses on probability of loss Takes into account the size of loss (shape in the tail)
Less useful for shewed distributions Better reflection of extreme values
More common, simple concept, clear interpretation More advanced, more difficult
Lack of subadditivity (coherence) Superior mathematical properties (coherence)
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Introduction to IFRS 17Cost of capital method
Cost of Capital methodR
isk
Ad
just
me
nt
Cost of Capital = Capital x [CoC Rate]
Risk Adjustment = Discounted Cost of Capital at risk free rate
Companies already have Solvency II Risk Margin based on a CoC method
but…
Under IFRS 17, the equivalent „confidence level” has to be disclosed –additional work for CoC method.
If Solvency II Risk Margin was to be used, entities need to consider
Only non-financial risks included (non-hedgable market and general operational risk should not be covered by the RA)
Separate calculations for insurance contracts and reinsurance contracts
Allocation to IFRS 17 groups of contracts
Discount rates should be consistent with cash flows
RA at the consolidated level is the same as the RA at entity level
Benefits of using Solvency II Risk Margin may not be as great as could be expected.
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Introduction to IFRS 17Provision for adverse deviation method
Examples:
- Adjustment to mortality
- Adjustment to morbidity
- Minimum loss ratio
- Lower discount rate
- RA as fixed percentage of discounted cash flows (by line of business)
Provision for adverse deviation (PAD)
What is it?
Explicit margins on best estimate assumptions (non-financial risks)
RA equal to the difference between base scenario and shock scenario
Easy to implement – entities need to repeat base calculations
Easy to divide into groups of insurance contracts (policy by policy calculations)
Becoming more popular among companies
Challenges
Confidence level still needs to be assessed
Setting up explicit margins (selection of risks, selection of margins)
RA should be in line with principles defined in IFRS 17
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Introduction to IFRS 17Reinsurance risk adjustment
Risk adjustment for reinsurance contracts
IFRS 17.64:
Instead of applying paragraph 37, an entity shall determine the risk adjustment for non-financial risk so that it represents the amount of risk being transferred by the holder of the group of reinsurance contracts to the issuer of those contracts
Main consequence
Reinsurer share in RA cannot be calculated in separation from underlying contracts.
For proportional reinsurance (quote share) a percentage of gross RA can be a good proxy for reinsurer risk (depending on the size of risks on entity’s share).
GROSSRA
NETRA
REINS.RA
Gross Risk Adjustment
(i.e. excluding the reinsurancerisk mitigation effects)
Net Risk Adjustment
(i.e. excluding the reinsurancerisk mitigation effects)
Reinsurance RA
(i.e. the risk transferred to the reinsurer)
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Introduction to IFRS 17Reinsurance risk adjustment
Example: Risk adjustment for non-financial risk when an entity expects to buy reinsurance
Reinsurance not available Reinsurance available
50% QS for the price of 60
100
30RA
PV of claims
50
10
50
15
Premium = 130 Premium = 125Premium = 60
100
25
Reinsurer shareNet of reinsurance
Gross
Reinsurance contract transfers 50% of the risk so is accounted for:
Reinsurance premium 60
PV of recoveries 50
Risk Adjustment 12.5
CSM (net gain) (2.5)
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Introduction to IFRS 17Contractual Service Margin
Contractual Service Margin
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Effect of any new contracts added to the group
Interest accreted on the CSM during the reporting period, measured at the discount rate locked-in at inception
Entity’s share of the change in the fair value of the underlying items
Changes in fulfilment cash flows relating to future service
Effect of any currency exchange differences on the CSM
Amount recognised as insurance revenue because of the transfer of services in the period
Introduction to IFRS 17CSM roll-forward
GM VFA
Yes Yes
Yes No
Yes Yes
No Yes
Yes Yes
Yes Yes
Dif
fere
nce
bet
we
en
th
e G
M a
nd
VFA
26
Roll-forward stepRef
44(a), 45(a)
44(b)
45(b)
44(c), 45(c)
44(d), 45(d)
44(e), 45(e)
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3Blocks®Introduction to IFRS 17Coverage Units
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The number of coverage units in a group is the quantity of coverage
provided by the contracts in the group, determined by considering for each
contract the quantity of the benefits provided under a contract and its
expected coverage duration (IFRS 17, Art B119a)
“
”This is interpreted in the IASB and the TRG analysis as quantity of the relevant services
[CU delivered]
[CU delivered] + [CU projected]x CSM
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3Blocks®Introduction to IFRS 17Coverage Units
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Coverage units should reflect a quantity of services provided to a policyholder so understanding what type of services are provided should be a starting point for the coverage units definition
Investment service
Insurance service
a) there is an investment component, or the policyholder has a right to withdraw an amount;
b) the investment component or amount the policyholder has a right to withdraw is expected to include a positive investment return; and
c) the entity expects to perform investment activity to generate that positive investment return
Insurance service exist when a policyholder can make an insurance claim.
“A policyholder benefits from the entity standing ready to meet valid claims, not just from making a claim if an insured event occurs. The quantity of benefits provided therefore depends on the amounts that can be claimed by the policyholder.”
May 2019 IASB Paper 2C art. 13
May 2018 TRGPaper 5 art. 30e
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Should not represent the pattern of expected cash flows or the changes in the risk adjustment (IFRS 17 art. BC279a; Feb 2018 TRG P5 art. 11)
Should reflect different levels of cover across periods(Feb 2018 TRG P5 art 13, 17b, 19)
Should reflect the likelihood of an insured events occurring to the extent they affect the expected duration of contracts in the group (IFRS 17 B119a, Feb 2018 TRG P5 art 17a)
Should not reflect the likelihood of an insured events occurring to the extent they affect the amount expected to be claimed in a period (Feb 2018 TRG P5 art 11, 17c)
Can be calculated on both discounted and undiscounted basis(IFRS 17 BC282)
Coverage units of the group are calculated as a sum of the coverage units of each contract in the group. (IFRS 17 B119a)
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Example 1: The entity provides only custodial services in relation to the investment component i.e. an entity does not perform significant activities to meet its obligation to pay the investment component;
Example 2: The investment component is included solely to facilitate insurance coverage, such as the inclusion of a no claims bonus.
An existence of an investment component does not imply an existence of investment service (Jan 2019 IASB, P2E art. 36)
Investment component exists (*)
Investment service exists
(*) The amounts that an insurance contract requires the entity to repay to a policyholder in all circumstances.
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Example:
• Deferred annuity contract under which premiums are paid upfront.
• The premiums earn a return during the accumulation phase and the accumulated amount can be converted into an annuity at a fixed conversion rate at a future date.
• During the accumulation phase the policyholder has the right to transfer the accumulated amount to another annuity provider or to receive the accumulated amount if he dies.
• After conversion into an annuity, there is no period of guaranteed payments. This is also a reason why this contract does not have an investment component.
An existence of an investment component is not prerequisite to an existence of investment service (May 2019 IASB, P2E art. 36)
Investment component does not exists
Investment servicedoes not exists
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Product Description Coverage Units
Credit life loan insurance Death benefit equal to principal and interest Loan balance
Credit life - variable amount Benefit equal to the outstanding credit balance Expected credit balance
Mortgage loss coverDefault losses on mortgage after recovering the value of the property on which the mortage is secured
Mortgage balance or mortgage balancess less propety value
Product warranty Replacement of a purchased item if it fails to work properly Product price
Live contingent annuity Pays a fixed monthly amount until the annuitant dies Monthly benefit
Deferred annuityAnnuity in future at a fixed rate Monthly benefit, no CU in pre-
annuity period
Extended product warrantyReplacement of a purchased item if it fails to work properly, after original warranty has expired
Product price, no CU in original warranty period
Introduction to IFRS 17CU examples - no investment component
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Product Description Coverage Units
Insurance and investment component with different durations
• Death Benefit in the first 5 years equal to the higher of 110% of the premium paid or the accumulated account value
• An investment contract matures in year 10 and pays the customer the account value at maturity
• Death Benefit has been assessed to represent a significant insurance risk
Coverage period 10 years, CU should reflect both insurance and investment component (e.g. max of Death Benefit and account value)
Endowment Policy (WP)
Amount payable on death (Sum insured including allocated investment returns and bonuses)
• Regular level premiums
• Sum insured payable upon death or reaching the policy maturity of the life insurance
• Policyholder is entitled to share of the investment returns from an underlying pool of assets
• Possibility to allocate revisionary or terminal bonuses
• The investment returns are allocated to the policyholder though bonuses that are added to the policy sum insured
• Defined surrender value payable when the policy lapses before the maturity date
Introduction to IFRS 17CU examples - with investment component
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3Blocks®Introduction to IFRS 17CU discounting [1]
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Discounted releases of the CSM are the same regardless discounted or undiscounted coverage units are used.
Coverage units approach impacts the profit recognition pattern but does not change the present value of these profits.
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Discounted CUs result in a more even recognition of profits when analysed on nominal basis i.e. without taking into account the time value of money.
Undiscounted coverage units give more even recognition of profits if we take into account the time value of money.
Discounted coverage units results in a quicker release of the CSM
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3Blocks®Introduction to IFRS 17Constructing Coverage Units
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Indirect method based on the
points in time measures
Examples: sum insured, assets
value, value of O&G
(the most popular method)
Direct method based on the
period measures
Examples: claims paid, claims
incurred, premiums received
(less popular method)
Covera
ge U
nits
CU delivered in a period
correspond to the area
under the CU function
CU delivered in a period
correspond to the value of
the CU function
Rele
vant
measure
e.g
. S
um
insure
d
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3Blocks®Introduction to IFRS 17Initial measurement and locked-in discount rates
Q1 Q2 Q4Q3
Possible approach to the initial measurement discount rates
Possible approach to the locked-in discount rates
Avr Q1 Avr Q2 Avr Q3 Avr Q4
Avr Q1
Avr Q1-Q2
Avr Q1-Q3
Avr Q1-Q4
37
One of the possible approaches
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Sem
i-an
nu
alre
po
rtin
gA
nn
ual
re
po
rtin
g
IFRS 17.B137:
Notwithstanding the requirement in IAS 34 Interim Financial Reporting that the frequency of an entity’s reporting shall not affect the measurement of its annual results, an entity shall not change the treatment of accounting estimates made in previous interim financial statements when applying IFRS 17 in subsequent interim financial statements or in the annual reporting period.
Main consequence
- IFRS 17 calculations will not be on a ‘year-to-date’ basis.
- Annual financial result for IFRS 17 will be the sum of the four individual quarters or two semi-annual periods.
Introduction to IFRS 17Interim reporting
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(2000-300) x 2/4
2000 x 1/4
(1500-300) x 1/3
Difference
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Introduction to IFRS 17Reinsurance
Reinsurance
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Introduction to IFRS 17Reinsurance mismatches
Reinsurance mismatches
Different models – reinsurance held does not have to be
measured with the same model as related insurance contracts.
Additionally the VFA cannot be applied to the reinsurance held.
Contract boundaries – contract boundary of the reinsurance
contract held can be different that the contract boundary of the
related insurance.
Grouping – Reinsurance contracts held can follow different
grouping that do not map one-to-one with the related insurance
contracts groups.
Recognition - there are different reinsurance held recognition
rules comparing to the related insurance contract recognition.
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Introduction to IFRS 17Reinsurance measurement models
Different models
Reinsurance held does not have to be measured with the same model as related ins. contracts. Additionally the VFA cannot be applied to the reinsurance held.
Insurance contracts Reinsurance contracts held
VFA Reinsurance assetIns. liability GM
VFA Reinsurance assetIns. liability PAA
GM Reinsurance assetIns. liability GM
GM Reinsurance assetIns. liability PAA
PAA Reinsurance assetIns. liability GM
PAA Reinsurance assetIns. liability PAA
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Introduction to IFRS 17Reinsurance contract boundaries
Insurance contracts
Reinsurance held
Contract boundaries
Contract boundary of the reinsurance held can be different that the contract boundary of the related insurance.
Insu
ran
ce l
iab
ility
Re
insu
ran
ce a
sset
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Introduction to IFRS 17Reinsurance grouping
Grouping
Reinsurance contracts held can follow different grouping that do not map one-to-one with the related insurance contracts groups.
Insurance contracts
Reinsurance held
Ins
Gr
AIn
Gr
BIn
s G
r C
Re
Gr
XR
e G
r Y
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Introduction to IFRS 17Reinsurance recognition
Insurance contracts Reinsurance contracts held
Reinsurance recognition
There are different reinsurance contracts held recognition rules comparing to the related insurance contract recognition.
An entity shall recognise a group of insurance contracts it issues from theearliest of the following:
a) the beginning of the coverage period of the group of contracts;
b) the date when the first payment from a policyholder in the group becomes due; and
c) for a group of onerous contracts, when the group becomes onerous
Proportional reinsurance
At the beginning of the coverage period of the group of reinsurance contracts held or at the initial recognition of any underlying contract, whicheveris the later;
Non-proportional reinsurance
From the beginning of the coverage period of the group of reinsurance contracts held
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Introduction to IFRS 17Reinsurance risk adjustment
LiabilitiesAssets
Insu
ran
ce c
on
trac
ts
Re
insu
ran
ce c
on
trac
ts h
eld
LiabilitiesAssets
RA RA
RARA
Insurance contracts risk adjustment has a credit balance i.e. it reduces the insurance assets and increases the insurance liabilities
Insurance contracts risk adjustment has a debit balance i.e. it increases the insurance assets and reduces the insurance liabilities.
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Introduction to IFRS 17IFRS 17 Reporting
IFRS 17 Reporting
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Expected cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (300) (300) (600)
Acquisition costs - - - -
Total 1000 (300) (300) 400
Actual cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (300) (300) (600)
Acquisition costs - - - -
Total 1000 (300) (300) 400
Income statement 1 2 Total
Expected claims & expenses 300 300 600
Release of the CSM 200 200 400
Acquisition costs experience adj. - - -
Premiums experience adj. - - -
Acquisition costs recognition - - -
Insurance revenue 500 500 1000
Actual claims and expenses (300) (300) (600)
Acquisition cost recognition - - -
Loss component recognition - - -
Loss component run-off - - -
Insurance service costs (300) (300) (600)
Profit or loss 200 200 400
CSM 400 200 - n/a
Loss component - - - n/a
Example 1 - profitable; no variances
Introduction to IFRS 17IFRS 17 Reporting – Example 1
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Introduction to IFRS 17 – Jun 2019www.3blocks.co
3Blocks®
Expected cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (300) (300) (600)
Acquisition costs (200) - - (200)
Total 800 (300) (300) 200
Actual cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (300) (300) (600)
Acquisition costs (200) - - (200)
Total 800 (300) (300) 200
Income statement 1 2 Total
Expected claims & expenses 300 300 600
Release of the CSM 100 100 200
Acquisition costs experience adj. - - -
Premiums experience adj. - - -
Acquisition costs recognition 100 100 200
Insurance revenue 500 500 1000
Actual claims and expenses (300) (300) (600)
Acquisition cost recognition (100) (100) (200)
Loss component recognition - - -
Loss component run-off - - -
Insurance service costs (400) (400) (800)
Profit or loss 100 100 200
CSM 200 100 - n/a
Loss component - - - n/a
Example 2 - profitable, no variances, acquisition costs recognition
Introduction to IFRS 17IFRS 17 Reporting – Example 2
48
Introduction to IFRS 17 – Jun 2019www.3blocks.co
3Blocks®
Expected cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (600) (600) (1200)
Acquisition costs - - - -
Total 1000 (600) (600) (200)
Actual cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (600) (600) (1200)
Acquisition costs - - - -
Total 1000 (600) (600) (200)
Income statement 1 2 Total
Expected claims & expenses (*) 500 500 1000
Release of the CSM - - -
Acquisition costs experience adj. - - -
Premiums experience adj. - - -
Acquisition costs recognition - - -
Insurance revenue 500 500 1000
Actual claims and expenses (600) (600) (1200)
Acquisition cost recognition - - -
Loss component recognition (200) - -
Loss component run-off 100 100 200
Insurance service costs (700) (500) (1000)
Profit or loss (200) - (200)
CSM - - - n/a
Loss component (200) (100) - n/a
Example 3 - onerous at recognition and onerous subsequently, no variances
Introduction to IFRS 17IFRS 17 Reporting – Example 3
(*) less the loss component run-off
49
Introduction to IFRS 17 – Jun 2019www.3blocks.co
3Blocks®
Expected cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (300) (300) (600)
Acquisition costs - - - -
Total 1000 (300) (300) 400
Actual cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (500) (300) (800)
Acquisition costs - - - -
Total 1000 (500) (300) 200
Income statement 1 2 Total
Expected claims & expenses 300 300 600
Release of the CSM 200 200 400
Acquisition costs experience adj. - - -
Premiums experience adj. - - -
Acquisition costs recognition - - -
Insurance revenue 500 500 1000
Actual claims and expenses (500) (300) (800)
Acquisition cost recognition - - -
Loss component recognition - - -
Loss component run-off - - -
Insurance service costs (500) (300) (800)
Profit or loss - 200 200
CSM 400 200 - n/a
Loss component - - - n/a
Example 4 – profitable; claims experience adjustment in year 1
Introduction to IFRS 17IFRS 17 Reporting – Example 4
50
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3Blocks®
Expected cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (300) (300) (600)
Acquisition costs - - - -
Total 1000 (300) (300) 400
Actual cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (300) (400) (700)
Acquisition costs - - - -
Total 1000 (300) (400) 300
Income statement 1 2 Total
Expected claims & expenses 300 400 700
Release of the CSM 150 150 300
Acquisition costs experience adj. - - -
Premiums experience adj. - - -
Acquisition costs recognition - - -
Insurance revenue 450 550 1000
Actual claims and expenses (300) (400) (700)
Acquisition cost recognition - - -
Loss component recognition - - -
Loss component run-off - - -
Insurance service costs (300) (400) (700)
Profit or loss 150 150 300
CSM 400 150 - n/a
Loss component - - - n/a
Example 5 - profitable; change in claims estimates in year 1
Introduction to IFRS 17IFRS 17 Reporting – Example 5
Expected cash flows 2 Total
Premiums - -
Claims & expenses (400) (400)
Acquisition costs - -
Total (400) (400)
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3Blocks®
Expected cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (400) (400) (800)
Acquisition costs - - - -
Total 1000 (400) (400) 200
Actual cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (400) (700) (1100)
Acquisition costs - - - -
Total 1000 (400) (700) (100)
Income statement 1 2 Total
Expected claims & expenses (*) 400 600 1000
Release of the CSM - - -
Acquisition costs experience adj. - - -
Premiums experience adj. - - -
Acquisition costs recognition - - -
Insurance revenue 400 600 1000
Actual claims and expenses (400) (700) (900)
Acquisition cost recognition - - -
Loss component recognition (100) - -
Loss component run-off - 100 -
Insurance service costs (400) (500) (900)
Profit or loss (100) - (100)
CSM 200 - - n/a
Loss component - 100 - n/a
Example 6 - profitable at recognition, onerous subsequently; change in claims estimates in year 1
Introduction to IFRS 17IFRS 17 Reporting – Example 6
Expected cash flows 2 Total
Premiums - -
Claims & expenses (700) (700)
Acquisition costs - -
Total (700) (700)
(*) less the loss component run-off
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3Blocks®
Expected cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (300) (300) (600)
Acquisition costs - - - -
Total 1000 (300) (300) 400
Actual cash flows 0 1 2 Total
Premiums 1000 200 - 1200
Claims & expenses - (300) (300) (600)
Acquisition costs - - - -
Total 1000 (100) (300) 600
Income statement 1 2 Total
Expected claims & expenses 300 300 600
Release of the CSM 200 200 400
Acquisition costs experience adj. - - -
Premiums experience adj. 200 - -
Acquisition costs recognition - - -
Insurance revenue 700 500 1200
Actual claims and expenses (300) (300) (600)
Acquisition cost recognition - - -
Loss component recognition - - -
Loss component run-off - - -
Insurance service costs (300) (300) (600)
Profit or loss 400 200 600
CSM 400 200 - n/a
Loss component - - - n/a
Example 7 - profitable; premium experience adjustment in year 1
Introduction to IFRS 17IFRS 17 Reporting – Example 7
53
Introduction to IFRS 17 – Jun 2019www.3blocks.co
3Blocks®
Expected cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (300) (300) (600)
Acquisition costs (200) - - (200)
Total 800 (300) (300) 200
Actual cash flows 0 1 2 Total
Premiums 1000 - - 1000
Claims & expenses - (300) (300) (600)
Acquisition costs (200) (100) - (300)
Total 800 (400) (300) 100
Income statement 1 2 Total
Expected claims & expenses 300 300 600
Release of the CSM 100 100 200
Acquisition costs experience adj. (100) - (100)
Premiums experience adj. - - -
Acquisition costs recognition 200 100 300
Insurance revenue 500 500 1000
Actual claims and expenses (300) (300) (600)
Acquisition cost recognition (200) (100) (300)
Loss component recognition - - -
Loss component run-off - - -
Insurance service costs (500) (400) (900)
Profit or loss - 100 100
CSM 200 100 - n/a
Loss component - - - n/a
Example 8 - profitable, acquisition costs experience adjustment in year 1
Introduction to IFRS 17IFRS 17 Reporting – Example 8
54
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Introduction to IFRS 17Balance Sheet – IFRS 4 vs IFRS 17
Balance Sheet
Financial assets
Deferred acquisition costs
Premiums receivable
Reinsurance assets
Other assets
Total assets
Insurance liabilities
Unearned premium
Other liabilities
Equity
Total liabilities and equity
Explicit deferred acquisition costs asset
Reinsurance in assets position netted with reinsurance in liabilities position
Insurance contracts in liabilities position netted with insurance contracts in assets position
IFRS 4 BS
Balance Sheet
Financial assets
Reinsurance assets
Other assets
Total assets
Insurance liabilities
Other liabilities
Equity
Total liabilities and equity No explicit deferred acquisition costs asset
Groups of insurance and reinsurance contacts in an asset potions presented separately from that in an a liability position
IFRS 17 BS
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Introduction to IFRS 17Income Statement – IFRS 4 vs IFRS 17
Income Statement
Gross premium
Premium ceded to reinsurers
Investment income
Total Income
Gross claims and benefits
Claims ceded to reinsurers
Change In insurance contract liab.
Expenses
Acquisition costs
Total expenses
Profit before tax
Premiums are cash based and include deposit components
Confusing adjustment that incorporates multiple factors
Claims include repayments of deposit components
IFRS 4 P&L
Income Statement
Insurance revenue
Incurred claims
Insurance contracts expenses
Acquisition costs
Result on reinsurance
Insurance service expenses
Insurance service result
Investment income
Insurance financial expenses
Net financial result
Profit before tax
Revenue excludes deposit components and reflects provision of services
Separation of insurance and financial result
Reinsurance result is shown separately
IFRS 17 P&L
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Introduction to IFRS 17Measurement - VFA
MeasurementVariable Fee Approach (VFA)
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Introduction to IFRS 17VFA overview
Fair value of underlying
assets
Risk Adjustment
CSMInsurance liabilities
Share of FV of underlying
assets
Fulfilment CF that do not vary
on returns
Variable Fee
Insurance with Direct Participation Features
Policyholder participates in a share of a clearly identified pool of underlying items;
Policyholder gets a substantial share of the fair value returns on the underlying items;
Change in the amounts to be paid to the policyholder vary with the change in fair value of the underlying items.
Cash Flows
VFA
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Introduction to IFRS 17VFA CSM
Fair value of underlying
assets
Risk Adjustment
CSM[closing]
Insurance liabilities
CSM[opening]
Entity’s share in the FV change
Change in future estimates
CSM[closing]
Release to revenue
Share of FV of underlying
assets
Fulfilment CF that do not vary
on returns
P&L CSM CSM CSM/P&L
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Introduction to IFRS 17VFA - Differences comparing to the GM
General Model Variable Fee Approach
Accreting interest on the CSM Interest accreted, the related financial cost recognised in the income statement
No interest accretion on the CSM
Fulfilment cash flows PV of Cash Flows + Risk Adjustment Account value + Variable Fee + Risk Adjustment
Time value of money, variances in estimates of financial variables
Financial cost/income recognised in the income statement
1) Related to the policyholders’ account (B104a) : financial cost/income recognized in the income statement
2) Not related to the policyholders’ account (B104b) : allocated to the CSM except it is subject to a qualified hedging
Variances in estimates of non-financial variables
Measured at locked-in discount rates and accounted to the CSM
Measured at current discount rates and accounted to the CSM
Coverage period i.e. the period over with the CSM is amortised
Insurance services Insurance and investment services
Area
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Introduction to IFRS 17VFA – Risk Mitigation
Risk mitigation option not applied
Risk mitigation option applied
P&
Lim
pac
t
100
Var
iab
le F
ee (100) CSM
Financialcosts
0
Var
iab
le F
ee
h
ed
gin
g 100Financialincome
Financialincome
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Introduction to IFRS 17VFA - Example [1]
Single premium 1,000
Policy term 3 years
AMC 5%
Death benefit 150%
Maturity benefit 100%
Surrender value 100%
• Single premium UL with a death benefit
• Policy term: 3 years
• Maturity benefit: fund value
• Surrender value: fund value
• Death benefit: 1.5% of the fund value
• Asset Management Charge (AMC): 5%
Product description
Expenses 10
Rete of return on assets 10%
Risk free discount rate 3%
Probability of death 1%
Lapses 20%
Assumptions
• Risk Adjustment assumed to be zero
• No estimate or experience variances
• Contract is not onerous
• AMC and expenses at the beginning of the year,
all other cash flows at the end of the year
• Credit (liabilities and incomes) shown with minus
• Debits (assets and expenses) shown with plus
• No hedging qualifying as a risk mitigation under VFA
• One coverage unit delivered each year
• Future coverage units calculated on discounted basis
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Introduction to IFRS 17VFA - Example [2]
Assets – Inv. Comp. 1 2 3
Opening b/ce 1,000.0 836.0 698.9
AMC (50.0) (41.8) (34.9) Bank acc.
Investment return 95.0 79.4 66.4 Financial income
Lapses (209.0) (174.7) (146.1) Liab. - Inv. Comp.
Maturity - - (584.3) Liab. - Inv. Comp.
Closing b/ce 836.0 698.9 -
Variable Fee Approach General Model
Assets – Inv. Comp. 1 2 3
Opening b/ce 1,000.0 836.0 698.9
AMC (50.0) (41.8) (34.9) Bank account
Investment return 95.0 79.4 66.4 Financial income
Lapses (209.0) (174.7) (146.1) Fulfilment CF
Maturity - - (584.3) Fulfilment CF
Closing b/ce 836.0 698.9 -
Death benefit 15.7 13.1 11.0
Expenses 10.0 10.0 10.0
Death benefit 15.7 13.1 11.0
Expenses 10.0 10.0 10.0
Initial Fulfilment CF 1 2 3 Total
AMC (discounted @10%) 50.0 38.0 28.9 116.9
Death benefit (discounted @10%) (14.3) (10.8) (8.2) (33.3)
Expenses (discounted @3%) (10.0) (9.7) (9.4) (29.1)
Variable Fee 54.4
Investment component (1,000.0)
Insurance liability (945.6)
Initial Fulfilment CF 1 2 3 Total
Death benefit (discounted @10%) (14.3) (10.8) (8.2) (33.3)
Lapses (discounted @10%) (190.0) (144.4) (109.7) (444.1)
Maturity (discounted @10%) - - (439.0) (439.0)
Expenses (discounted @3%) (10.0) (9.7) (9.4) (29.1)
Insurance liability (945.6)
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Introduction to IFRS 17VFA - Example [3]
Liability – Inv. Comp. 1 2 3
Opening b/ca (1,000.0) (836.0) (698.9)
AMC 50.0 41.8 34.9 Variable Fee
Financial costs (95.0) (79.4) (66.4) Financial costs
Lapses 209.0 174.7 146.1 Assets - Inv. Comp.
Maturity - - 584.3 Assets - Inv. Comp.
Closing b/ce (836.0) (698.9) -
Variable Fee Approach General Model
Fulfilment CF 1 2 3
Opening balance 54.4 (803.1) (683.9)
Premium (1,000) - - Assets
Death benefit 15.7 13.1 11.0 Revenue
Expenses 10.0 10.0 10.0 Revenue
Lapses - surrender value 209.0 174.7 146.1 Assets
Maturity benefit 0.0 0.0 584.3 Assets
Discounting unwind (92.2) (78.6) (67.4) Financial costs
Closing b/ce (803.1) (683.9) -
Variable Fee 1 2 3
Opening balance 54.4 32.9 15.0
AMC (50.0) (41.8) (34.9) Liab. - Inv. Comp.
Death benefit 15.7 13.1 11.0 Revenue
Expenses 10.0 10.0 10.0 Revenue
Share of FV changes 2.8 0.8 (1.0) CSM
Closing b/ce 32.9 15.0 -
Inv. Comp. + Var. Fee (803.1) (683.9) -
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Introduction to IFRS 17VFA - Example [4]
CSM 1 2 3
Opening balance (54.4) (37.6) (18.9)
Share of FV change (2.8) (0.8) 1.0 Variable Fee
Release to P&L 19.6 19.5 17.9 Revenue
Closing b/ce (37.6) (18.9) -
Variable Fee Approach General Model
CSM 1 2 3
Opening balance (54.4) (36.8) (18.7)
Interest (1.6) (1.1) (0.6) Financial cost
Release to P&L 19.2 19.2 19.2 Revenue
Closing b/ce (36.8) (18.7) -
Coverage Units 1 2 3
Coverage Units (CU) 1.00 1.00 1.00
CU - discounted @3% 0.97 0.94 0.92 A
CU - disc. cumulative 2.83 1.86 0.92 B
Release to P&L 0.34 0.51 1.00 A/B
Coverage Units 1 2 3
Coverage Units (CU) 1.00 1.00 1.00
CU - discounted @3% 0.97 0.94 0.92 A
CU - disc. cumulative 2.83 1.86 0.92 B
Release to P&L 0.34 0.51 1.00 A/B
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Introduction to IFRS 17VFA - Example [5]
Variable Fee Approach General Model
Income Statement 1 2 3
Death benefit (15.7) (13.1) (11.0) Variable fee
Expenses (10.0) (10.0) (10.0) Variable fee
CMS amortisation (19.6) (19.5) (17.9) CSM
Revenue (45.3) (42.6) (38.9)
Death benefit 15.7 13.1 11.0 Bank acc
Expenses 10.0 10.0 10.0 Bank acc
Insurance service cost 25.7 23.1 21.0
Financial income (95.0) (79.4) (66.4) Assets - Inv. Comp.
Financial costs 95.0 79.4 66.4 Liab - Inv. Comp.
Unwind of discount - - - -
Interest on CSM - - - -
Financial result - - -
Gross result (19.6) (19.5) (17.9)
Income Statement 1 2 3
Death benefit (15.7) (13.1) (11.0) Fulfilment CF
Expenses (10.0) (10.0) (10.0) Fulfilment CF
CMS amortisation (19.2) (19.2) (19.2) CSM
Revenue (44.9) (42.3) (40.2)
Death benefit 15.7 13.1 11.0 Bank acc
Expenses 10.0 10.0 10.0 Bank acc
Insurance service cost 25.7 23.1 21.0
Financial income (95.0) (79.4) (66.4) Assets
Financial costs - - -
Unwind of discount 92.2 78.6 67.4 Fulfilment CF
Interest on CSM 1.6 1.1 0.6 CSM
Financial result (1.1) 0.3 1.6
Gross result (20.4) (18.9) (17.7)
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Introduction to IFRS 17Measurement - PAA
MeasurementPremium Allocation Approach (PAA)
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Introduction to IFRS 17PAA eligibility criteria
The PAA measurement of the LFRC does not differ materially
from the GM measurement
orThe Coverage period of
each contract in the group is one year or lessThe criterion is not met if an entity
expects significant variability in the fulfilment cash flows
PAA or not PAA,that is the question
at in
cep
tio
n
Materiality assessment
Comparison to the GM
Variability assessment
1
2
3
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Introduction to IFRS 17PAA eligibility – Materiality Assessment
Materiality assessment1
IFRS Materiality Definition (IAS 1) - effective 1 Jan 2020
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.
The primary users of general purpose financial reporting are present and potential investors, lenders and other creditors, who use that information to make decisions about buying, selling or holding equity or debt instruments, providing or settling loans or other forms of credit, or exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources.
Typical materiality thresholds:
0.5 - 1%
Revenue
5 - 10%
Gross Profit
1 - 2%
Total Assets
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Introduction to IFRS 17PAA eligibility – Comparison to the GM
Comparison to the GM – CU and risk distribution misaligned 2
Misalignment of coverage units and risk distribution leads to a difference between LFRC measured under the GM and the PAA
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Introduction to IFRS 17PAA eligibility – Materiality Assessment
Comparison to GM – CU and risk distribution aligned 2
Alignment of coverage units and risk distribution leads to the same LFRC measured under the GM and the PAA
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Introduction to IFRS 17PAA eligibility – Variability
Variability criterion3
Only the insurance contracts that are onerous (or have a significant possibility becoming onerous) and at the same time exhibit significant variability in estimates of future claims have a practical chance to infringe the PAA eligibility variability criterion.
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Introduction to IFRS 17PAA initial measurement
Init
ial m
eas
ure
me
nt
Premiumreceived
Pre-recogn.acq. CF
Insurance liability
Acquisition cash flows Initial
acquisitioncosts
Acquisition costs deductions not applicable if the entity opted to recognise acquisition costs directly in the P&L
BankInsurance
assetsBank
Insurance liability
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Introduction to IFRS 17PAA subsequent measurement
Sub
seq
ue
nt
me
asu
rem
en
t
Insurance liabilities[opening]
Acquisition cash flows
Insuranceliabilities[closing]
Opening balance
Premiumsreceived
Acquisition costs CF
Acquisitioncosts
Acquisition cost recognition
Accreted interest
Premiums Interest Release to revenue
Release to revenue
Closing balance
Inv. comp.
Investment component
Bank acc.(BS)
Bank acc.(BS)
Financial cost (P&L)
Acquisition costs (P&L)
Fin. Assets(BS)
Revenue(P&L)
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Introduction to IFRS 17PAA revenue recognition [1]
IFRS 17.B126Insurance revenue for the period is the amount of expected premium receipts (excluding any investment component and adjusted to reflect the time value of money and the effect of financial risk, if applicable, applying paragraph 56) allocated to the period.
IFRS 17.B126 & B127The entity shall allocate the expected premium receiptsto each period of coverage:(a) on the basis of the passage of time; (…)(b) on the basis of the expected timing of incurred
insurance service expenses.
The options (a)/(b) can be changed if facts and circumstances change.
- Total expected premium for the contract is included in the calculation of revenue (not only premium paid in the period)
- Revenue for total insurance contract term represents premium (less investment component, plus interest if applicable)
- Timing of premium receipts does not directly affect the revenue recognition (it affects LFRC)
- PAA reserves may result in a similar outcome to IFRS 4 UPR method
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Introduction to IFRS 17PAA revenue recognition [2]
Example: different term vs revenue recognition- Single premium paid up front- Single premium paid at the end of the coverage period- Monthly premium
- 1 year contract- quarterly reporting- premium of 2000- acq. costs of 200 paid up front- linear recognition of revenue
Initial measurement
Quarter 1 Quarter 4Quarter 3Quarter 2
Opening balance
Premium received
Acquisition cash flows
Acquisition cost
Release to revenue
Closing balance
0
2000
(200)
0
0
1800
1800
0
0
50
(500)
1350
1350
0
0
50
(500)
900
900
0
0
50
(500)
450
450
0
0
50
(500)
0
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Introduction to IFRS 17PAA revenue recognition [3]
Example: different term vs revenue recognition- Single premium paid up front- Single premium paid at the end of the coverage period- Monthly premium
- 1 year contract- quarterly reporting- premium of 2000- acq. costs of 200 paid up front- linear recognition of revenue
Initial measurement
Quarter 1 Quarter 4Quarter 3Quarter 2
Opening balance
Premium received
Acquisition cash flows
Acquisition cost
Release to revenue
Closing balance
0
0
(200)
0
0
(200)
(200)
0
0
50
(500)
(650)
(650)
0
0
50
(500)
(1100)
(1100)
0
0
50
(500)
(1550)
(1550)
2000
0
50
(500)
0
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Introduction to IFRS 17PAA revenue recognition [4]
Example: different term vs revenue recognition- Single premium paid up front- Single premium paid at the end of the coverage period- Monthly premium
- 1 year contract- quarterly reporting- premium of 2000- acq. costs of 200 paid up front- linear recognition of revenue
Initial measurement
Quarter 1 Quarter 4Quarter 3Quarter 2
Opening balance
Premium received
Acquisition cash flows
Acquisition cost
Release to revenue
Closing balance
0
0
(200)
0
0
(200)
(200)
500
0
50
(500)
(150)
(150)
500
0
50
(500)
(100)
(100)
500
0
50
(500)
(50)
(50)
500
0
50
(500)
0
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Introduction to IFRS 17PAA – simplifying options
IFRS 17 allows using simplifying options for PAA, if certain conditions are met
IFRS 17.56
No adjustment of LFRC for time value
of money
Lack of significant financing
component
IFRS 17.59(a)
Recognition of insurance
acquisition cash flow as expense when
incurred
Coverage period of each contract less
than a year
IFRS 17.59(b)
No adjustment of PVFCF for incurred
claims for time value of money
Claims cash flows expected to be paid in less than a year
Option
Condition
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Introduction to IFRS 17PAA – judgements
Areas of judgement in Premium Allocation Approach
Acquisition costs
recognition
• Interest accreted on Notional DAC
• Interest not accreted on Notional DAC
Acquisition costs
recognition units
• Discounted
• Not discounted
Risk distribution
units
• Discounted
• Not discounted
PAA
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Introduction to IFRS 17Onerous contracts test [1]
Facts and circumstances
Major changes in cost
allocation
Major shifts in economic environment
Intentional pricing strategy leading to the
lossLocal GAAP, SII or MI combined loss ratio greater than
100%
Change in the regulatory
environment
Onerous contracts test
Comparison of the PAA measurement of the LFRC with the measurement based on the fulfilment cash flows.
Events triggering the test
Onerous contracts test should be done if the facts and circumstances indicate that the group of contracts is onerous.
PAA measurement of onerous contracts
The PAA measurement of onerous contracts should include the unexpired risk adjustment resulting from the test.
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Introduction to IFRS 17Onerous contracts test [2]
IFRS 4
IFRS 17
Facts and circumstances
indicate that the group is onerous
N/a
No
Yes
At the group recognition date
Onerous contracts test
At the reporting date
No Yes
No No
Yes Yes
LAT Reserve / URR
GM measurement
Impacts grouping
May impact the recognition date
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83
Introduction to IFRS 17PAA measurement summary summary
PPA Liability Estimate
Unexpired Risk(Remaining Coverage)
Liability for Incurred Claims(Past Coverage)
LossComponent
Insurance Liability
Non-Loss Component
Future cashflows
Disc.
RA
PAA
Me
asu
rem
ent
Fulf
ilme
nt
Cas
h F
low
s
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84
Introduction to IFRS 17Non-life insurance fulfilment CF example
Co
mb
ined
LR
Expected value of the Combined Loss Ratio
Combined Loss Ratio at the confidence levelcorresponding to the adopted risk adjustment methodology
Claims and expenses (including acquisition costs calculated on
discounted basis)
Including premiums receivable
An example of general insurance fulfilment
cash flows calculation
UnearnedPremium[ ] Combined
Loss Ratio[ ]RiskAdjustment
Present Value of Premiums CF[ ]Fulfilment
Cash Flow[ ]
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85
Introduction to IFRS 17Onerous contracts at recognition – PAA vs GM
GM
PAA
GM vs PAA for onerous contracts at recognition
Cal
cula
tio
n o
f th
e C
SM
Cas
h f
low
s p
roje
ctio
n
Ris
k ad
just
men
t
Acq
. co
sts
op
tio
n
Cla
ims
dis
c.
op
tio
n
Fin
.co
mp
.o
pti
on
If PAA options are not used then the PAA liability measurement is not simpler than under the GM
Required disclosures under the PAA are simpler comparing to the GM
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86
Introduction to IFRS 17PAA – Differences comparing to the GM
General Model Premium Allocation ApproachArea
Scope LFRC and LIC LFRC and LIC (LIC measured at the FCF value)
ApplicationAll except contracts with DirectParticipation Features (DPF)
Non-DPF contracts with the insurancecoverage no more than a year
Initial measurement PVCF + RA + CSM Premiums less initial acquisition costs
Subsequent measurement PVCF + RA + CSM Recurrent formula (see slides 64-67)
Cash flow projections Yes No (except for the LC and LIC)
Risk adjustment Yes No (except for the LC and LIC)
CSM Yes (if non-onerous and insurance issued) No
Immediate acquisition costs recognition option
No Yes
RevenueIn line with insurance service measuredwith claims, expenses and coverage units
Pro rata temporis or in proportion to the risk release
Onerous contract test No Yes (depending on facts and circumstances)
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87
Introduction to IFRS 17PAA - Example [1]
Single premium 1,000
Initial acquisition CF 120
Pre-recognition acquisition CF 80
Claims - projected 600
Claims - actual 500
Expenses - projected 100
Expenses - actual 150
Risk free discount rate 3%
Investment component -
• Single premium one year accident insurance
• Uniform risk distribution over the insurance coverage period
• Coverage period starts on the first day of the financial year
• All acquisition costs are paid on day one
• The entity opted to accrete interest on the PAA liability
• The entity opted to recognise acquisition costs over the coverage period
• Credit (liabilities and incomes) shown with minus
• Debits (assets and expenses) shown with plus
Premium Allocation Approach General Model
Initial measurement FCF CSM Bank Ins. asset
Premium - (1,000.0) 1,000.0
Initial acquisition CF - 120.0 (120.0)
Pre-recognition acquisition CF - 80.0 - (80.0)
PV of projected claims (582.5) 582.5 -
PV of projected exp. (97.1) 97.1 -
Total (679.6) (120.4) 880.0 (80.0)
Initial measurement Ins. liab. Bank Ins. asset
Premiums received (1,000.0) 1,000.0
Initial acquisition costs 120.0 (120.0)
Pre-recognition acquisition CF 80.0 - (80.0)
Total (800.0) 880.0 (80.0)
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88
Introduction to IFRS 17PAA - Example [2]
Premium Allocation Approach General Model
Insurance liability
Opening b/ca (800.0)
Interest (24.0) Financial costs
Amortisation of acquisition costs (200.0) Ins. service costs
Release to revenue 1,024.0 Revenue
Closing b/ce -
Fulfilment Cash Flows
Opening b/ce (679.6)
Unwind of discount (20.4) Financial costs
Claims - projected 600.0 Revenue
Expenses - projected 100.0 Revenue
Closing b/ce -
CSM
Opening b/ce (120.4)
Interest (3.6) Financial cost
Release to revenue 124.0 Revenue
Closing b/ce -
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Introduction to IFRS 17PAA - Example [3]
Premium Allocation Approach General Model
Income Statement
Revenue (1,024.0) Insurance liability
Claims - actual 500.0 Bank/LIC
Expenses - actual 150.0 Bank/LIC
Acquisition costs 200.0 Insurance liability
Insurance service cost 850.0
Financial costs 24.0 Insurance liability
Unwind on discount 0.0
Interest accreted on CSM 0.0
Financial insurance income 24.0
Gross result (150.0)
Income Statement
Claims - projected (600.0) Fulfilment cash flows
Expenses - projected (100.0) Fulfilment cash flows
Acquisition costs (200.0) Ins. service costs
CMS amortisation (124.0) CSM
Revenue (1,024.0)
Death benefit 500.0 Claims reserve
Expenses 150.0 Liabilities
Acquisition costs 200.0 Revenue
Insurance service cost 850.0
Financial costs 0.0
Discounting unwind 20.4 Fulfilment cashflows
Interest accreted on CSM 3.6 CSM
Financial insurance income 24.0
Gross result (150.0)
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Introduction to IFRS 17Onerous contracts
Onerous Contracts
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Contract is profitable because the expected losses are lower than the expected premiums.
91
Introduction to IFRS 17Onerous contract concept
Expected Loss Expected Premiums Exp Loss + Risk Adj.
A B
A
Contract is onerous because the expected losses plus risk adj. are higher then expected premiums.
B
Example of a profitable insurance contract that at the same time is onerous under IFRS 17
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Introduction to IFRS 17Loss component concept
Loss component LossNotional
DACAcquisition
costs
The difference between the loss component and loss is similar to the difference between the notional DAC and acquisition cost
• Notional DAC represent the portion of acquisition costs that have not been recognised in the P&L yet
• Amortisation of the Notional DAC does not have any impact on the results (the same amount recognised in revenue and costs)
• Notional DAC amortisation pattern should be based on the passage of time.
• Loss component represents the portion of the loss that has not been recognised in the P&L yet
• Amortisation of the loss component does not have any impact on the results (the same amount deducted from revenue and costs)
• Amortisation of the Loss component is driven by the run-off of claims, expenses and risk adjustment.
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Introduction to IFRS 17Loss component - Initial measurement
PV of Expenses
PV ofClaims
PV of premiums
Acquisitioncosts
Risk Adj.Loss
The loss component determines the amounts that are presented in P&L as reversals of losses on onerous groups and are consequently excluded from revenue. (Art 49)
Claims, expenses and the risk adjustment movement related to the current service (CERA) have to be allocated to the LC and the LFRC excluding LC in systematic way. (Art 50, 51)
CERA - Claims, Expenses, Risk Adjustment
Acquisition cost should not be allocated to the loss componentas they are fully recognised in revenue (Art B125 and Art 51)
Premiums are not accounted through income statement therefore cannot be allocated to the loss component (Art 51 Art B123)
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Introduction to IFRS 17Acquisition costs
Acquisition Costs
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PVFC
Acq.
costs
CSM
Result Revenue Costs
The CSM mechanism on its own
does not guarantee that:
• Revenue includes the portion of
premiums covering acq. costs
• Service costs include acq. costs
incurred by an entity
Introduction to IFRS 17Acquisition costs recognition in P&L
Revenue
Costs
Result
100
(100)
-
95
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Pre-recognition
acq. cost cash flows
Post-recognition
acq. cost cash flows
Recognised in the balance
sheet as an insurance asset
(pre-recognition acq. cf)
Recognised as a
reduction to the CSM
(all acq. cash flows)
Systematic recognition of
acquisition cost in P&L
(all acq. cash flows)
Introduction to IFRS 17Acquisition costs recognition in BS
96
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Pre-recognition acquisition cost cash flows
Acquisition cost cash flows upon recognition
Cr Dr
Dr Cr
Future projected acquisition costs cash flows Cr Dr
Income Statement
Re
ven
ue
Acc
ou
nt
Incu
rre
dC
laim
s
Incu
rre
dEx
pe
nse
s
Balance Sheet
Fulf
ilme
nt
Cas
h F
low
s
CSM
Ban
k A
cco
un
t
Insu
ran
ceA
sse
t
Acq
uis
itio
n
Exp
en
ses
Pre-recognition acquisition cost cash flows Dr Cr
Pre-recognition period
Upon recognition
Post-recognition
Systematic recognition of acquisition costs
Expected acquisition cost cash flows - current service
Acquisition costs – changes in estimates
Cr Dr
CrDr
D/C C/D
Expected acquisition cost cash flows - future service Dr Cr
Acquisition costs experience adjustment - current service D/C D/C
Actual acquisition cost cash flows - current service DrCr
Actual acquisition cost cash flows - future service Dr Cr
Experience adjustmentcurrent service
Experience adjustmentfuture service
(Art B96a, Art B113a)
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3Blocks®Introduction to IFRS 17Acquisition cost – Example 1
98
Acquisition cost cash flows upon recognition 100 -100
P&L
Rev
en
ue
Acco
un
t
Balance Sheet
Fu
lfilm
en
t
Cash
Flo
ws
CS
M
Ban
k
Acco
un
t
Insu
ran
ce
Asset
Acq
uis
itio
n
Exp
en
ses
1 Jan 2018
31 Dec 2018
Systematic recognition of acquisition costs -10 10
• Insurance policy issued on 1 Jan 2018• 100 GBP of acquisition cost paid when the insurance policy is issued • Policy’s coverage period is 10 years
No
tio
nal
DA
C
off BS
100
90
Example 1
Introduction to IFRS 17 – Jun 2019www.3blocks.co
3Blocks®Introduction to IFRS 17Acquisition cost – Example 2
99
The situation as in Example 1 but additionally 30 GBP of acquisition costs paid on 15 Nov 2017 i.e. before the insurance policy was issued (so called pre-recognition acq. costs)
Acquisition cost cash flows upon recognition 100 -100
P&L
Rev
en
ue
Acco
un
t
Balance Sheet
Fu
lfilm
en
t
Cash
Flo
ws
CS
M
Ban
k
Acco
un
t
Insu
ran
ce
Asset
Acq
uis
itio
n
Exp
en
ses
1 Jan 2018
31 Dec 2018
Systematic recognition of acquisition costs -13 13
No
tio
nal
DA
C
off BS
130
117
Pre-recognition acquisition cost cash flows -30 30
15 Nov 2017
30
Pre-recognition acquisition cost cash flows 30 -30 30
Example 2
Introduction to IFRS 17 – Jun 2019www.3blocks.co
3Blocks®Introduction to IFRS 17Acquisition cost – Example 3
100
The situation as in Example 2 but additionally 2 GBP of acquisition cost per year, payable on 1 Jan, is expected to be paid over the insurance period. Future acq. cost in total amount to 20 GBP (10 x 2 GBP). Discounting is ignored.
Acquisition cost cash flows upon recognition 100 -100
P&L
Rev
en
ue
Acco
un
t
Balance Sheet
Fu
lfilm
en
t
Cash
Flo
ws
CS
M
Ban
k
Acco
un
t
Insu
ran
ce
Asset
Acq
uis
itio
n
Exp
en
ses
1 Jan 2018
31 Dec 2018
Systematic recognition of acquisition costs -15 15
No
tio
nal
DA
C
off BS
130
135
Pre-recognition acquisition cost cash flows -30 30
15 Nov 2017
30
Pre-recognition acquisition cost cash flows 30 -30 30
Future projected acquisition costs cash flows -20 20 150
Acquisition cost cash flows 2 -2 135
31 Dec 2019
Systematic recognition of acquisition costs -15 15 120
1 Jan 2019
Example 3
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3Blocks®Introduction to IFRS 17Acquisition cost – Example 4
101
The situation as in Example 3 but additionally 7 GBP of acquisition was paid in 2018 instead of expected 2 GBP. The related experience variance relate to the future service.
P&L
Rev
en
ue
Acco
un
t
Balance Sheet
Fu
lfilm
en
t
Cash
Flo
ws
CS
M
Ban
k
Acco
un
t
Insu
ran
ce
Asset
Acq
uis
itio
n
Exp
en
ses
31 Dec 2019
Systematic recognition of acquisition costs -15.6 15.6
No
tio
nal
DA
C
off BS
124.4
Expected acquisition cost cash flows - future service 2 2
Actual acquisition cost cash flows - future service 7 -7 140
140
1 Jan 2019
Experience
adjustment
future service
(Art B96a, Art B113a)
31 Dec 2018
Systematic recognition of acquisition costs -15 15 135
Example 4
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3Blocks®Introduction to IFRS 17Acquisition cost – Example 5
102
The situation as in Example 4 but the estimation of future yearly payments was changed from 2 GBP per year to 7 GBP per year.The total change in the future acq. cost cash flows estimate was 45 GBP ( (7-2) GBP x 9 years )
P&L
Rev
en
ue
Acco
un
t
Balance Sheet
Fu
lfilm
en
t
Cash
Flo
ws
CS
M
Ban
k
Acco
un
t
Insu
ran
ce
Asset
Acq
uis
itio
n
Exp
en
ses
31 Dec 2019
Systematic recognition of acquisition costs -15.6 15.6
No
tio
nal
DA
C
off BS
124.4
Expected acquisition cost cash flows - future service 2 -2
Actual acquisition cost cash flows - future service 7 -7 140
140
1 Jan 2019
Experience
adjustment
future service
(Art B96a, Art B113a)
Acquisition costs – changes in estimates -45 45 169.4
31 Dec 2018
Systematic recognition of acquisition costs -15 15 135
Example 5
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3Blocks®Introduction to IFRS 17Acquisition cost – Example 6
103
The situation as in Example 5 but the experience variance related to the current service instead of future service.
P&L
Rev
en
ue
Acco
un
t
Balance Sheet
Fu
lfilm
en
t
Cash
Flo
ws
CS
M
Ban
k
Acco
un
t
Insu
ran
ce
Asset
Acq
uis
itio
n
Exp
en
ses
31 Dec 2019
Systematic recognition of acquisition costs -15 15
No
tio
nal
DA
C
off BS
120
Expected acquisition cost cash flows - current service 2
Actual acquisition cost cash flows - current service -7
-2
7 135
135
1 Jan 2019
Acquisition costs – changes in estimates -45 45 165
31 Dec 2018
Systematic recognition of acquisition costs -15 15 135
Experience
adjustment
current service-5 5 135
Example 6
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Introduction to IFRS 17OCI Option
OCI option
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Introduction to IFRS 17Other comprehensive income
IAS 1
Other comprehensive income comprises items of income
and expense (including reclassification adjustments) that
are not recognized in profit or loss as required or permitted
by other IFRSs.
Other Comprehensive Income is a method to:
Remove short term volatility from P&L
Eliminate accounting mismatch between assets related and liabilities related income statement impacts
Separate underwriting performance from financial effects
IFRS 17 OCI option
Accounting policy choice – to present changes in financial assumptions in P&L or OCI
Change in financial
assumptions
Financial cost (P&L)
OCI
Financial cost (P&L)
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Introduction to IFRS 17Other comprehensive income
Do contracts havedirect participation features?
Does the entity hold underlying items?
Current period book yield approach
Do changes in financial risk assumptions have substantial
effect on amounts paid to policyholder?
Discount rates determined at initial recognition
(„locked-in”)
Effective yield or projected crediting rate approach
OCI option decision tree
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Introduction to IFRS 17Other comprehensive income
• Three year accident contract with single premium
• Change of interest rate at the end of year 1 from 10% (initial) to 5%
Example: „locked-in rate”
Unwinding of interest of 10% and change of discount
Unwinding of interest of 5%
OCI option applied Y1 Y2 Y3 Total
P&L -90 -64 -34 -189
OCI -25 16 9 0
OCI option not applied Y1 Y2 Y3 Total
P&L -115 -48 -26 -189
OCI 0 0 0 0
• OCI option „on”: smoother profit recognition (locked – in rate)• OCI option „off”: increased costs in Y1 due to change of discount rate• Both options present the same total financial cost (total OCI equals to zero)
Present Value of FCFs Inception Y1 Y2 Y3
Disc. at locked-in rate [A] 403 -347 -182 0
Disc. at current rate [B] 403 -372 -190 0
Disc.Rate change impact on PVFCF [A] - [B] -25 -9 0
Total finance cost in a year -115 -48 -26
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Introduction to IFRS 17Other comprehensive income
Example: current book yield
• Three year, single premium contract with direct participation
• Change of interest rate at the end of year 1 from 10% (initial) to 5%
• OCI option „on”: smoother profit recognition (amortized cost)• OCI option „off”: increased costs in Y1 due to change of discount rate• Both options present the same total financial cost (total OCI equals to zero)
Asset valuation Inception Y1 Y2 Y3
Fair value 1 500 1 811 1 901 1 997
Change in fair value 311 91 95
Amortised cost 1 500 1 650 1 815 1 997
Change in amortised cost 150 165 182
Disc.Rate change impact 161 86 0
OCI option applied Y1 Y2 Y3 Total
P&L -150 -165 -182 -497
OCI -161 74 86 0
OCI option not applied Y1 Y2 Y3 Total
P&L -311 -91 -95 -497
OCI 0 0 0 0
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Introduction to IFRS 17Other comprehensive income
Example: effective yield approach
• Three year, single premium contract without direct participation features with payment equal to percentage of accumulated value
• Premium invested in 2year zero coupon bond with 10% return
• Change of interest rate at the end of year 1 from 10% (initial) to 5%
Before change of assumptions Inception Y1 Y2 Y3
Fair value - total assets 1 500 1 650 1 815 1 997
delta 10% 10% 10%
Fair value - assets credited to PH 1 418 1 560 1 716 1 890
After change of assumptions
Fair value - total assets 1 500 1 650 1 815 1 906
delta 10% 10% 5%
Fair value - assets credited to PH 1 418 1 560 1 716 1 802
Effective yield = 7.47%
B132 (a)
A systematic allocation for the finance income or expenses arising from the estimates of future cash flows can be determined (…):
(i) using a rate that allocated the remaining revised expected finance income or expenses over the remaining duration of the group of contracts at a constant rate;
Insurance finance income and expenses Y1 Y2 Y3
P&L: OCI option applied 10% 7% 7%
P&L: OCI option not applied 15% 5% 5%
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Introduction to IFRS 17Other comprehensive income
Example: projected crediting rate approach
• Three year, single premium contract without direct participation with crediting rate of 8% pa
• Premium invested in 2year zero coupon bond with 10% return
• Change of interest rate at the end of year 1 from 10% (initial) to 5% and crediting rate from 8% to 3%.
B132 (a)
A systematic allocation for the finance income or expenses arising from the estimates of future cash flows can be determined (…):
(ii) For contracts that use a crediting rate to determine amounts due to policyholders – using an allocation that is based on the amounts credited in the period and expected to be credited in future periods.Before change of assumptions Inception Y1 Y2 Y3
Fair value - total assets 1 500 1 650 1 815 1 997
delta 10% 10% 10%
Fair value - assets credited to PH 1 500 1 620 1 750 1 890
After change of assumptions
Fair value - total assets 1 500 1 650 1 815 1 906
delta 10% 10% 5%
Fair value - assets credited to PH 1 500 1 620 1 750 1 802
Crediting rates Y1 Y2 Y3 Total
Actual crediting factors 108,0% 108,0% 103,0% 120,1%
Projected crediting factors 110,0% 110,0% 104,9% 126,9%x const
cumulated projected crediting factors = delta PVFCF at current discount rates
Insurance finance income and expenses Y1 Y2 Y3
P&L: OCI option applied 10% 10% 5%
P&L: OCI option not applied 15% 5% 5%
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Introduction to IFRS 17Full retrospective approach
Full Retrospective Approach
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Introduction to IFRS 17Transitional provisions - Introduction
2019 2020 2021 2022
First IFRS 17Fin. Stat.
Effective DateInitial Application
TransitionDate
IAS 8 Article 19(b)
Modified Retrospective Approach1
Fair Value Approach2
IAS 8 Article 19(b)Changes an accounting policy upon initial application of a Standard or an Interpretation that does not include specific transitional provisions applying to that change, or changes an accounting policy voluntarily, it shall apply the change retrospectively
CSM Transitional Provisions:
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Introduction to IFRS 17Application of transitional provisions
2010-2021
FV Approach
A B C
Modified Retrospective FullRet.
D E F
P2
P3
P1
1990-2009 P2
P3
P1
1970-1989 P2
P3
P1
XXXX-XXXX
Different generations may be covered by different sets of transitional provisions
P2 P3P1
Different portfolios may be covered by different sets of transitional provisions
B CA
There may be different sets of modifications within the given transitional approach
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Introduction to IFRS 17Full retrospective approach steps
Ass
ets
Risk Adj.
CSM
Equity
Other Liab.
IFRS 17
C
B
A
Oth
er A
sset
s
Equity
Other Liab.
IFRS 4
C
B
Derecognize any existing balances that would not exist had IFRS 17 always applied
For example DAC, DIR, VOBA
1
Identify, recognize and measure each group of insurance contracts as if IFRS 17 had always applied
2
Recognize any resulting net difference in equity
3
DAC
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115
Introduction to IFRS 17Modified retrospective approach
Modified Retrospective Approach
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Introduction to IFRS 17Modified retrospective approach - Introduction
CSMA B
D E
Risk Adjustment
C
F
CashflowsDiscount Rates
6416
= 41 The objective of the modified retrospective approach
is to achieve the closest outcome to retrospective application possible without undue cost or effort
• Use of the actual cashflows vs projected cashflows
• Ins. contracts identification and classification date
• Cohorts with duration exceeding 1 year
• Use the Risk Adjustment at the Transition Date adjusted for estimated Risk Adjustment releases
• Approximate discount rates curve vs exact calculation
• Two methods to determine the approximate discount rates curve
• Contracts without DPF: calculation of cumulative effect of CSM movements
• Contracts with DPF: calculation based on the fair value at the transition date
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117
Introduction to IFRS 17Cashflows modification
FULL
Ret
rosp
ect
ive
A
pp
roac
hM
OD
IFIE
DR
etro
spe
ctiv
e
Ap
pro
ach
Projection
ProjectionActual
Transitiondate or earlier
Transitiondate or earlier
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Introduction to IFRS 17Risk adjustment modification
FULL
Ret
rosp
ect
ive
A
pp
roac
hM
OD
IFIE
D R
etro
spe
ctiv
e
Ap
pro
ach
Transition date or earlier
Transition date or earlier
Estimated releases of the Risk Adjustment
Transition date
Transition date
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119
Introduction to IFRS 17Discount rates modification
T-1
T-2
T-3
IFRS 17 yield curve [A]
Observable yield curve [B]
Average A-B spread [C]
Average [A]-[B] spreadBased on T-1, T-2, T-3
Use observable curve yield curve if it approximates well IFRS 17 yield curve
Use observable yield curve adjusted for the average spread in relation to the IFRS 17
yield curve
Yield curve B adj. for C
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120
Introduction to IFRS 17CSM modification – Contracts without DPF
CSM0(Initial)
Accreted interest
CSM0Release to Revenue
[CU Provided]
[CU Provided] + [CU Remaining]CSM0 x
CSMT(Transition)
Coverage Units provided since the inception date
Coverage Units remaining at the transition dateCSM0 x { [1+r(0,1)] x [1+r(0,2)] x …. x [1+r(0,T)] -1 }
CSM0 x { [1+r(T,1)] x [1+r(T,2)] x …. x [1+r(T,T)] -1 }
or
allowed if the cohorts modification applied
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Introduction to IFRS 17CSM modification – Contracts with DPF
Fair Value of underlying items
Fulfillment Cashflows
Charges to the policyholder prior to the transition(including amounts deducted from underlying items)
Payments made prior to transition thatwould not have varied with the underlying items
Estimated reduction in the Risk Adjustmentprior to the transition
CSM at the Inception Date
CSM that relates to the period before the transition date
CSM at the Transition Date
Deduct
Add
Deduct
Deduct
Deduct
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Introduction to IFRS 17MRA - other modifications
Identification of insurance groups
Default Treatment Modified Retrospective Approach
Determined attransition date
Size of cohorts 1 year or less Cohorts can be bigger than 1 year
Determined at initial recognition date
No cohort simplifi-cation
Cohort simplifi-cation
Assessment against the VFA criteria
Identification of discretionary cash flows
Locked-in discount rates
OCI options
initial recognition date Determined at transition date
Calculated retrospectively i.e. at each reporting date
At nil or in case of contracts with DPF on cumulative basis calculated at the transition date
OCI options
At nil if financial assumptions changes have a substantial effect on the benefits
PAA: Systematic allocation based on the discount rates at transition date instead of claim date
Calculated retrospectively i.e. at each reporting date
For contract with DPF equal to amount recognised in OCI on underlying assets
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Introduction to IFRS 17Fair value approach
Fair Value Approach
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Introduction to IFRS 17Fair value approach - Introduction
FairValue
PV of Future Cashflows
Risk Adj.
CSM
Fair Value
Fulfillment Cashflows
CSM CSM or Loss Component at the Transition Date calculated as the difference between the fair value of a group of insurance contracts and the fulfilment cash flows
FairValue
PV of Future Cashflows
Risk Adj.Loss
Comp.
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3Blocks®Introduction to IFRS 17FVA - Insurance contracts issued
FV
PV
CF RA
Loss
TP
FV
PV
CF
RA
Loss
TP
FV
PV
CF
RA
Loss
TP
FV
PV
CF
RA
CSM
TP
FV
PV
CF
RA
CSM
TPFV
PV
CF
RA
CSM
TP
For insurance contracts issued: RARisk Adjustment has always credit (liability) balance
CSMCSM has always credit (liability) balance
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Introduction to IFRS 17FVA - Reinsurance contracts held
FV
PV
CF
RA
CSM
Re FV
PV
CF
RA
CSM Re
FV
PV
CF
RA
CSM
Re
FVP
VC
F
RA
CSM
Re
FV
PV
CF
RA
CSM
Re
FV
PV
CF
RA
CSM
Re
For reinsurance contracts held: RARisk Adjustment has always debit (asset) balance
CSM CSM may have both credit (liability) or debit (asset) balance
CSM
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Introduction to IFRS 17FVA - Other modifications
Identification of insurance groups
Default Treatment FV Approach Modification
Determined attransition date
Size of cohorts Cohorts should be 1 year or less Cohorts can be bigger than 1 year
locked-in discount rate determination
Determined at initial recognition date
OCI option applicationCalculated retrospectively i.e. at each
reporting date
At nil or in case of contracts with DPF on cumulative basis calculated
at the transition date
PAA claims discount rates Determined at claim incurred date
Assessment against the VFA criteria
Identification of discretionary cash flows
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Introduction to IFRS 17Implementation considerations
Implementation considerations
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Metho-dology
Systems
Data Processes
IFRS 17 Target Operating Model
Implementation from the process perspective
Process 1
Process 2
Process 3
Process 4
Process
Imp
lem
enti
ng
syst
ems/
too
lsto
su
pp
ort
th
e p
roce
ss
Sou
rcin
g d
ata
Ensu
rin
g th
e p
roce
ss c
om
plie
s w
ith
th
e m
eth
od
olo
gy
Introduction to IFRS 17 IFRS 17 Target operating model
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System D
System C
System A
System B
Department 1 Department 2 Department 3 Department 4
Process P6Process P5
Process P4
Process P3
Process P2
Process P1
Introduction to IFRS 17IFRS 17 High level solution design
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Methodology
▪ Consider implications of gap analysis and identify which areas are most important
▪ Deep dive into specific aspects of methodology
▪ Identify points of decision (IFRS 17 leaves room for decision)
Impact assessment
▪ Build prototypes models for all major products
▪ Perform financial impact assessment
▪ Select options
▪ Prepare position papers / accounting policies
▪ Consider operational impacts
Solution design
▪ Ensure availability of data
▪ Decide on appropriate external system or decide on internal system
▪ Review processes to identify impacts from IFRS
Implementationand testing
▪ Implement IT solution
▪ Check the data flow from the source till reporting result
▪ Perform dry run calculations
Introduction to IFRS 17Implementation approach
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Introduction to IFRS 17 Solution design process
Methodologyteam
Methodology papers
Impactassess. team
Impactassessment
Solutiondesign team
Solution architecture
Consultation with the auditor
Methodology committee
Methodology approval
Systems
Data
Processes
Solution design
Solution design committee
Solution design decisions
Business requirements documents(needed if the solution design leaders do have sufficient understanding of the requirements)
High level solution design
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Introduction to IFRS 17 Teams
Met
ho
do
logy
team
Actuaries
Accounting specialists
Business analysis
Project management and governance
Representatives of different operating entitiesInte
rnal
Exte
rnal
Acc
ou
nti
ng
team
Pro
toty
pin
g an
d
imp
act
asse
ssm
en
ts
Tran
siti
on
al
CSM
Cas
h f
low
san
d C
SM
Pre
miu
mA
lloca
tio
n
An
alys
is o
f m
ove
me
nt
Ris
kad
just
me
nt
Dis
cou
nt
rate
s
Test
ing
IT specialists
Testers
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Introduction to IFRS 17Project governance
Set goals and objectives for the IFRS 17 programme
Approves the budgets and makes project strategic
decisions (e.g. selection of the CSM solution)
Review the progress and technical content of the
programme
Escalates issues to the relevant bodies: Management
Board, Audit Committee, Risk/Capital Committee
Steering Committee
Monitor and control the management of IFRS 17
methodology deliverables
Review and challenge methodology proposals (e.g. use
of the OCI option,
The Methodology Committee has the methodology
decision making powers, approves proposed accounting
policies and methods
Methodology Committee
Working groups are set up across the programme to
concentrate on specific topics (e.g. actuarial working
group, accounting working group)
Working groups do not have decision making powers
but they act as “think tanks” to apprise the proposed
solutions before they are passed to the Methodology or
Solution Design Committee
Working Groups
Monitor and control the management of IFRS 17
solution design deliverables
The Solution Design Committee has the solution design
decision making powers, approves proposed IFRS 17
solution design papers)
If required escalates the strategic solution design
decisions to the Steering Committee
Solution Design Committee
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Introduction to IFRS 17IFRS 17 methodology sources
IFRS 17standard
IASB meetings papers
Illustrativeexamples
IFRS 17TRG papers
IndustryIFRS 17 publications
IFRS 4 Solvency II
Industry IFRS 17 groups
Basis for conclusions
Consultations with advisors
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Introduction to IFRS 17Methodology development
Methodology Paper
Impact Assessment
Design Authority
Auditor’s Review
Position Paper
Deals with interpretation questions
Flagging potential interpretation issues
Approves the proposed methodology
- Build prototype models for all major products
- Perform financial impactassessment for tested elements and options
Sets out methodology for a given area taking into account conclusions form the position paper issues
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Introduction to IFRS 17Impacts
OCI option
Acquisition cost immediate
recognition option
Coverage Units
Risk Adjustment Method and calibration
Discount Rates method and calibration
Expense assumption
methodologyJustification of the
divergence from rules on materiality
grounds
Transitional methods (FRA,
MRA, FVA)
Different options available within the
transitional methods
Profits Revenue
EquityCosts
IFR
S 1
7
imp
acts
IFR
S 1
7
imp
acts
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Introduction to IFRS 17Prototype models
Using simple Excel spreadsheet with formulas (ensures visibility and
traceability)
For typical / average policy
Using standard assumptions
Prototype models
Major cash flows
Draft balance sheet and income statements
Liability and CSM calculations
To facilitate impact analysis
To perform financial impact assessment for options allowed under IFRS 17
To trigger discussion on accounting treatment
For education purposes (enhance understaning of IFRS 17)
How theyare built?
What do theycalculate?
Why use them?
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Introduction to IFRS 17Products matrix
Product matrix
Line of business / product
IFRS 17 portfolio
Solvency II HRG
Ins. / Invest. with DPF / Re. held
Contract boundary
Coverage period
IFRS 17 model: GM, VFA, PAA
Transitional CSM: FRA, MRA, FVA
Profitability profilePortfolio
Pro
fita
bili
ty
Firs
t st
ep
an
d f
ou
nd
atio
n o
fth
e IF
RS
17
imp
lem
en
tati
on
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Introduction to IFRS 17Data flow - without a central warehouse
Process P6Process P5
Process P4
Process P3
Process P2
Process P1
Process without the central data warehouse
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Introduction to IFRS 17Data flow - with a central warehouse
Process P5Process P6
Process P4
Process P3
Process P1
Process P2
Process with the central data warehouse
DataWarehouse
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3Blocks®Introduction to IFRS 17Processes
Processes with high impact from
IFRS 17
Processes with low impact from
IFRS 17
Reporting
Budgeting, planning and forecasting
External communication
Risk management
Pricing and product development
Reinsurance strategy
Internal control and internal audit
HR
• Budgeting and planning needs to be done according to IFRS 17 metrics
• External communication of financial results will be more complex
• Materiality thresholds for internal control processes need to be redefined
• Reinsurance impact on income statement will be different
• Risk management metrics based on equity or profits need to be adjusted
• Product requirements such as payback period and IRR need to be modified
• Incentive schemes based on new metrics
• IFRS 17 requires new reporting process
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Introduction to IFRS 17IFRS 17 vs Solvency II
IFRS 17 vs Solvency II
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Introduction to IFRS 17Solvency II and IFRS 17 – Differences [1]
Solvency II IFRS 17
Goal Capital adequacy and risk management Show financial position and result for the reporting period
Scope Recognition, measurement, presentation and disclosure of insurance liabilities
Assets and liabilities, own funds, capital requirements
Contracts covered (Re)insurance contracts issued, Reinsurance contracts held, investments with DPF
All contracts giving rise to asset or liabilities
Geographical coverage All insurance and reinsurance companies in the world reporting under IFRS
EEA i.e. the European Union plus Iceland, Liechtenstein and Norway
Acquisition cost Recognized in systematic way over the insurance period
Recognized immediately
Discounting Risk free rate with adjustments: matching adj., volatility adj., discount rate transitional
Risk free rate plus illiquidity adjustment
Initial gain Recognized immediately in P&L Initial gain recognized gradually over the insurance coverage period
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3Blocks®Introduction to IFRS 17Solvency II and IFRS 17 – Differences [2]
Solvency II IFRS 17
Contract end Similar as SII however only insurance and financial risk considered
Unilateral right to terminate contract, amend premiums or benefits
Short-term contracts Simplification allowed for short term contractsNo special treatment of short-term contracts
Contract beginning Earlier of the coverage period, first premium due, the group becomes onerous
Earlier of the coverage period and policy date
Risk Adjustment Cost of Capital method, applied only to the insurance liabilities
No method prescribed; RA applied to both insurance liabilities and reinsurance held
Unbundling Not required Distinct derivative, investment or service components should be unbundled
Grouping Groups based on portfolio, profitability and underwriting period
Homogeneous Risk Groups
Expenses Cashflow models include only expenses that relate directly to the ins. contract fulfilment
Cashflow models include overhead expenses
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3Blocks®Introduction to IFRS 17Solvency II and IFRS 17 – Differences [3]
Solvency II IFRS 17
Transition Possibility to apply transitional measures on the TPs or TPs discount rates
Possible simplifications related to the transitional CSM
Effective date 1 January 2022 with an earlier implementation option
1 January 2016
Reinsurance modeling Reinsurance held and the related insurance contract are modelled independently
Reinsurance modelling mirrors the related insurance contract calculations
Disclosures Disclosures focused on explaining the financial position and result for the period
Disclosures focused on the solvency position and risk management (QRT, SFCR, ORSA)
Contracts with DPF Does not regulate the country specific elements, IFRS are principle based
“Surplus Funds” defined in the UK regulations excluded from the TPs
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Introduction to IFRS 17Solvency II vs IFRS 17 – Balance Sheet
Best Estimate Liability
Assets Risk Margin
Other Liabilities
MCR
Best Estimate Liability
AssetsRisk
Adjustment
Contractual Service Margin
Shareholder equity
Other Liabilities
Free Surplus
Technical Provisions
SCR
Own Funds
Technical Provisions
Solvency II IFRS 17 Spot the difference
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Introduction to IFRS 17Wrap-up
Wrap-up
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Introduction to IFRS 17Thank you
Pawel WozniakDirector
[email protected]. +44 7492 750133London [UK]
Agnieszka HupertManager
[email protected]. +48 79305 4440Warsaw [Poland]
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Introduction to IFRS 17Appendices
Appendices
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Introduction to IFRS 17Appendix I - Loss component - Example [1]
• 3-year insurance
• Premiums 70 per year, paid at the beginning of the year
• Claims 40 per year, paid at the end of the year
• Expenses 10 per year, paid at the end of the year
• Acquisition costs 90, paid at inception
• Recognised evenly over the insurance period
• CERA movement allocated to the LC in proportion to
LC/CERA at the beginning of the year
Cash flows 0 1 2 3 Total
Premiums 70.0 70.0 70.0 - 210.0
Claims - (40.0) (40.0) (40.0) (120.0)
Expenses - (10.0) (10.0) (10.0) (30.0)
Acq. Costs (90.0) - - - (90.0)
Total (20.0) 20.0 20.0 (50.0) (30.0)
Initial accounting FCF CSM Bank P&L
Initial premium - (70.0) 70.0 -
Future premiums 140.0 (140.0) - -
Claims (120.0) 120.0 - -
Expenses (30.0) 30.0 - -
Acq. Costs - 90.0 (90.0) -
Initial loss - (30.0) - 30.0
Total (10.0) 0.0 (20.0) 30.0
• No experience variances
• No changes in estimates in the first version of the example
• Claims and expenses estimates for the year 3 changed
From 50 (40+10) to 10 (5+5) in the second version of the example
• Risk margin ignored
• Discounting ignored
• Credit (liabilities and incomes) shown with minus
• Debits (assets and expenses) shown with plus
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Introduction to IFRS 17Appendix I - Loss component - Example [2]
Loss component 0 1 2 3
LC (30.0) (20.0) (10.0) -
CSM - - - -
CERA (150.0) (100.0) (50.0) -
LC/CERA 20.0% 20.0% 20.0% -
Income statement 1 2 3 Total
Claims (32.0) (32.0) (32.0) (96.0) Claims x (1-LC/CERA)
Expenses (8.0) (8.0) (8.0) (24.0) Expenses x (1-LC/CERA)
Acq. Cost (30.0) (30.0) (30.0) (90.0) Acq. Costs/3
CSM amortisation - - - -
Revenue (70.0) (70.0) (70.0) (210.0)
Claims 40.0 40.0 40.0 120.0
Expenses 10.0 10.0 10.0 30.0
Acq. Cost 30.0 30.0 30.0 90.0
Initial loss 30.0 - - 30.0
Reversal of losses (10.0) (10.0) (10.0) (30.0) (Claims+Expenses) x LC/CERA
Insurance service cost 100.0 70.0 70.0 240.0
Result 30.0 - - 30.0
First version of the example
No changes in estimates
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Introduction to IFRS 17Appendix I - Loss component - Example [3]
Loss component 0 1 2 3
LC (30.0) (20.0) - -
CSM - - 30.0 -
CERA (150.0) (100.0) (50.0) -
LC/CERA 20.0% 20.0% - -
Income statement 1 2 3 Total
Claims (32.0) (32.0) (5.0) (69.0)
Expenses (8.0) (8.0) (5.0) (21.0)
Acq. Cost (30.0) (30.0) (30.0) (90.0)
CSM amortisation - - (30.0) (30.0)
Revenue (70.0) (70.0) (70.0) (210.0)
Claims 40.0 40.0 5.0 85.0
Expenses 10.0 10.0 5.0 25.0
Acq. Cost 30.0 30.0 30.0 90.0
Initial loss 30.0 - - 30.0
Reversal of losses (10.0) (20.0) - (30.0)
Insurance service cost 100.0 60.0 40.0 200.0
Result 30.0 (10.0) (30.0) (10.0)
Second version of the example
Claims and expenses estimate for the year 3 changedfrom 50 (40+10) to 10 (5+5)
Impacted elements market in yellow
As a result of the positive estimate variance of 40, the remaining LC has been reduce to 0 and the CSM of 30 has been set up
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Introduction to IFRS 17Appendix II - Unbundling
Embedded derivatives
Investment components
Service component
• Separate an embedded derivative if it is not closely related and a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative;
• Account for the separated embedded derivative under IFRS 9 (FVTPL)
• Separate a distinct investment component
• The component is distinct if it is not highly interrelated and could be sold separately in the same market
• The component is highly interrelated if it cannot be measured without considering the other and the policyholder is unable to benefit from only one component.
• Account for the separated investment component under IFRS 9 (FVTPL, FVTOCI, Amortised Costs)
• Separate a distinct service component i.e. promise to transfer goods or non-insurance services to a policyholder.
• The component is distinct if it is not highly interrelated and a policyholder can benefit from the good or service on its own.
• Account for the separated service component under IFRS 15 (allocate revenue to the service component and recognize it when the service is rendered)
Fin
anci
al
Inc/
Exp
Fi
nan
cial
Inc/
Exp
or
Oth
er
Co
mp
. In
com
eR
eve
nu
e
IFR
S 9
IFR
S 9
IFR
S 1
5