1. New Zealand Society of Actuaries Financial Services Forum 27 November 2009

2. IFRS: Insurance Accounting.
Charles Hett
November 2009
Audit. Tax. Consulting. Actuarial. Financial Advisory
IFRS Insurance Accounting - November 2009

3. Agenda Recap the Insurance Project to date
Key Features of the Phase II Framework
Issues and recent developments
What this means for NZ reporting
Implications and other
IFRS/Reporting factors
IFRS Insurance Accounting - November 2009

4. Recap the Insurance Project.
IFRS Insurance Accounting - November 2009

5. Insurance Accounting timeline
Thinking/Concern
IFRS
IFRS Phase II
Development ??
Issues Paper
1999
IFRS 4
Phase 1
Discussion Paper
May’07
Back to the Drawing Board
IASB
IFRS NZ
1 Jan 07
Extended Consultation
DSOP Issued
1990s
July
2001
January
2005
2007
2008+
IFRS Insurance Accounting - November 2009

6. Life insurance companies Insurance Disclosures Contract classification
IFRS 4 Phase I
Temporary measure to continue until Phase II standard emerges
Intangible assets
Insurance & Participating Contracts – Local GAAP
Investment Contracts – IAS 39
Life insurance companies
Non-life companies
Insurance Disclosures
NZ FRS 35
NZ FRS 34
Contract classification
Assumptions and risk objectives
Risk concentration
Central Estimate
OCR / IBNR
UPR, DAC
Risk Margin
Best Estimate
Planned Margins
(recover AC)
Analyses & Reconciliations
Sensitivities
Claims development
Liability Adequacy
NZ ~ Little methodology change, mostly level of disclosure
IFRS Insurance Accounting - November 2009
IFRS Insurance Accounting - November 2009

7. Development of Phase II.
IFRS Insurance Accounting - November 2009

8. The Proposed Model
3 building blocks to measure insurance liabilities :
Explicit, unbiased, probability weighted and current estimates of the
contractual cash flows;
Current market discount rates that adjust the estimated cash flows for the
time value of money;
Margin:
Explicit - Bearing risk (a risk margin) and providing other services (a service margin)
Composite - Single margin (calibrate to premium)
IFRS Insurance Accounting - November 2009
IFRS Insurance Accounting - November 2009

9. Phase II – Measurement: Three Building Blocks
Estimates of future cash flows
Explicit and Current view (Balance Sheet date) Unbiased and Probability weighted
Considerations
Not necessarily most recent information
Availability of “market” data for insurance liabilities
As consistent as possible with observed market prices
“Market consistent” vs. “Entity specific”
Complexity of possible stochastic scenarios – Looks unlikely
IFRS Insurance Accounting - November 2009
IFRS Insurance Accounting - November 2009

10. Phase II – Measurement: Three Building Blocks (cont’d)
Discounting
Observable market rates:
Timing
Currency
Liquidity
Considerations
Consistency with observable market rates
Availability of market rates for long term insurance liabilities
Does not reflect risk inherent in cash flows
Own insurer’s credit position in measuring liabilities – unlikely
Use of asset-based rates – only if directly linked to liabilities
Liquidity Premium (avoid annuity mismatching)
Further guidance – unlikely (Fair Value measurement: IAS39)
IFRS Insurance Accounting - November 2009
IFRS Insurance Accounting - November 2009

11. Phase II – Measurement: Three Building Blocks (cont’d)
Margins – Composite or Explicit
Composite: single margin calibrated to premium (essentially current MoS)
Risk Margin: Allow for variance and skew in underlying distribution(s)
(Uncertainty in projected cash flows)
Service Margin: The amount for servicing the contract
Considerations:
Risk Margin methods can have very different outcomes
Percentile Basis (~ NZ non-life margin: 75% confidence level)
Cost of Capital (~ Solvency II)
Economic Capital (~ Adverse Scenarios/MCEVs)
Not a shock absorber
Availability of “market participant” data on servicing
“Sub-contractor” profit margin or use “entity-specific” basis
Residual Margin: To ensure no Day 1 profits
IFRS Insurance Accounting - November 2009
IFRS Insurance Accounting - November 2009

12. Phase II Key Issues.
IFRS Insurance Accounting - November 2009

13. Other Key Issues ½ DAC and Revenue Recognition
Exit Price or Fulfilment Value : IAS 37
Margins
Future Premiums: Contract Boundary
Profit/Loss at Inception
Other Issues
IFRS Insurance Accounting - November 2009
IFRS Insurance Accounting - November 2009

14. Position at Mid-October 2009
IASB
Initial Measurement
Selling should not affect measurement
Day 1 revenue to cover acquisition costs
AcqCosts – direct and incremental
IAS 37 approach (draft)
IAS 37 influenced by Insurance Project
Consistency with other liabilities
No market info. => Entity based estimates
Explicit Margins
(Risk, Service, Residual)
Risk/Service Margin remeasured
Expense Initial Costs as incurred
No Profit/Loss at Inception
FASB
Initial Measurement
Contract liability based on consideration
Prohibit DAC (No Service at PoS)
Current Fulfilment (CFV)
Not inconsistent with IAS 37 (draft)
Composite Margin
Consistency with approach to Revenue
Expense Initial Costs as incurred
No Profit/Loss at Inception
IFRS Insurance Accounting - November 2009

15. Proposed Models – Mid October 2009
IFRS Insurance Accounting - November 2009
IFRS Insurance Accounting - November 2009

16. Proposed Models – Mid October 2009
IFRS Insurance Accounting - November 2009
IFRS Insurance Accounting - November 2009

17. Proposed Models – Mid October 2009
IFRS Insurance Accounting - November 2009
IFRS Insurance Accounting - November 2009

18. Recent Developments.
IFRS Insurance Accounting - November 2009

19. Late October 2009 Unwelcome Convergence!
Revenue recognition is paramount
Acquisition Costs expensed as incurred
IASB agreed margins calibrate to full contract premium (after PoS)
FASB agreed explicit margin for Risk (Uncertainty)
Revisiting Policyholder Accounting
Insurance Policies held by Customers (as assets) – reconsider, no decision
IFRS Insurance Accounting - November 2009

20. Proposed Models – Before 28 October 2009
IFRS Insurance Accounting - November 2009

21. Proposed Models – After 28 October 2009
IFRS Insurance Accounting - November 2009

22. Other Issues Yet to be Discussed/Resolved
Policyholder Accounting
Policyholder Participation Rights
Credit Characteristics of insurance liabilities
Unbundling
UPR, Recognition, IAS 39
Disclosure
IFRS Insurance Accounting - November 2009

23. What This Means.
IFRS Insurance Accounting - November 2009

24. Timetable (Updated 18 Nov) Next two years
Exposure Draft to be issued January April 2010
A joint IASB/FASB Exposure Draft
Comment period to May August 2010
Standard to be in place by June 2011
Substantial IASB membership changes July 2011
IASB/FASB appear to be allocating resource
to ensure this timetable can be met
IFRS Insurance Accounting - November 2009

25. Implications for New Zealand
Many similarities to NZ MoS (composite margin)
Some differences:
Explicit assessment of Risk & Service margins
Residual Margin may not be remeasured
No income to cover acquisition costs (No DAC, -’ve PL)
No mention of Tax (anywhere) => Gross of Tax liabilities and margins
Reinsurance treated explicitly (as current)
Financial Advice at Point of Sale a service?
IFRS Insurance Accounting - November 2009

26. Business Implications for the Insurance Industry
Need to review impacts on:
IFRS
Phase II
Systems, data,
models & processes
External reporting, disclosures
and financial communication
Experience Monitoring
Assumption setting
Management reporting and
budgetting
Product pricing and design
Regulatory Reporting
Asset and Liability matching
Capital Management
Tax and Tax Planning
Value Creation
IFRS Insurance Accounting - November 2009
IFRS Insurance Accounting - November 2009

27. Three key areas to consider
Valuation
Increased reliance on actuarial models
Analysis to derive explicit margins ~ risk margin
Assumption changes => not Re-spread ~ volatility
Yet more disclosure?
Product Development
Reporting incentives to structure products (contract boundaries)
Higher profit volatility
Use of Reinsurance
Impact of acquisition cost reporting loss on distribution costs
Risk Management
Risks and Controls for valuation models
Managing market risk to mitigate profit volatility
(closer link between risk management and reporting)
Risk Margins  Risk Management
IFRS 4 Phase II will likely be the chance to move more fully to a gross of tax profit reporting requirement (separate IAS 12 tax treatment)
Overall a more explicit risk based reporting requirement should lead to stronger links between reported profits, risk management, reinsurance and investment strategy and capital requirements
IFRS Insurance Accounting - November 2009

28. Contacts Charles Hett Head of Actuarial Services
Margaret Cantwell
Manager - Actuarial Services
Klaas Stijnen
Manager - Actuarial Services
(0)
IFRS Insurance Accounting - November 2009

29. This presentation and the accompanying handouts cover topics only in general terms and are intended to give a wide audience an outline understanding of certain issues relating to Phase II of the IASB insurance project, and therefore cannot be relied on to cover specific situations; applications of the principles set out will depend on the particular circumstances involved. Furthermore, responses given in the presentation to questions are based on only an outline understanding of the facts and circumstances of the cases and therefore do not form an appropriate substitute for considered specific advice tailored to your circumstances. We recommend that you obtain professional advice before acting or refraining from acting on any of its contents. We would be pleased to advise you on the application of the principles demonstrated at the seminar and other matters to your specific circumstances but in the absence of such specific advice cannot be responsible or liable.
Deloitte & Touche LLP is a limited liability partnership registered in England and Wales with registered number OC and its registered office at Stonecutter Court, 1 Stonecutter Street, London EC4A 4TR, United Kingdom. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu ('DTT'), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other's acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT.
IFRS Insurance Accounting - November 2009
IFRS Insurance Accounting - November 2009

30. New Zealand Society of Actuaries Financial Services Forum 27 November 2009