Insurance IFRS Seminar December 2, 2016 Eric Lu Session 34 Discounting Workshop Insurance IFRS Seminar December 2, 2016 Eric Lu Session 34

Discount rates in the model Considering the following examples, what is the most appropriate discount rate and why. Use the following data, assuming flat yield curves and no taxes: Rate New money Corp A yields 4.0% New money Gov’t yields 2.5% Expected A defaults 0.2% Risk adj for defaults on A bonds 1.0% Expected yield on assets 5.3% Liquidity adjustment for product ???

Non-par product Whole life non-par product All terms are fixed at contract issue as at 31/12/2016 What is the appropriate discount rate? 31/12/2016 New money Corp A yields 4.0% New money Gov’t yields 2.5% Expected A defaults 0.2% Risk adj for defaults on A bonds 1.0% Expected yield on assets 5.3% Liquidity adjustment for product 0.3%

Non-par product (Cont.) What is the appropriate discount rate for 31/12/2017? Change in liability that gets into P&L? Change in liability that gets into balance sheet? Interest accretion on CSM? Is CSM unlocked for the change in discount rate? 31/12/2016 31/12/2017 New money Corp A yields 4.0% 3.8% New money Gov’t yields 2.5% 2.3% Expected A defaults 0.2% Risk adj for defaults on A bonds 1.0% Expected yield on assets 5.3% 5.0% Liquidity adjustment for product 0.3%

Par product that qualifies for VFA Whole life par product that qualifies for VFA All terms are fixed at contract issue as at 31/12/2016 What is the appropriate discount rate? 31/12/2016 New money Corp A yields 4.0% New money Gov’t yields 2.5% Expected A defaults 0.2% Risk adj for defaults on A bonds 1.0% Expected yield on assets 5.3% Liquidity adjustment for product 0.3%

Par product that qualifies for VFA (Cont.) What is the appropriate discount rate for 31/12/2017? Change in liability that gets into P&L? Change in liability that gets into balance sheet? CSM accretion? Is CSM unlocked for the change in discount rate? 31/12/2016 31/12/2017 New money Corp A yields 4.0% 3.8% New money Gov’t yields 2.5% 2.3% Expected A defaults 0.2% Risk adj for defaults on A bonds 1.0% Expected yield on assets 5.3% 5.0% Liquidity adjustment for product 0.3%

Par product that does not qualify for VFA Whole life par product that does not qualify for VFA All terms are fixed at contract issue as at 31/12/2016 What is the appropriate discount rate? 31/12/2016 New money Corp A yields 4.0% New money Gov’t yields 2.5% Expected A defaults 0.2% Risk adj for defaults on A bonds 1.0% Expected yield on assets 5.3% Liquidity adjustment for product 0.3%

Par product that does not qualify for VFA (Cont.) What is the appropriate discount rate for 31/12/2017? Change in liability that gets into P&L? Change in liability that gets into balance sheet? CSM accretion? Is CSM unlocked for the change in discount rate? 31/12/2016 31/12/2017 New money Corp A yields 4.0% 3.8% New money Gov’t yields 2.5% 2.3% Expected A defaults 0.2% Risk adj for defaults on A bonds 1.0% Expected yield on assets 5.3% 5.0% Liquidity adjustment for product 0.3%

Transition Full Retrospective What is the appropriate discount rate to determine initial CSM? What is the appropriate discount rate at transition date? Modified Retrospective Fair Value