Insurance IFRS Seminar December 2, 2016 Darryl Wagner Session 23 Presentation Insurance IFRS Seminar December 2, 2016 Darryl Wagner Session 23

Statement of Financial Position Statement of Comprehensive Income Agenda Introduction Statement of Financial Position Statement of Comprehensive Income Key Issues

Introduction The margin presentation model in the 2010 ED was developed from two key conclusions made by the Board: Presentation of an insurer’s profit or loss is better expressed from the building-blocks model A margin approach is the most suited presentation to display the sources of profit from the building-blocks model However, based on feedback received, including industry outcry for volume information, the 2013 ED now requires presentation of insurance revenue – a metric derived from the building blocks model.

Statement of Financial Position Items proposed in the ED An insurer shall present separately, as a single line item, the carrying amount of the portfolios of insurance contracts that are assets from insurance contract liabilities An insurer shall not offset reinsurance assets or liabilities against direct insurance contract assets or liabilities For unit-linked contracts, the pool of assets underlying these contracts shall be presented as a single line item and not commingled with the insurer’s other assets The portion of the liabilities linked to the pool of assets shall be presented as a single line item and not commingled with the insurer’s other insurance contract liabilities

Statement of financial position Example statements of financial position Insurance Contracts Statement of financial position Current U.S. GAAP Assets Investments X Cash Other assets Premium Receivables DAC Unearned Premium Reserve — (short duration) Liabilities Policyholder and claim reserves Debt Other liabilities

Statement of financial position Exposure Draft Assets Cash X Investments Unconditional premium receivable Insurance contract asset Reinsurance contract asset Liabilities Liability for remaining coverage (PAA/BBA) Liability for incurred claims (PAA/BBA) While separate presentation of the PAA and BBA assets and liabilities is not required under the IASB ED, the separate components will be contained within the total insurance contract asset and liability.

Statement of Comprehensive Income Other items the ED proposes An insurer should present premiums, claims, benefits, and the gross underwriting margin in the SCI. Insurers should exclude from the aggregate premium presented in the SCI income the present value of the amounts the insurer is obligated to pay to policyholders or their beneficiaries regardless of whether an insured event occurs, determined consistently with measurement of the overall insurance contract liability. It should be required to present in OCI changes in the insurance liability arising from changes in the discount rate and to present in profit or loss interest expense using the discount rate locked in at inception of the insurance contract. Reinsurers and cedants shall present any gains or losses on commutations as an adjustment to claims or benefits and should not gross up the premiums, claims, or benefits in recognizing the transaction on the SCI. Change since the 2013 ED: The IASB tentatively decided that an entity should be prohibited from presenting premium information in the statement of comprehensive income if that information is not consistent with commonly understood notions of revenue. an entity should choose to present the effect of changes in discount rates in profit and loss or in other comprehensive income as its accounting policy.

Example statements of comprehensive income Statement of comprehensive income Current U.S. GAAP Revenues Earned premium X Investment product type fees Net investment gains/losses Expenses Policyholder benefits and claims Interest credited to policyholder Balances Other expenses

Statement of comprehensive income Exposure Draft Insurance contract revenue X Claims and benefits incurred (X) Amortization of acquisition costs Changes in estimates for future claims Unwind of previous changes in estimates Total Underwriting Margin Investment income Interest accreted on insurance contracts Profit Components of other comprehensive income Total comprehensive income This presentation would be similar for both the BBA and PAA. However, complexities may arise in applying such presentation to a liability measurement model, most notably portfolios in the BBA.

Presentation of Insurance Revenue Linking liability movements to revenue and expense Change since the 2013 ED: IASB tentatively decided that differences in the current and previous estimates of the Risk Adjustment that relate to coverage and other services for future periods should adjust the CSM subject to the condition that the CSM should not be negative.

Presentation of Insurance Revenue Linking liability movements to revenue and expense Revenue is formula driven based on release of contractual service margin period expected cash outflows acquisition cost period allocation risk adjustment change The BBA outflows are split between those relating to future coverage and services and those beyond the expiry of that period (settlement cash flows). Outflows experience variances for the first sub-set are grossed up: expected cash flows are taken to the insurance revenue line whilst actual cash outflows (benefits and expenses) are reported as insurance expenses. Net experience variances on inflows (premiums) that relate to future coverage are added to the revenue together in line with the changes in CSM recognized through earnings and the changes in the risk adjustment related to future coverage net cash flows. Amounts derived from the CSM are grossed up for direct acquisition costs which are presented as an expense using an amortization pattern that mirrors the release of the CSM through earnings.

Presentation of Insurance Revenue Linking liability movements to revenue and expense

Key issues and concerns Does the revenue metric address industry concerns? What type of volume information are investors looking for – sales or present value of future premiums? How to display premium is subject to debate Earned premium vs. premiums written approach Difficult to measure earned premium for life insurers Would an expanded summarized margin with volume information satisfy industry concerns?

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