International Accounting Standards Board © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. The views expressed in this presentation are those of the presenters, not necessarily those of the IASB. Taking stock As at 31 October 2011 A high level overview of progress on the insurance contracts project

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. 2 Where we were: The proposals in the exposure draft Cash flows Time value of money Risk adjustment Residual margin The amounts the insurer expects to collect from premiums and pay out for claims, benefits and expenses, estimated using up-to-date information An adjustment that uses an interest rate to convert future cash flows into current amounts An assessment of the uncertainty about the amount of future cash flows Contract profit (reported over the life of the contract) Total insurance liability Other matters: presentation, scope, unbundling and disclosure

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. Tentative decisions No gains at inception Adjust prospectively for changes in estimates of cash flows Include independently measured and updated risk adjustment Adjust for time value of money using rate that reflects characteristics of liability Expected value considering all relevant information Includes all direct costs incurred in acquiring the contracts Where we are: high level overview 3 Cash flows Time value of money Risk adjustment Residual margin

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. What we still need to do Complete remaining topics –Unbundling of non-insurance components –Residual margin –Presentation –Short duration contracts –Transition Assess whether any differences between IASB and FASB can be reconciled Review draft or re-expose 4

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. What’s changed since the ED: overview Exposure draftDecisions so far Definition and scope No significant change from ED except financial guarantee contracts To discuss investment DPF UnbundlingSome changes from ED. On-going discussions Which cash flows, including acquisition costs Minor changes in response to comment letters Recognition point Contract boundary Acquisition costs Discount rateSome changes in application. No change in principle Risk adjustmentMinor changes from ED. No change in principle Residual marginOn-going discussions: unlocking is a significant change from ED 5

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. What’s changed since the ED: overview (continued) Exposure draftDecisions so far Participating features On-going discussions: minor change from ED Short duration contracts On-going discussions ReinsuranceOn-going discussions: some changes from ED in response to comment letters PresentationOn-going discussions: some changes from ED in response to comment letters DisclosuresOn-going discussions Transition and effective date To be discussed 6

International Accounting Standards Board © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. The views expressed in this presentation are those of the presenters, not necessarily those of the IASB. Details 7

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. * Indicates change from ED proposals Which cash flows? 8 Cash flows Time value of money Risk adjustment Residual margin ED proposalTentative decisions Fulfilment cash flows Expected value of cash flows incurred in fulfilling the contract, considering all relevant information Confirm use of expected value +Add guidance that not all possible scenarios need to be identified and quantified Acquisition costs* Include only acquisition costs incremental at contract level Include all direct costs incurred in originating a portfolio of insurance contracts * Indicates change from ED

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. Which cash flows? 9 Cash flows Time value of money Risk adjustment Residual margin ED proposalTentative decisions Recognition point* Recognise when insurer is bound or first exposed to risk from contract Recognise when coverage period begins Onerous test before then Contract boundary* Ends when insurer: No longer required to provide coverage or Can set price that fully reflects risk of particular policyholder Confirm ED proposal Add clarification: risk can be assessed at portfolio level in some cases Some details yet to be resolved * Indicates change from ED proposals

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. Time value of money 10 Cash flows Time value of money Risk adjustment Residual margin ED proposalTentative decisions Discount rate Adjusts future cash flows for time value of money Reflects only the characteristics of the insurance contract liability Current and updated each reporting period Confirm discount rate Do not prescribe method +Add guidance: ‘Top-down’ and ‘bottom- up’ both acceptable Remove any factors that influence observable rates not relevant to the liability

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. Risk adjustment (IASB decisions) 11 Cash flows Time value of money Risk adjustment Residual margin ED proposalTentative decisions Objective “The maximum amount the insurer would rationally pay to be relieved of the risk that the ultimate cash flows exceed those expected.” “The compensation the insurer requires to bear the risk that the ultimate cash flows could exceed those expected” Risk adjustment vs composite margin Include explicit estimate of the effects of uncertainty about future cash flows. Measurement of liability should include explicit risk adjustment Techniques Restrict techniques that can be used to determine risk adjustment No restriction on techniques, as long as technique meets objective

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. Risk adjustment (IASB decisions) 12 Cash flows Time value of money Risk adjustment Residual margin ED proposalTentative decisions Disclosure Disclose confidence level equivalent Included in disclosures of methods and inputs used to determine estimates Confirmed requirement for confidence level disclosure Confirm disclosures of methods and inputs to be consistent with those required for other estimates. +Add requirement to disclose effect of change in methods To complete ? Whether to take account of diversification benefits

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. Residual margin (IASB decisions) 13 Cash flows Time value of money Risk adjustment Residual margin ED proposalTentative decisions Gains at inception Include residual margin to eliminate gains at inception Confirm no gain at inception Residual margin after inception: unlocking* Residual margin locked-in at inception Adjust residual margin prospectively for changes in estimates of cash flows (unlocking) Do not unlock for risk adjustment

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. Residual margin (IASB decisions) 14 Cash flows Time value of money Risk adjustment Residual margin ED proposalTentative decisions Residual margin after inception: allocation* Residual margin allocated over coverage period Residual margin allocated: Over coverage period On a systemic basis that is consistent with the pattern of transfer of the services provided To complete ? Whether changes in discount rate adjust residual margin or are recognised in profit or loss ? Whether and how to address any accounting mismatches ? Level of aggregation

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK What do these decisions mean? Cash flows Time value of money Risk adjustment Residual margin A component representing the obligation to provide services in fulfilling the contract Total insurance liability A component representing the risk-adjusted present value of cash flows needed to fulfill the contract

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. Guidance on applying building blocks 16 Cash flows Time value of money Risk adjustment Residual margin ED proposalsStatus of discussions Participating contracts (Some details to complete) Discount rate reflects dependence of cash flows on specific assets  Cash flows adjusted to reflect the measurement basis of the items underlying participation*  Guarantees measured at current value Reinsurance (Some details to complete) Confirm insurer uses same estimates for reinsurance asset and underlying direct insurance liability  Gains arising from reinsurance contract recognised over contract term*  Losses arising from reinsurance contract recognised immediately if for past events, otherwise deferred* * Indicates change from ED proposals

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. How to present changes in the insurance contract liability Tentative decisions Line items to show: Premiums Claims and expenses Gross underwriting margin ?Exploring whether some changes should be presented in other comprehensive income 17 Risk adjustment Residual margin Profit or loss Net interest and investment Investment income Interest on insurance liability Changes in estimates Underwriting result Experience adjustment x x x x x x x x x x 20XX ED proposals Income statement Underwriting margin

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. What does the insurance contracts standard apply to? Tentative decisionsIssues to be resolved ScopeConfirm proposed definition of insurance contract Confirm most scope exceptions proposed in ED Financial guarantee contracts included if previously considered insurance Investment contracts with discretionary participation features UnbundlingUnbundle: Embedded derivatives not closely related to host insurance contract Using approach from revenue recognition for: Goods and services Some explicit account balances Allocation of fees and charges Remaining explicit account balances Permit or require Prohibit when not permitted or required 18

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. IASB and FASB: Key decisions in common Measurement of insurance contract using all cash flows expected to fulfil contract Cash flows discounted using a rate that reflects only the characteristics of the liability No gain at inception Presentation that shows information about key drivers of profitability, including volume information 19

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. IASB and FASB: Differences Differences so far –Acquisition costs –Treatment of policyholder participation –Explicit risk adjustment, therefore residual margin –Scope – financial guarantee contracts Further possible differences –Other comprehensive income –Short duration contracts –Investment contracts with discretionary participation features 20

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK Stay up to date Where to find out more Sign up for our alert go.ifrs.org/insurance_contracts Project staff: –Andrea Pryde, –Rachel Knubley, –Izabela Ruta, –Leslie Vermaak, –Joanna Yeoh, –Matthias Zeitler, Resources IASB Update Meeting webcasts Project podcasts Investor resources Effects of board redeliberations on ED Insurance Contracts Project timetable