1. Indian Actuarial Profession Serving the Cause of Public Interest
28th India Fellowship Seminar
Topic:
IFRS 17- Introduction, History, Features and Implications on Insurers
Guide Name:
Kamlesh Gupta
Presenters Name:
1. Jimmy Jacob
2. Rohit Mall
3. Subhasree Nigamma
4. Nandan Nadkarni
Date: November 10, 2017
Venue: Mumbai
Indian Actuarial Profession
Serving the Cause of Public Interest

2. Coverage Aspects Paras Content Level of Aggregation 14-24
Minimum criteria for grouping
Recognition
25-28
The contract recognition date
Measurement
---Initial Measurement
32-38
Estimation of fulfilment cash flows and contractual service margin
---Subsequent Measurement
40-43
The measurement of subsequent carrying amount and the impact on P&L
---Onerous Contracts
47-52
Treatment of onerous contracts
Source: IFRS 17

3. Coverage (Contd…) Aspects Paras Content ---PAA approach 53-59
An alternate measurement approach
---Reinsurance Contracts held
60-69
Recognition and Measurement of Reinsurance contracts
---Investment Contracts with DPF 71
Modified requirements for these contracts
Modification and Derecognition
72-74
The conditions for modification and de-recognition
Presentation
78-87
Presentation Requirements
Disclosure
97-114
Disclosure requirements
Source: IFRS 17

4. Introduction and History
Areas to be addressed
Introduction and History
Timelines and Scope
History
Features
Three valuation methods
Aggregation Level
General Measurement Model
Onerous Contracts
Implications
Life Insurance
General Insurance
Common

5. Time Lines and Scope 2017 2022 2021 2020 2019 2018 IFRS 17 applies to:
Disclosure of expected impacts of the issued but not yet effective standard
Revised IFRS 9 classification from IFRS 17 implementation
First IFRS 17-compliant financial statements
IFRS 17 start of comparative period
IFRS 17 effective 1 January 2021
IFRS 17 issued
IFRS 17 applies to:
Insurance and reinsurance contracts that an entity issues
Reinsurance contracts that it holds
Investment contracts with DPF (provided entity issues Insurance contracts)
Applicable for annual periods starting on or after 1st Jan, 2021, comparative reporting through 2020
Early application permitted for entities that apply IFRS 9 and IFRS 15
Source: EY IFRS 17 report

6. History
IFRS 4 permitted wide latitude in a/c practice
Hampered comparability of financial statements
Some a/c practices under IFRS 4 did not reflect true financial position
Non-marketability of an insurance contract posed measurement issues
Need for a common global insurance standard
IFRS 17 focuses on transparency and consistency of accounting practice!
Source: IFRS 17

7. Introduction and History
Areas to be addressed
Introduction and History
Timelines and Scope
History
Features
Three valuation methods
Aggregation Level
General Measurement Model
Onerous Contracts
Implications
Life Insurance
General Insurance
Common

8. Three valuation methods
General Measurement (GM) Model (Building block Approach-BBA)
Insurance Contracts (without Direct Participating feature)
Unearned profit over the coverage period
Estimates of Future cash flows
Long term contracts
PAA Approach
Short term contracts (< than 1 year)
Stable cash flows
Simplified GM model
Similar to ‘Unearned premium approach’
Variable Fee Approach (VFA)
Direct Participating Contracts and Investment Contracts with DPF
Variant of GM model
Long term Contract with Investment Component

9. Level of Aggregation Onerous contracts are loss making contracts!
Contracts with similar risks to be grouped together
Minimum Grouping at inception
Nature
Profitable and unlikely to be onerous
Onerous
Remaining
Duration
Issue dates- Maximum one year apart
Onerous contracts are loss making contracts!
“Profitable and unlikely to be onerous”?? ..Judgment??

10. IFRS 17 and the valuation methods
IFRS 17 Aim/Intention
Focus on Profit drivers
Three valuation methods
General Measurement Model- Deviation from current practice??

11. General Measurement (GM) Model -Building Block approach (BBA)
Liability for future coverage
Contractual Service Margin(CSM)
Risk Adjustment
Probability weighted discounted EPV
Unearned profit amortized over coverage period
Eliminates gain at contract inception
Liability for Incurred claims
Risk Adjustment
Probability weighted discounted EPV
For non-financial risks +
Best Estimate Liability at a liability discount rate
Risk Adjustment + Probability weighted discounted EPV=Fulfilment Cash flows

12. Subsequent Measurement- BBA
P&L Release post this reassessment
OCI
CSM
P&L
Subsequent Measurement-
BBA
Risk Adjustment
Probability weighted discounted EPV
Risk Adjustment
Probability weighted discounted EPV
Estimated cash flow changes +
Reassessment of fulfilment cash flows
Release through P&L/OCI

13. BBA- CSM Impact of changes for future coverage
P&L (CSM Release)
Risk Adjustment
Estimated changes related to future service
Probability weighted cash flows
P&L
Discount rate changes
Other Comprehensive Income
Why through CSM??

14. GM Model- New components
Liability for future coverage
Contractual Service Margin(CSM)
Risk Adjustment
Unearned profit amortized over coverage period
Eliminates gain at contract inception
Liability for Incurred claims
Risk Adjustment +
For non-financial risks
Risk adjustment /CSM at the portfolio level?? Judgment in allocation
IFRS guidance for Risk Adjustment estimation
Cash flow characteristics; Probability distribution of cash flows
Confidence Interval
Components to be tracked

15. Key Aspects of GM Model Subsequent Measurement Initial Recognition
Pricing equation… CT5!
Initial Recognition
Quantifying the CSM
Liability at inception is NIL.
CSM ensures that the Income/Expense in NIL
Subsequent Measurement
---Reevaluate the fulfilment cash flows
---P&L/OCI impact
The change in cash flows impact either the CSM or the P&L/OCI
Cash Flow Changes
Flow through P&L
Absorbed in Balance sheet(CSM)
Flow to OCI

16. Insurance Contract (without Direct Participating Features)
General Measurement Model (BBA)
-Illustration
Insurance Contract (without Direct Participating Features)
Values
Comments
Coverage period (years) 4
Total premium at inception(in Rs.)
1500
Initial acquisition cost (in Rs.)
100
Expected claims and expenses (in Rs.)
800
Incurred evenly over 4 years
No lapse assumed
Risk adjustment for non-financial risk (in Rs.) 80
Assumed even release
Discount rate
Negligible
Actual Experience
Same as expected & no assumption changes
Source: KPMG, July 2017

17. -Illustration (Contd..)
GM Model (BBA)
-Illustration (Contd..)
Years
Cash flow description
Initial recognition 1 2 3 4
EPV of cash inflows
Premium
1500
EPV of cash outflows
Expected claims and expenses (incl. acquisition cost)
-900
-600
-400
-200
Risk adjustment
Non-fin risk adj
-80
-60
-40
-20
Fulfilment cashflows
520
-660
-440
-220
Contractual service margin
-520
-390
-260
-130
Insurance contract liability
-1050
-700
-350
Source: KPMG, July 2017

18. GM Model (BBA)-P&L Impact
Change in liability for remaining coverage
Years 1 2 3 4
Opening balance
-1050
-700
-350
Premiums received
-1500
Acquisition cash flow
100
Expected claims
200
Risk adjustment recognised 20
CSM allocation
130
Closing balance
P &L impact 1 2 3 4
Expected claims
200
Risk adjustment recognised 20
CSM allocation
130
Revenue for services provided
350
Revenue to cover acquisition cash flows 25
Insurance revenue
375
Service expenses
-200
-25
Insurance service expenses
-225
Insurance service result
150
Source: KPMG, July 2017

19. GM Model (BBA)-Balance Sheet Impact
Years 1 2 3 4
Asset
Cash
= 1200
= 1000
= 800
= 600
Liability and Equity
Insurance contract Liability
1050
700
350
Equity
150
300
450
600
Total Liability and Equity
1200
1000
800

20. Balance sheet measurement
General Measurement Model-
Macro Perspective (Contd..)
CSM
Risk Adjustment
Estimated changes related to future service
Probability discounted cash flows
Flow to Income/OCI
Balance sheet measurement
Source: PWC, March 2, 2017

21. Balance sheet measurement
General Measurement Model-
Macro Perspective (Contd..)
CSM
CSM Release
Risk Adjustment
Release of Risk Adjustment
Estimated changes related to future service
Probability discounted cash flows
Interest on Insurance liability at inception rate (unwind of discount rate)
Discount Rate changes (update current market rates)
Changes in cash flows related to past and current service period
Flow to Income/OCI
Balance sheet measurement
Source: PWC, March 2, 2017

22. Balance sheet measurement
General Measurement Model-
Macro Perspective (Contd..)
CSM
CSM Release
P&L
(Underwriting Result)
Risk Adjustment
Release of Risk Adjustment
P&L (Investment Result)
Estimated changes related to future service
Probability discounted cash flows
Interest on Insurance liability at inception rate (unwind of discount rate)
Discount Rate changes (update current market rates)
Changes in cash flows related to past and current service period
Other Comprehensive Income (Equity)
Flow to Income/OCI
Balance sheet measurement
Source: PWC, March 2, 2017

23. Onerous Contracts Definition When? CSM Impact Treatment
Total fulfilment cash flows are a net outflow
Loss making contracts
When?
Initial Recognition; or
Subsequent Measurement
CSM Impact
Wipes out the CSM
Treatment
Immediate recognition of the liability
P&L
Management judgment to identify profitable contracts that could turn onerous!

24. Introduction and History
Areas to be addressed
Introduction and History
Timelines and Scope
History
Features
Three valuation methods
Aggregation Level
General Measurement Model
Onerous Contracts
Implications
Life Insurance
General Insurance
Common

25. Life Insurers: Likely Impact on Segment Mix
Business Mix for life Insurance Industry
[for 6 months ended 30th Sep 2017 (FYP)]
Category
Business Mix
Individual Single Premium
14%
Individual Non-Single Premium
26%
Group Single Premium
57%
Group Non-Single Premium 2%
Group Yearly Renewable Premium
Key Aspects
IFRS 17 amends the way revenue is measured and disclosed.
Likely to Impact Single premium mix; since it will not contribute to immediate top line growth
Aggressive sale of ULIP/Group fund based products may not translate in to top line growth

26. Life Insurers: Likely Impact on Segment Mix
Key results disclosed in Income statement
Underwriting result
Net Interest and Investment income
Profit/ Loss
Total comprehensive income
Key Performance indicators likely to change.
Likely that Insurers will focus on more Profitable segments like Protection Products.

27. Life Insurers: Measurement Approach for different Segments
Need for the Approach
Types of contract
(Illustrative list)
General Measurement Approach (Building Block Approach)
Default model for all Insurance contracts.
Applicable for contracts without direct participating features.
Term / Whole life / Endowment
Long term health
Other protection business
Certain annuities
Immediate annuities
Premium Allocation Approach (PAA)
Simplified approach for Short term contracts
Short term life contracts
Variable fee approach (VFA)
To deal with Participating business, where payments to policy holders are linked to underlying items like assets.
Applicable for contracts with direct participating feature.
Variable Insurance contracts
Unit linked contracts

28. Variable fee Approach : Illustration
Facts for ULIP contract
Values
Coverage period (years) 3
Single premium (payable at inception) (in Rs.)
150
Number of Policies issued
100
Benefit payable
-Account balance, if the policy holder survives
-In case of death, higher of guaranteed death benefit of 170 or Account balance.
Expected claims
One Policy holder will die at the end of each year.
Return on underlying assets (p.a.)
10%
Service charge levied by Insurer(p.a.) 2%
Risk free interest rate (p.a.) 6%
Risk adjustment for non-financial risk
25 (12 to be recognized in profit statement in
year 1)
Source: KPMG, July 2017

29. Variable fee Approach : Illustration
Estimate of CSM
Estimate of Present value of cash inflows
(100 Policies*150)
15,000
Estimate of Present value of cash outflows
*Factors in the current discount rate as well the time value of guarantee in providing a minimum death benefit
(14,180)*
Risk adjustment
(25)
Fulfillment cash flows
795
CSM to be recognized
(795)
Source: KPMG, July 2017

30. Variable Fee Approach : Illustration
Fair value of Underlying assets at end of year 1
Premium received on inception
15,000
Investment return at 10%
1,500
Annual charge [16,500 * 0.02]
(330)
Payment for death [(16, )*1/100]
(162)
Fair value at end of year 1
16,008
CSM at end of year 1
Opening balance
(795)
Company’s share of change in fair value of underlying items (increase of 1500*.02)
(30)
Effect of time value of money and other financial risk
(67)
CSM before Allocation
(892)
CSM to be allocated for year 1(892*percentage of service provided in year 1)
Percentage of service provided in Year 1: (100/( )) =34%.
300
(592)
Source: KPMG, July 2017

31. Variable fee Approach : Illustration
Results for Year 1
Expected claims and other expenses
(Guaranteed amount of 170 minus account balance of 162) 8
Changes to risk adjustment for the non-financial risk 12
CSM allocation during the period
300
Insurance Revenue
320
Insurance service expenses
Insurance service result
312
Investment income
1500
Insurance finance expenses
(1500)
Finance result
Profit
Source: KPMG, July 2017

32. Life Insurers: Acquisition cash flows
IFRS 17
:Insurance Acquisition cash flows to be included in determining CSM on initial recognition.
:Insurance Acquisition cash flows eventually affect profit or loss through the CSM release process (So in effect we defer acquisition cost).
Current Practice : Expense all Acquisition cash flows at inception.
Implication of implementing IFRS 17
:Smaller losses at inception (less year one strain)
:Lower profit in Year 2 & later.

33. Implications – General Insurance
Aspect
Implication
Method
Expectation – PAA
Long tailed LoB – application of PAA – doubtful
Judgments – Regarding Onerous
Cash flow Determination, risk adjustment
Non availability – Year wise
High volatility – more judgment
Same implications as BBA approach
Acquisition cost
Realised year after year
Long term contracts may be affected

34. Actuaries will have a greater role!
Implications-General Insurance
Aspect
Implication
Recognition of incurred claims
Different from current practice
Not - (Paid + Changes in O/S & IBNR Claims)
Key metrics
Review of Combined ratio, Incurred claims ratio required
Actuaries will have a greater role!

35. Common Implications – Cost/Data
Aspect
Implication
Aggregation (Grouping)
By inception dates and nature (Onerous, profitable,etc) implies large storage requirements
CSM/Risk Adjustment release
Allocation methodology to be devised e.g could depend upon the number of contracts, coverage offered, etc.
Risk Adjustment
An explicit adjustment; No specific IFRS guidance; Impact on comparability
Confidence Interval

36. Common Implications – Cost/Data
Aspect
Implication
Reconciliation
E.g. CSM and Risk Adjustment
Cash flows
Information on cash flows (Historical and Future), discount rates and risk adjustments for each contract group to be stored
Adverse circumstances
Methodology to monitor circumstances indicating onerous contracts
‘Facts and Circumstances’ for onerous under PAA
e.g CSM margin at inception, sensitivity of cash flows to assumption changes etc.

37. Common Implications – Cost/Data
Aspect
Implication
Discount rates
Two set of discount rates to be stored
Performance Appraisal
New benchmarks to be developed; incentives around new KPIs
Data, Systems Human Talent
Upgradation of legacy systems
New controls and increased interaction of actuaries and accountants
Indeterminate Impacts
Tax authorities and Regulators

38. More time and effort Common Implications – Disclosures Disclosure
Requirement
Insurance risk
Sensitivity to changes in risk exposure, claim development
Credit risk, Liquidity risk, Market risk
Exposure to risk, Policies and process to manage the risk
More time and effort
Working group by IRDA for reviewing and early adoption of IFRS 17

39. Thank you