© Society of Actuaries in Ireland

© Society of Actuaries in Ireland
Financial Reporting Emerging Issues 10 December 2019 © Society of Actuaries in Ireland

Disclaimer The views expressed in this presentation are those of the presenter(s) and not necessarily of the Society of Actuaries in Ireland or of their employers.

Competency Framework

Life Financial Reporting working group
Current members Aidan Murphy Aileen Murphy Andrew Kay Caroline Lynch Ciara Fitzpatrick David MacCurtain Francis Furey Miriam King Niall Naughton (chair) Paraic Byrne Note: not accountants!

Agenda Reporting bases considerations Discussion paper

Recap on current accounting standards
Statutory financial statements (“local reporting”) IFRS or Irish GAAP (FRS 101 or FRS 102 / 103) FRS 101 = “IFRS with reduced disclosures” FRS 103 is the Irish GAAP standard for insurance classified contracts 2015 Insurance Accounts Regulations relevant to existing accounting policies for insurance contracts* IFRS group reporting Insurance contract* accounting can differ for group reporting compared to local reporting E.g. US GAAP, EV, Canadian GAAP, French GAAP etc *Insurance references include contracts classified as “with DPF” (i.e. with profits) S.I. 485 of European Union (Insurance and Reinsurance) Regulations 2015 S.I EU (Insurance Undertakings - Financial Statements) (Amendment) Regulations, 2016 FRS 103 includes IFRS 4 contract classification requirements, i.e. splitting business between insurance and investment contracts Investment classified contracts valued as per IFRS reporting, e.g. “fair value” reserves and deferrals

Change is coming! IFRS 17 IFRS 9 (if availed of deferral)
FRS 101 will no longer be applicable from the effective date of IFRS 17 Unlike accounts that apply IFRS in full, those under FRS 101 must comply with detailed accounting requirements set out in company law. Some of these requirements conflict with the requirements of IFRS 17 Will need to move to either IFRS or FRS 102 / 103 FRS 103 will be reviewed by the FRC in light of IFRS 17 but the timing of this review (as well as extent of change or convergence) is yet to be determined 11 July The FRC has concluded its annual review of FRS 101 for 2018/19 and issued Amendments to FRS 101 – 2018/19 cycle, which amends the definition of a qualifying entity so that. Unlike accounts that apply IFRS in full, those prepared in accordance with FRS 101 must comply with detailed accounting requirements set out in company law. Some of these requirements conflict with the requirements of IFRS 17. This amendment to FRS 101 was necessary to ensure continued compliance with company law that applies to non-IAS accounts.

Timeline for accounting standards
2021 2022 2023 2024 2025 2026 onwards IFRS 17 (and 9) effective from 1 January 2022 /2023? IFRS 17, 9 FRS 101 gone when IFRS 17 goes live FRS 101 Fully aligned with IFRS 17? (no date set) FRS 103 Mind the gap!

Why does this gap matter?
If group is reporting under IFRS, then a subsidiary using FRS 102 may have a different accounting basis for its local reporting (following IFRS 17 going live) Could have significant dual reporting impacts e.g. processes, systems, people, reporting timescales, KPIs Impact will depend on materiality of subsidiary’s insurance (and with DPF) contracts for IFRS group reporting e.g. if nearly all the subsidiary’s business is investment classified, then the impact of “dual reporting” may be insignificant Also need to consider impacts due to Solvency II balance sheet items (outside of technical provisions) being based on IFRS, e.g. where differences arise between IFRS and FRS FRS 102 for local reporting may be beneficial for some insurers

Example differences: IFRS vs FRS 102
Example area Example potential differences (post IFRS 17) Measurement Presentation & disclosure Contract classification, unbundling Potential reclassifications and rebundling under IFRS 17 Knock-on impacts where differences arise Insurance contract accounting Significant Investment contract accounting No significant differences expected Significant extra disclosures under IFRS 9 Financial assets Leases (IFRS 16) IFRS 16 Lease impact will depend on nature of leases Areas of divergence between IFRS and FRS may grow!

Could I delay IFRS 17 impacts?
Some UK insurance groups have moved from IFRS to FRS 102 A subsidiary of an IFRS reporter could look to move from FRS 101 (or possibly from IFRS) to FRS 102, which would delay IFRS 17 impacts for local reporting BUT would need to consider factors such as: Group requirements Materiality for IFRS group reporting, i.e. subsidiary’s exposure to insurance and with DPF contracts (now and in the future) – need to consider materiality on an IFRS 17 basis Group projects & systems ALM Solvency II production / impacts Tax Etc

Irish insurers accounting bases at YE18
Warning: indicative only! IFRS FRS 101 FRS 102 Life 58% 12% 30% Non-Life 23% 5% 72% Reinsurers 26% 4% 70% Total 32% 6% 62% *Percentages are based on the number of companies in CBI registers Some companies are changing their reporting basis for YE19

Supplementary reporting at YE18
Company Example supplementary info reported at YE18 Allianz MCEV (Market Consistent Embedded Value) Aviva VNB (value of new business on adjusted SII basis), PVNBP AXA EEV (European Embedded Value) CNP MCEV Direct Line Ratios (based on ESMA APMs* guidance) Generali Ratios (based on ESMA APMs guidance) Hannover Re “Intrinsic value creation” (based on economic profit, allowing for CoC) Lloyds PVNBP (PV of new business premium) L&G Ratios Munich Re “Economic earnings” (based on change in SII EOF, adjusted) NN Group VNB Old Mutual Prudential EEV RSA SCOR Standard Life Zurich *APM = alternative performance measures CoC = cost of capital Warning: indicative only!

Supplementary reporting
Divergence in supplementary reporting measures in recent years Types and extent of supplementary reporting varies significantly IFRS 17 will have significant impacts on KPIs for insurance business: Some existing KPIs will be turned on their head, e.g. adjusted operating profit VNB may continue to be useful for investors, however, the new business CSM may become an alternative measure for new business New KPIs may be introduced, e.g. based on CSM Insurers may still wish to consider alternative metrics for insurance contracts and particularly for investment contracts Whether IFRS or FRS for local reporting, subsidiaries will need to consider group KPIs

US GAAP / IFRS convergence?
Several companies use US GAAP as their accounting basis for insurance classified contracts under IFRS. Some companies may also report under US GAAP for group reporting In 2007, the SEC began allowing foreign filers to report under IFRS without reconciliation to US GAAP SEC floated the idea of adopting IFRS as the primary financial reporting regime for US companies, but interest has waned over the years FASB and IASB continue to work on their convergence projects, but level of convergence / divergence varies by standard Joint work on the insurance contracts project has been discontinued, although the IASB and FASB continue to liaise on some issues New FASB guidance revises measurement and disclosure requirements for long-duration (re)insurance contracts (“LDTI”) biggest change in US GAAP reporting for life insurers in the last 40 years potential deferral announced of the effective date to 1 January, 2022 for large SEC filers and a two or three year deferral for all other entities Throughout the world, companies use two predominant accounting standards to report their financial results: GAAP and IFRS. The primary difference is that GAAP tends to be prescriptive and rules-based, whereas IFRS tends to be subjective and principles-based. SEC Chairman Jay Clayton has announced that a consideration to require or allow U.S. public companies to use IFRS is “not a focus” for him. His lack of interest contrasts with the “high priority” former Chair Mary Jo White placed on IFRS during her tenure. FASB Chairman Russell Golden has said that "Different starting points, different cultures, and different legal systems made bilateral convergence impossible to achieve" IFRS 15 "Revenue from Contracts with Customers“ fully converged with US GAAP standard (ASU )

Opportunity for actuaries to help navigate!
Summary FRS 101 is going => plan your move Uncertainty re convergence of FRS 103 with IFRS 17 => mind the gap! Can be areas of divergence between FRS 102 and IFRS Consider knock on impacts if you stay on FRS 102, 103 …not least the potential for new KPIs for group reporting and for changes in supplementary reporting Don’t expect US GAAP / IFRS convergence for insurance accounting in the near future Opportunity for actuaries to help navigate!

Agenda Reporting bases considerations Discussion paper

ASP LA-7 Background Withdrawn July 2018
Role of the ‘Appointed Actuary’ CBI’s Domestic Actuarial Regime and role of HoAF in a Solvency II world Relevance of ASP LA-7 in current regulatory situation Role of the ‘Reporting Actuary’ What guidance (if any) is needed from the SAI? IFRS17 is coming… Multiple reporting bases ASP LA-7 was withdrawn in July 2018. This covered the role of actuaries in relation to financial statements and it was developed to address the 1996 Insurance Accounts Regulations introduction of new professional role for actuaries. The ASP provided professional guidance to Actuaries involved in the calculation of life insurance provisions in financial statements of Republic of Ireland authorised insurance companies or Republic of Ireland domiciled insurance groups. It also provided guidance for Appointed Actuaries and other actuaries involved in the preparation of financial statements under the Companies Acts for companies or groups transacting long-term insurance business and domiciled in the Republic of Ireland. It also covered areas such as the interaction with the auditors. In terms of the Appointed actuary, the CBI’s domestic actuarial regime is very prescriptive in terms of the role of the HoAF, so it would seem unnecessary to have further SAI guidance for HOAF’s. The 2016 amendment to the 2015 Insurance Accounts Regs removed the reference to ‘Fellow of the SAI’ in respect of the person who calculates the life assurance provision. A lot of the guidance provided in LA-7 is useful and helpful, so our working group were tasked with thinking about the areas of LA7 that were useful and helpful to reporting actuaries and in determining whether we could produce something that would assist the reporting actuary of the future. As part of this we sat down and had a think about whether the SAI should produce revised guidance in this area. We also thought about where financial reporting for actuaries is heading and the most obvious point is that IFRS17 is coming, so this was a key consideration of the working party and we’ll talk about IFRS 17 guidance in a few minutes. But not to forget that there are still multiple other reporting bases for insurance company financial statement, as already outlined by Niall.

ASP PA-2 Considerations
ASP PA-2 General Actuarial Practice Examples provided in this discussion paper consistent with requirements of PA-2 Reliance on others Materiality Data Assumptions Methodology This is not to say that ALL requirements of PA-2 are covered In deciding upon whether specific guidance for financial reporting actuaries was needed, we considered the requirements of ASP-PA2 (General Actuarial Practice). ASP-PA2 sets out that ‘recorded communication’ is required when performing actuarial work and indeed the requirements of PA-2 set out that items such as materiality, data quality, reliance on others, and selection of assumptions and methodology should all be covered in the recorded communication. So in preparing this discussion paper, we have ensured consistency with PA-2 in terms of the type of information a reporting actuary might include in their report. It’s probably worth stating that the discussion paper doesn’t necessarily cover all of the requirements of PA-2 but there is significant overlap.

Where things are going in terms of Actuarial Reporting?
Producing actuarial reports for Insurance contracts under IFRS17: ISAP4 (expected completion end November 2019) There is Australian guidance and Canadian Guidance available IAN100 in draft Why not similar reporting expectations for: Investment classified business? Insurance classified business under FRS 102? Solvency II: As for SII, there are already actuarial reporting requirements under European requirements, which are further expanded by the Domestic Actuarial Regime. ASP PA-2: All of this fits with the requirements of ASP PA-2 in context of documenting actuarial work and reporting to stakeholders. We also had a think about what other guidance exists at the moment in terms of the various financial reporting bases where reporting actuaries may be involved in the preparation of financial statements. In terms of IFRS 17, ISAP 4 was expected to be completed and released by the IAA (International Actuarial Association) at the end of November The proposed final version is available on the IAA website. This document is an international standard of actuarial practice and is IFRS17 specific. IAN100 is also under development by the IAA. The exposure draft is available on the website – the purpose of the this IAN is to assist actuaries in complying with IFRS17 so it’s very detailed and runs to about 240 pages at the moment. It covers the standard chapter by chapter and provides insights and interpretations for each area of the standard. In terms of other jurisdictions, there is financial reporting guidance for actuaries available in Australia. In Canada, the financial reporting guidance for actuaries is very prescriptive, even detailing ranges for pads to be included in assumptions. For Solvency II, as we know, there are already actuarial European reporting requirements which are further expanded in Ireland by the DAR. So this does leave a gap for reporting actuaries in terms of other financial reporting bases, for example for investment classified business and for insurance classified business under FRS102.

AAE Survey Question Ireland Germany Austria Czech Republic France
Is there a statutory/regulatory requirement for the actuary to produce a report on the actuarial balances included in the financial statements? No Yes for Local GAAP - German Supervisory Law Yes for Local GAAP - Austrian Insurance Act Is there a non-statutory/non-regulatory requirement (e.g. guidance by an actuarial association) for a report on actuarial balances in the financial statements ASP-PA2 Yes, additional guidance provided by member organisation Where there is no requirement for a report is it general market practice for such a report to be produced? n/a Does your actuarial association provide guidance around the structure and content of such report? Yes If there is guidance around such a report what areas does it cover? Yes: A number of individual documents which set out specifics around products, considerations of short, medium and long term obligations and required sensitivities We wanted to further understand current market practice across Europe, so we issued a survey via the AAE and received responses from actuarial bodies in Germany, Austria, France and the Czech Republic. We posed 5 questions: -The first: Is there a statutory or regulatory requirement for the actuary to produce a report on actuarial balances in the financial statements. In Germany there is a requirement under German Supervisory Law to produce a report for local GAAP reporting and the same requirement applies in Austria. There is no requirement in France or Czech Republic. The second question was whether there is a non-statutory/non-regulatory requirement – i.e. guidance issued by an actuarial association. In Germany, there is additional guidance but there is no additional guidance in Austria, France or the Czech Republic. The third question was where there is no requirement to produce a report, is it general market practice for a report to be produced – the question only applies to France and Czech republic who answered no. The fourth was whether the relevant local actuarial association provides guidance around the structure and content of the report and only Germany answered yes. And the final question asked where guidance is provided, what areas does it cover. Germany answered that a number of individual guidance documents are available covering specifics around products, considerations of short, medium and long term obligations and required sensitivities.

Who’s responsible (as noted in ASP LA-7)
Francis will now talk through the various areas of the discussion paper that the Life Financial Reporting Working Group felt would be worth considering in producing a reporting actuaries report, and before Francis gets started it’s probably worth mentioning that while we talk about the reporting actuaries report in the singular sense, there is no reason that the report would not comprise multiple reports. This will of course depend on the complexity of the organisation, the process, the calculation of the balances and the ownership of the various items discussed throughout the paper.

Paper Overview Actuaries may be involved in the calculation of a number of balances in the financial statements of insurance companies. Examples include: Policyholder liabilities Intangible assets and liabilities Currently no legislative or regulatory requirement in Ireland to produce a report. It’s worth recapping that there is currently no legislative or regulatory requirement in Ireland to produce a reporting actuaries report. So taking everything into account in terms of market practice, IFRS17 guidance available and ASP-PA2 requirements, we felt that the best course of action was to prepare discussion paper rather than a formal guidance note. As already noted, ASP PA-2 already sets out the requirement to produce a report. Our focus in the discussion paper is on the areas that the reporting actuary might include in that report. In terms of the key items that would be covered in the reporting actuaries report, we expect that it would cover the balances in financial statements that the actuary is involved in calculating, so for example policyholder liabilities and intangible assets and liabilities.

Paper Overview Life Financial Reporting Working party was asked to consider what, if any, areas an actuary may wish to consider in such a report. Working party produced a discussion paper which lists a number of example areas for potential consideration in producing such a report. Francis will now talk through the various areas of the discussion paper that the Life Financial Reporting Working Group felt would be worth considering in producing a reporting actuaries report, and before Francis gets started it’s probably worth mentioning that while we talk about the reporting actuaries report in the singular sense, there is no reason that the report would not comprise multiple reports. This will of course depend on the complexity of the organisation, the process, the calculation of the balances and the ownership of the various items discussed throughout the paper.

Caveat and limitations of the paper
The list of areas for potential consideration suggested below is neither intended to be wholly complete nor to form a minimum or maximum set of areas that an actuary may consider in the Report. In particular, it is not expected that all areas would necessarily apply to a single insurance company. The list is provided only for educational purposes. There are likely to be exceptions and circumstances where many, but not all, of the areas below are appropriate for individual companies to consider. There may also be circumstances where areas beyond those listed below would be appropriate to consider.

. Possible areas for consideration in a Reporting Actuary Report (1/4)
Section Description General considerations for the report, governance and controls 1 General 2 Governance and Controls Context/ background / scope of the Reporting Actuary 3 Nature of financial statements 4 Financial statement accounting basis 5 Accounting policies for insurance, insurance with-DPF and investment with-DPF classified contracts 6 Balances (or “line items”) in scope of the report 7 Materiality threshold applied 8 Overview of the undertaking in scope 9 Overview of key relevant developments in the reporting period

Section Description Classification, unbundling, embedded derivates, service contracts 10 Classification of contracts (i.e. under IFRS 4/FRS 103) between investment w/o DPF, insurance w/o DPF, insurance with DPF, investment with DPF and for reinsurance 11 Unbundling of deposit and insurance components 12 Embedded derivatives (Eds) 13 Contracts outside of scope of IFRS 4/FRS 103 and of IFRS 9/ FRS 102

Section Description Reserving methodology, models , data, assumptions, reinsurance 14 Investment (non-DPF) methodology 15 Insurance/ with-DPF methodology 16 Models 17 Data 18 Assumptions 19 Reinsurance Reserving results and analysis 20 Liability adequacy testing (“LAT”) 21 Breakdown of reserves 22 Movement analysis 23 Out-of-model items (e.g. manual reserves, adjustments) 24 Reconciliations of reserves to other reporting basis 25 Sensitivities 26 Analysis of surplus

Section Description Other items 27 DAC, DIL 28 Shadow accounting 29 Acquisition accounting and investments in subsidiaries 30 Contingent liabilities (FS note disclosure) 31 Tax

General considerations for the report, governance and controls Section Description Example 1 General Table of contents and page numbers Who the report is addressed to / anticipated users of the report Responsibilities of the Board Scope of the Reporting Actuary’s work Other team members involved in the production of the report Executive summary Recommendations Conclusions Subsequent events Simplifications and approximations Material uncertainties Reliances and limitations Glossary Version control, history Appendices, e.g. Summary descriptions of products and of reinsurance Status of previous recommendations Statement relating to compliance with any relevant ASP’s Table of compliance with ISAP 4/ relevant ESAP Data sources Cross references to other documents for relevant content which is not repeated in this report

. 2 Governance and controls Key risks and corresponding controls
Possible areas for consideration in a Reporting Actuary Report (2/2) General considerations for the report, governance and controls Section Description Example 2 Governance and controls Key risks and corresponding controls Review and sign-off process and application

Classification, unbundling, embedded derivates, service contracts Section Description Example 10 Classification of contracts…. Summary of exposure to each classification Threshold for significant insurance risk transfer (e.g. 5%,10%) and how applied Reference to documentation of application of contract classification, e.g. document with contract/product level classification, conclusion and supporting rationale Approach to classification of policies with an option to invest in with-DPF

Reserving methodology, models, data, assumptions, reinsurance Section Description Example 18 Assumptions Whether best estimate Adjustments to best estimate (e.g. PADS) Differences vs Solvency II Appropriateness of assumptions Consideration of uncertainties in assumption setting Expert judgements involved in assumption setting Effect of discontinuities in experience on assumption setting Whether the assumption set is reasonable in the aggregate Alternative assumptions and sensitivity testing Internal consistency of assumptions Consideration or otherwise of entity specific assumptions (including whether entity specific data has been used to set assumptions)

Reserving results and Analysis Section Description Example 20 Liability adequacy testing (“LAT”) How assessed, whether on a qualitative basis or a quantitative basis, e.g. by comparison of booked reserves (less related intangibles) in the financial statements against a best estimate How the best estimate value (used in the comparison) was determined, e.g. whether based on Solvency II BEL and if any adjustments applied (e.g. inclusion of post- contract boundary VIF) LAT results split by contract classification (see example table below) Explanation of movement in LAT results in the period

. 24 Reconciliations of reserves to other reporting basis
Possible areas for consideration in a Reporting Actuary Report (2/2) Reserving results and Analysis Section Description Example 24 Reconciliations of reserves to other reporting basis Local vs group FS to Solvency II

Other items Section Description Example 27 DAC, DIL Nature of costs and fees deferred and not deferred, and why Amortisation period, how determined and if changes Consistency of amortisation period with when services are provided Approach to policy "offs" (such as surrender, maturity, death), i.e. whether write down DAC/DIL and consistency with amortisation period Reconciliation of new deferred (before amortisation) to incurred in period Approach to DAC recoverability, e.g. grouping level Roll-forward from opening to closing (see example further below)

Next Steps Draft discussion paper can be found on the SAI website
Please send any feedback to Subject to feedback, may revisit in 2020

Questions?

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