1. IFRS 4 Phase II Insurance Contracts (Exposure Draft)
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2. History IFRS 4 Insurance Contracts
started in 1997
standard issued in 2004 (‘Phase I’)
aimed at making only limited improvements
Discussion Paper Preliminary Views on Insurance Contracts (‘Phase II’)
issued in 2007
further discussed since early 2008
162 comment letters received
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3. Insurance accounting TODAY is a black box
Why IFRS 4 Phase II?
IFRS 4 (Phase I) temporary solution
Wide variety of
accounting practices for different contract types and jurisdictions
measurement models
lack of comparability and transparency
current insurance accounting does not provide users with relevant information
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Insurance accounting TODAY is a black box

4. Unbundling Unbundling
Account for components of a contract as if they were separate contracts
Unbundle components of an insurance contract that are not closely related to the insurance coverage
Most common examples:
Policyholder account balances
Embedded derivatives
Goods and services that are not closely related to insurance
Not permitted otherwise
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5. Measurement - Building blocks
Expected (probability-weighted) future incremental cash flows (that arise from the contract)
Time value of money
Risk adjustment
No day one gains: residual margin
Day one losses recognised in profit or loss
Cash flows
Discounting
Risk adjustment
Margin
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6. Measurement - Building blocks
Cash flows
Discounting
Risk adjustment
Margin
Expected (probability-weighted) future incremental cash flows
current estimates
on a portfolio level
expected to arise from the contract, including
incremental acquisition costs
cash flows arising from participating features
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7. Measurement - Building blocks continued
Cash flows
Acquisition costs
Costs of selling, underwriting and initiating an insurance contract
Some insurers currently defer all acquisition costs
Proposal in the ED:
incremental acquisition costs (on a contract level) are included in the cash flows
non-incremental acquisition costs are expensed
Discounting
Risk adjustment
Margin
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8. Measurement - Building blocks
Cash flows
Discounting
Risk adjustment
Margin
Participating contracts
Cash flows from participating features
(incremental) participating benefits an insurer expects to pay arising from participating insurance contracts
 Contract cash flows like any other
Mutual insurers?
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9. Measurement - Building blocks continued
Cash flows
Discounting
Risk adjustment
Margin
Time value of money
Discount rate:
Reflecting characteristics of the insurance contract
Non-participating: risk-free plus adjustment for illiquidity
Participating: consider performance of assets
Excluded: non-performance risk
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10. Measurement - Building blocks continued
Cash flows
Discounting
Risk adjustment
Margin
Risk adjustment
Explicitly measures the effects of uncertainty associated with future cash flows
insurer’s view of uncertainty
Re-measured each reporting period
Measured at portfolio level
Permitted measurement techniques
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Confidence interval/ Conditional Tail Expectation/ Cost of Capital

11. Measurement - Building blocks continued
Residual margin
Allocation of ‘day-one gain’ - releasing it to profit or loss over the coverage period in a systemic way
passage of time, or
pattern that better reflects the occurrence of benefits and claims
‘Day-one loss’ exists when: cash inflows < cash outflows + risk adjustment
Accretion of interest (locked-in)
Cash flows
Discounting
Risk adjustment
Margin
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<
Expected claim payments 10
Premium received 12
Risk adjustment 3

12. Measurement - Building blocks continued
Cash flows
Discounting
Risk adjustment
Margin
premium
residual margin
Margins
composite margin
Two approaches considered
risk adjustment
cash outflows
cash outflows
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13. Measurement model Performance reporting
Liability at start of year
Changes in the liability
Liability at end of year
Cash
Cash
Items in profit or loss 20
- 5
+ 1
- 3
+ 2 14
- 1
expected cash flows
release of residual margin
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unexpected cash flows
release from risk
interest on liability
Effect in profit or loss
= +1

14. Presentation and disclosures
Presentation of income statement
Margin-based approach
follows the direct measurement model
treating insurance premiums as deposits
broadly showing:
change in the risk adjustment and the release of the residual margin
what insurers expect to earn from providing insurance services and investment return
gross inflows and outflows (premiums, claims and benefits) in disclosures
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15. Presentation and disclosures continued
Inception
six months
1 Jan
to 30 Jun
to 31 Dec
Risk margin 21 26
Residual margin 2
Insurance margin 23 28
Experience adjustment
(10)
Changes in estimates
(20)
Net gain at inception
Investment income 40 38
Interest on insurance liability
(25)
(23)
Net interest and investment 15
Profit 8 33
Presentation Example
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16. Presentation and disclosures continued
Disclosure principle aims at
explaining the amounts recognized in the financial statements arising from insurance contracts; and
the nature and extent of risks arising from those contracts.
Auditable information about effectiveness in risk management practices (vs. non-audited MD&A info)
Risk disclosures similar to IFRS 7
Sensitivity analysis
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17. Advantages of the proposed model
Principles not detailed guidance
Comparability – global standard, consistent accounting
Coherent framework to deal with:
more complex contracts
emerging issues (no need for ‘add – on’ rules)
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18. Advantages of the proposed model continued
Relevant information for users:
focus on drivers of profitability of insurance contracts
amount, timing and uncertainty of future cash flows
current estimates
income recognised in line with release from risk
eliminate accounting mismatches
consistent accounting for embedded options and guarantees
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19. Thank you (above slides are prepared based on IASB 2010. 8
Thank you (above slides are prepared based on IASB Taipei seminar materials)
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