11/07/2018

Reserving Seminar 2018

IFRS 17 Overview

Alice Boreman
on behalf of the IFoA IFRS 17 for General
Insurance working party

11 July 2018

A work in progress
This presentation represents the views of the working party members and does not
represent the views of the members’ respective employers.
Our thinking is still a work in progress rather than agreed consensus views.

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Agenda
• Background to IFRS 17
• General overview of IFRS 17
• Key current practical implementation issues
– PAA eligibility
– Unit of account/onerous contracts
– Risk Adjustment
– Reinsurance

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Overview of IFRS 17
IFRS 17 is the first truly international, comprehensive accounting Standard for insurance, replacing IFRS4 – an interim
Standard that results in widely divergent practices
• Some entities begin implementation process
IFRS 17 • General questions Entities finalising Effective date
published • Contentious/specific implementation questions implementation of IFRS 17

18 May 2017 2018 2019 2020 2021

The IASB aimed for IFRS 17 to bring: What IFRS 17 requires: Impact of IFRS 17 on general insurers:

 Consistent accounting for all insurance  A measurement model for insurance  Move to a best estimate basis, no reserve
contracts (health, life and general contracts which is based on: margins will be permitted instead an
insurance sectors and with other sectors)  expected future cash flows; explicit risk adjustment will be required
 Updated information about obligations,  discounted to reflect time value of  Driver of profit and recognition of profit
risks and performance of insurance money; and over time will change due to new best
contracts estimate valuation model, unwind of
 a risk adjustment to reflect the discount, release of risk adjustment and
 Increased transparency in financial compensation the insurer requires to release of CSM (GM only)
information reported by insurance bear risk
companies  Underwriting result and finance result will
 The expected profit in a contract is have a new ‘feel’ and presentation.
measured on day one and released over
the coverage period  New KPIs, strategy, incentives and
education are required as well as system
 Early recognition of potential loss making changes
contracts
 Expansion of disclosure requirements
 Increased disclosure requirements

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Adoption of IFRS 17 across the globe

United Kingdom People Republic of China
UK listed companies are required to use The Chinese Accounting Standards for Business
EU-adopted IFRSs in their consolidated Enterprises (CAS) are substantially converged with
accounts. Choice between UK GAAP or EU- The EU
Endorsement process of IFRS, except for certain modifications which reflect
adopted IFRS for individual companies China's unique circumstances and environment
IFRS 17 underway. No
decision expected before South Korea
mid 2019 Formed special task force, requested
high level impact assessment to be
submitted to regulator

Japan
Eligible companies are permitted to
voluntarily apply IFRS. A Technical
Committee has been set up to deliberate the
ASBJ’s views on IFRS 17

United States
Will not adopt Taiwan
IFRS 17 Delayed adoption by 3
years
Hong Kong
Endorsed on 12
December 2017
Australia
Endorsed on 20 July
Singapore 2017
Bermuda Thailand
Eq Re currently Endorsed on 29
prepare AASB IFRS 17 will be March 2018
1023 financial endorsed in Thai FRS
statements. This Philippines New Zealand
means IFRS 17 but with a 12 month Endorsed on 10 August
reporting 1/1/21. delay of the effective Philippine FRS is aligned 2017
date with IFRS and PFRS 17 is
expected soon

Vietnam
Malaysia
Plans to adopt IFRS from 2020 with focus Full adoption to MFRS 17.
on bank and insurance companies.
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Measurement model overview

IFRS 17 introduces two measurement models:
1. “General Model” (GM) where unearned and earned coverage is all measured by considering discounted, risk-adjusted cash
flows and profit is measured at inception by the Contractual Service Margin (CSM) which is earned out over the coverage
period.
2. “Premium Allocation Approach” (PAA) which offers a simplified approach to measurement of unearned business.

PAA GM

AC CSM
PAA GM PAA and GM measurement are
AC CSM the same in the post coverage
RA Liability for
RA period

Discount UPR ≈ Discount

remaining
coverage PAA GM
Future CFs
RA RA
UPR RA RA
Discount Discount
Discount Discount Liability for
Future CFs
= incurred
Future CFs Future CFs claims Future CFs Future CFs

Day 0 Coverage Period Post Coverage (settlement period)

Contracts are eligible for the simplified approach if:

• the coverage period is 12 months or less; or
• if the entity reasonably expects it would produce a liability for remaining coverage for the group that would
not differ materially from the one that would be produced under GM.

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Overview of key areas of the standard

Portfolios / Central Simplified

Presentation
onerous estimate cash approach
and disclosure
contracts flows (PAA)

Discounting/ Contractual
Risk Reinsurance
service margin
adjustment inflation measurement
(GM only)

Acquired
Transition Unbundling Expenses
portfolios

Premium Allocation Approach

When can it apply?
PAA Eligibility Decision
For each portfolio/cohort of contracts
Do all contracts within the • The portfolio/cohort automatically applies for the PAA.
portfolio/cohort have a YES • No need to demonstrate eligibility.
coverage period of 12 • Auditors may request evidence that the portfolio/cohort fulfils the criteria.
months or less?

NO

Can it be reasonably • The portfolio is likely to be eligible for the PAA.

expected that the LRC under YES • Auditors are likely however require justification.
the PAA would not differ • Need to define what ‘reasonably expects’ and ‘differs materially’ means for the reporting entity.
materially from the GM? • May require modelling of future stresses/scenarios to demonstrate immateriality in a range of outcomes.

NO

Is the portfolio/cohort and • This consideration is outside the scope of IFRS 17.
associated deviation in the YES • Broader accounting/materiality question – see IASB Practice Statement 2 “Making Materiality Judgements”.
This
LRC is unlikely
immaterial for to
thehold if “the• entity expects
Will need significant
to carefully variability
monitor the materiality of thein the fulfilment
portfolio’s/cohort’s cash
which are not eligible (based on the above
flowsreporting entity? affect the measurement
that would steps) over time.
of the liability for remaining coverage during
the period
NO before a claim is incurred. Variability in the fulfilment cash flows increases
with, for example:
It is unlikely that the PAA will
…(b) be the length
available of the
coverage period of the group of contracts.”
to the
Paraportfolio/cohort.
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IFRS 17 introduces more rigorous measuring and reporting requirements

for “groups” of loss making contracts

Measurement of insurance liabilities is (performed or allocated) at the level of a “group of insurance contracts” so that favourable and
unfavourable changes in estimates from the individual contracts in the group are offset within the group but not with other groups.
IFRS 17 asks to consider profitability gross of reinsurance, and allowing for the effect of discounting and risk adjustment. For PAA
groups, this is identified based on “facts and circumstances”.

Divide a portfolio of insurance contracts into a minimum of the following (ie. consider each of the three groups below):

Onerous group Other No significant possibility of becoming onerous

Groups that are onerous (loss making), ie. Groups that could potentially turn onerous under Resilient group: Some characteristics of resilience
fulfilment cash flows is a net outflow very stressed conditions include low sensitivity to risk drivers, “thick” margin

For PAA, assume that there are no onerous Assess whether non onerous contracts have no significant possibility of becoming onerous subsequently
contracts unless “facts and circumstances” based on likelihood of changes in facts and circumstances
indicate otherwise.

Where senior management would be aware Example of “Other” may be groups of contracts on a ‘watch list’ (such as where historic COR >95%) or
of selling loss making business which are particularly sensitive to changes in assumptions (volatile)

Identifying “groups” of insurance contracts

What the standard requires
IFRS 17 expects you to identify portfolios of insurance contracts which comprise contracts that have similar risks and are managed
together. These portfolios are then divided into a minimum of three groups: a group of contracts that are onerous at initial recognition,
a group of contracts that have no significant possibility of becoming onerous and a group of remaining contracts. In addition, within
these groups there will be underwriting cohorts as a group cannot contain contracts that are issued more than one year apart.

By group – at a minimum of
those below
Data at each
intersection is then
needed to calculate the
Expected to be onerous carrying amount of the
at initial recognition group of contracts.

No significant possibility of being

onerous as at initial recognition
By annual cohorts -
UW year

Other at initial recognition

Contracts issued in 20X2

Contracts issued
Portfolio A
in 20X1
Portfolio B
By portfolio – similar risks Portfolio C
managed together

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Risk Adjustment
The purpose of the risk adjustment for non-financial risk is to measure the effect of uncertainty in the cash flows that
arise from insurance contracts, other than uncertainty arising from financial risk. [IFRS 17.B89]
Estimation technique Diversification benefits
IFRS 17 does not mandate a method to estimate the Risk Adjustment required, Diversification benefits should be reflected and should be
but there is a requirement to publish the Confidence Level considered from the reporting entity’s perspective

Either May TRG (Agenda Paper 2) conclusions

(1) Individual financial statements of an entity
(subsidiary) that is part of a Group
Diversification benefit is only reflected to the extent it is
• ODP Bootstrap
Independent considered by the subsidiary when determining the
• Mack Risk
and past risk adjustment related to insurance contracts issued by
• Stochastic chain ladder metric
external the entity.
• Bespoke stochastic methods
systemic risk
• Stress and scenario tests • VaR (2) Consolidated financial statements of the Group
• TVaR of entities
Other • Qualitative overlay eg Oz • PHT
systemic risk score card approach The risk adjustment at the consolidated level is the
But then… same as the risk adjustment at the individual entity
Or • Cost of capital level.
• Stressed (deterministic)
reserving assumptions

The level at which the target CL and hence the risk adjustment is set for each entity could have a
material impact on the number of contracts being classified as onerous and will be important
factors in the tests for onerous contracts.

Reinsurance
• IFRS 17 uses ‘reinsurance contracts issued’ to describe inwards reinsurance contracts
• IFRS 17 describes outwards reinsurance contracts as ‘reinsurance contracts held’.
• Requirements in respect of reinsurance contracts issued are the same as the requirements applicable to insurance contracts issued
• These requirements are modified for reinsurance contracts held to reflect the specific features of reinsurance contracts held
Level of aggregation Treatment of net gains and losses on reinsurance held

Portfolio subject to similar risks Net expense/loss on initial recognition Net gain on initial recognition
and managed together.
On initial recognition, a debit CSM would If a net gain/credit CSM arises, i.e.
Annual cohorts typically be recognised which represents amount paid for RI < expected PV of
the net expense of purchasing reinsurance cash inflows plus risk adjustment
No significant possibility of achieving Remaining
Net gain Recognise over coverage period as services are received
net gain subsequently contracts Exception: If reinsurance held covers events that have already occurred (e.g. ADC),
Groups
recognise the whole net expense in P&L on initial recognition

PAA eligibility Coverage units for contracts applying the general model (GM)
Reinsurance contracts with coverage periods of a year or less are automatically The amount of CSM recognised in the P&L in each period is determined based on
eligible for the (simplified) premium allocation approach [PAA] “coverage units”. Coverage units are determined by considering the quantity of benefits
provided under a contract and its expected coverage duration

Embedded derivatives Ceding commissions

There may be derivatives embedded in insurance (or reinsurance) contracts that Ceding commissions are included as one of the cash flows used to determine the gain or
need to be accounted for separately under IFRS 9 Financial Instruments loss on a reinsurance contract held (rather than being recognised separately as income). If
gross presentation of reinsurance income/expenses is selected, treat ceding commissions
as:
* For proportional reinsurance held, the measurement on initial recognition should include a) part of the cash flows relating to claims or benefits in the underlying contracts when the
all rights and obligations relating to future coverage, including in relation to underlying
commissions are contingent on claims; and otherwise
contracts not yet written
b) a reduction of the premiums to be paid to the reinsurer

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Questions Comments

The views expressed in this presentation are those of invited contributors and not necessarily those of the IFoA. The IFoA do not endorse any of the views
stated, nor any claims or representations made in this [publication/presentation] and accept no responsibility or liability to any person for loss or damage suffered
as a consequence of their placing reliance upon any view, claim or representation made in this presentation.

The information and expressions of opinion contained in this publication are not intended to be a comprehensive study, nor to provide actuarial advice or advice
of any nature and should not be treated as a substitute for specific advice concerning individual situations. On no account may any part of this presentation be
reproduced without the written permission of the IFoA [or authors, in the case of non-IFoA research].

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