PAI-EY IFRS 17 Presentation April 2017
IFRS 17 Update
2nd Indonesian Actuaries Summit
21 April 2017
Kelvin Yap
EY Actuarial Services, ASEAN
The objectives of today
To outline
particular issues
the Indonesian
industry may be
face
To provide an
overview of main
changes and
rationale for
IFRS17
To outline the
impact to the
insurance industry
under IFRS17
Confidential — All Rights Reserved — EY
To discuss
operational
challenges to
insurers
To understand what
other insurers are
doing
IFRS17: latest news, implications and challenges faced by insurers |
2
Agenda
1. Introduction
2. Key features of IFRS 17
3. Challenges of IFRS 17
4. Numerical Example
5. Implementation implications
This material has been prepared for general informational purposes only
and is not intended to be relied upon as accounting, tax, or other
professional advice. Please refer to your advisors for specific advice.
01
Introduction
Why are changes needed to Insurance Accounting?
IFRS17 brings insurance more in line with other accounting standards
It is believed that the existing insurance contracts accounting does not provide investors, lenders and other creditors
with the information they need to understand the financial statements of entities that issue insurance contracts or
make meaningful comparisons between such entities.
•
Little or no Comparability between
entities
•
•
Does not always reflect the
economic and risks in a timely
manner
•
•
•
•
Accrual accounting basis
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IFRS 4 allows entities to maintain their existing accounting practices
Current FS not comparable (1) across insurers due to different reserving
practices (NPV, GPV wo PAD, GPV w PAD); or (2) across industries, eg
Banking and Wealth Management even for similar products
Long duration contracts measured using outdated information (eg NPV)
Economic risks such as options and guarantees embedded in insurance
contract are not reflected (eg Minimum Surrender Guarantees)
Time value of money is not reflected (eg GI Chain Ladder)
Little information is given about the sources of profit reported in current
period or expected in future periods (Analysis of Surplus)
Information about underwriting activity is often reported on cash / cash-like
basis even when services is delivered in a different period, “change in
liability” item which is needed to reconcile cash-based amounts to the
accruals-based result of the period
IFRS17: latest news, implications and challenges faced by insurers |
5
Simplified Example: Insurance vs Asset Management accounting
IFRS17 results in a more comparable P&L vs other financial institutions
Insurance Company
Simplified Example
•
•
•
•
•
5 Year Single Premium Unit Link, $10,000,000
•
Mutual Fund
Year 1
Premium Income
10,000,000
Commissions
SPUL Initial Allocation of 97.5% OR
•
IFRS 4 Phase 1
(100,000)
Increase in Reserves
Initial Charges of 2.5% (Asset Manager)
Acquisition Cost of 1% ($100,000) which is DAC over
5 years
(1,000,000)
Investment income on underlying items
250,000
Comprehensive Income
150,000
Yr 1 UL Returns of 2.56% ($250,000)
Ignore mortality, lapse
IFRS 17
Year 1
Insurance Contract Revenue
50,000
• Fulfilment cashflows
0
• Change in RA
• CSM amortization
Asset Management Company
IFRS 15 (Revenue Recognition)
Revenue (from initial charge)
Distribution Costs
Comprehensive Income
0
Year 1
250,000
(100,000)
150,000
30,000
• Acquisition cost
20,000
Amortisation of Deferred Acquisition Cost
Incurred losses
0
Underwriting result
30,000
Investment income on underlying items
Note: IFRS 15 may require the initial charge to be spread out over several
years if it is determined that the performance obligation is satisfied over
time
Interest expense on insurance obligations
250,000
(250,000)
Net investment income
0
Other Comprehensive Income
-
Comprehensive Income
Confidential — All Rights Reserved — EY
(20,000)
30,000
IFRS17: latest news, implications and challenges faced by insurers |
6
A Standard that better meets the needs of financial statements users
The new standard is expected to improve financial reporting by providing more transparent and comparable information.
The new standard is also seen as more in line with other IFRS standards for other industries.
Provides up-to-date market
consistent information of obligation
including value of options
& guarantees
Reflects time value
of money
Treats services provided by
underwriting activity as revenue and
expenses in comparable way to other
non insurance business
Single
accounting
approach
Provides separate information
about the investment and
underwriting performance
Reflects the characteristics of the
insurance contract rather than the risk
related to asset/investment activity
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7
IFRS 9 (Financial Instruments) and 17 (Insurance Contracts) are
highly interdependent for insurers, hence timing of the standards is
aligned by the IASB
IFRS 9 and 15
IFRS 9 and IFRS 15 Effective
date 1 Jan 2018 (*)
Possible IFRS 9 deferred
implementation date
First IFRS 9 annual financial
statements (*)
2016
2017
IFRS 17
Potential IFRS 17 Final
standard
2018
2019
2020
2021
Potential IFRS 17 start
of comparative period (**)
Potential IFRS 17 effective
date 1 Jan 2021 (**)
Ongoing IASB deliberations
Implementation period
Reporting
(*) IASB has proposed an option to either defer the effective date of IFRS 9 for insurers or to apply a temporary ‘overlay’ method to mitigate the PL impacts of IFRS 9
(**) Effective date tentatively set by IASB
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8
Adoption in Asia
Country
IFRS 17
aligned with IFRS
IFRS 9
delay in adoption
aligned with IFRS
Not adopting
delay in adoption
Indonesia
Note 1
1 January 2019
Taiwan
Note 1
Note 1
1 year later than
effective date of IFRS
1 January 2019
Thailand
China
Note 2
Malaysia
Sri Lanka
Laos
Note 2
Note 2
Korea
Philippines
Japan
Note 3
Note 1 – Local GAAP has not decided the date of adoption, but we are expecting the date to be later than the effective date of IFRS.
Note 2 – possible adoption but effective date of local GAAP is not known as of now
Note 3 - IFRS is not applied mandatory in Japan, and insurance/financial instruments accounting of JGAAP are different from IFRS4/9. However, listed companies can use IFRS.
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9
02
Key Features of
IFRS 17
IFRS 17 ED
Key areas of the proposed model will require Actuarial involvement
Definition and
scope
Building block approach/
variable fee approach
Reserves
Regulatory capital standards
Contractual service margin
Risk adjustment
Discount rate
Presentation /
disaggregation
Expected value of future
cash flows
Separation
Premium allocation
approach
Reinsurance
Disclosure
Risk
adjustment
Liability for
remaining
coverage
Discount rate
Transition
Cash flows of
claim liability
Financial Instruments and other accounting changes
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11
Sample P&L presentation: Term Insurance
Actuarial Involvement
Insurance Contract Revenue replaces Premium approach
A simplified statement of comprehensive income is presented below (when experience is similar to assumptions):
Future IFRS 17
Current IFRS 4
Premium Income
Year 1
Year 2
178,486
169,688
Year 1
Year 2
Insurance contract revenue
308,183
183,461
• Change in RA
223,437
105,090
4,324
3,048
49,358
46,228
31,064
29,094
(31,064)
(29,094)
(223,437)
(105,090)
53,682
49,277
7,139
14,213
(12,852)
(10,669)
(5,713)
3,544
-
-
47,969
52,820
• Fulfilment cashflows
• CSM amortization
• Acquisition cost
Amortisation of acquistion cost
Claims & Expenses
Increase in Reserves
252,685
105,090
-
44
Incurred losses
Underwriting result
Investment income on underlying items
(156)
354
Investment income on underlying items
Interest expense on insurance obligations
Net investment income
Other Comprehensive Income
Comprehensive Income
• Reserves are zeroised at the end of year 1
(74,355)
• Initial strain on surplus due to high acquisition expenses
64,909
Comprehensive Income
• No initial strain, less volatile
• Underwriting results reflect changes in RA and CSM amortization
when actual experience does not deviate from assumptions
• Drop in CSM amortization due to change in mortality
assumptions
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General model — overview
Contracts with no participation features
PV of
expected
future
cash inflows
Confidential — All Rights Reserved — EY
Fulfilment cash
flows
An explicit, unbiased
and probabilityweighted estimate (ie
expected value) of the
present value of the
future cash outflows
less the present value
of the future cash
inflows that will arise
as the entity fulfils the
insurance contract,
including a risk
adjustment
Contractual
service margin
A component of the measurement of the
insurance contract representing the unearned
profit that the entity recognizes as it provides
services
Risk adjustment
The compensation that an entity requires for
bearing the uncertainty about the amount and
timing of the cash flows
Time value of
money
An adjustment that converts future cash flows
into current amount
Best Estimate Liabilities (BEL)
(very similar to GPV wo PAD)
Future cash flows
Expected cash flows from future premiums,
expenses, claims and benefit payments
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General model – Future Cash Flows
Contracts with no participation features
Contractual
service
margin
• The estimates of CFs used to determine the fulfilment CFs shall include all cash inflows and outflows that
relate directly to the fulfilment of the portfolio of contracts:
• Current and explicit (separate from discount rate and risk adjustment)
• Market variables as consistent as possible with observable market prices
• Incorporate all available information in an unbiased manner (including trends), eg Best Estimate
• Possibly use stochastic models if cashflows are asymmetric
Risk
adjustment
• Include all CFs within contract boundary
Coverage period
Cash inflows
Time value
of money
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Premium
Time
Cash flows within contract boundary
Cash outflows
Future cash
flows
Premium
Other
expenses/taxes
Claims
payments
Claims payments
including claim
handling cost
Acquisition
costs
IFRS17: latest news, implications and challenges faced by insurers |
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Contracts with no participation features
General model - time value of money
• Adjust the estimates of future cash flows for the time value of money using discount rates that:
Contractual
service
margin
Risk
adjustment
• Reflects characteristics of fulfilment cash flows
• Consistent with observable market prices for instruments with cash flows that have consistent
characteristics with insurance contract, e.g., with respect to timing, currency and liquidity
• Adjust observed market prices to reflect the characteristics of the liability/the factors that are relevant for
the contracts, e.g., exclude irrelevant risks, estimate the rate beyond the period of observable data
• Consistent with other estimates used to measure the insurance contract (e.g., inflation, discount rate for
participating contracts)
• Top-down approach or bottom-up approach
Time value
of money
• Bottom Up approach possibly: Risk Free Rate + Illiquidity Premium
• No need to discount cash flows which are expected to be paid or received in one year or less (UPR)
• Together with the Future Cash Flow, this is commonly referred to as the BEL
Future cash
flows
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Contracts with no participation features
General model - risk adjustment
Contractual
service
margin
Risk
adjustment
Time value
of money
Future cash
flows
Confidential — All Rights Reserved — EY
• Compensation that an entity requires for bearing the uncertainty about the amount and timing of the cash
flows that arise as the entity fulfils the insurance contract
• RA shall be included in the measurement in an explicit way (i.e., uncertainty/PfAD should not be included in
the Future Cash Flows)
• No prescribed technique so different companies may use different techniques
• Disclosure on the confidence-level is required if the entity uses a technique other than the confidence level
Low
Low
frequency
frequency
but
buthigh
highrisk
risk
severity
severity
Uncertainty
Uncertainty
due
duetotolack
lackofof
experience
experience
Knowledge
Knowledge
about
aboutcurrent
current
estimate
estimate
and
and
trend
trend
Risk
Adjustment
Duration
Duration
of
of
contract
contract
Width
Widthofof
probability
probability
distribution
distribution
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Contracts with no participation features
General model - contractual service margin
• At initial recognition, the CSM is defined as the negative of fulfilment cash flow, floored by zero.
Contractual
service
margin
• Purpose of recognizing a positive initial CSM:
• To eliminate any day 1 gains (if initial Fulfilment Cash Flow is negative / CSM is positive)
• Represents the unearned profit that the entity will recognize in future, as it provides services under the
insurance contract.
Risk
adjustment
• If CSM is floored by zero at inception, the insurance contract is onerous. All loss should be recognized in P&L
at inception
Time value
of money
• The level of aggregation for determining CSM is therefore a key topic as it determines the cross-subsidy
between different policies.
• Subsequently after day 1, future changes in assumptions and experience adjustments will affect the level of
CSM, instead of flowing thru P&L
• Each cohort consists of:
• Similar product lines with similar risks (Whole Life, Annuities, …)
• Contracts issued within the same year
Future cash
flows
• Divided into the following groups at sale: Onerous (Loss Making),
Profitable and no significant risk of being Onerous, Other Profitable
Contracts
• This could have implications on:
• Cross-subsidy, for eg charging a single male / female premium rate
• Many separate CSM cohorts to track
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General model — contractual service margin
Contracts with no participation features
• Subsequently, the roll-forward calculation of CSM is summarized as follows:
Contractual
service
margin
Risk
adjustment
Time value
of money
CSM at the beginning of the reporting period
+
Accreted interest
—
Amount recognised for services provided in the period
+/—
Changes in the estimates of future cash flows (eg changes in mortality assumptions)
=
CSM at the end of the reporting period
• Locked-in interest rate at the inception of contract is used for accreting interest.
• An entity should recognise the remaining contractual service margin in profit or loss over the
coverage period in a systematic way that best reflects the remaining transfer of the services.
For contracts with no participating features, the service represented by the
contractual service margin is insurance coverage that:
• Is provided on the basis of the passage of time; and
Future cash
flows
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• Reflects the expected number of contracts in force
IFRS17: latest news, implications and challenges faced by insurers |
18
Sample P&L presentation: Term Insurance
Insurance Contract Revenue replaces Premium approach
A simplified statement of comprehensive income is presented below (when experience is similar to assumptions):
IFRS 17
CSM at the beginning of the reporting period
+
—
Accreted interest
Amount recognised for services provided in the period
+/—
Changes in the estimates of future cash flows (eg
changes in mortality assumptions)
Year 1
Year 2
Insurance contract revenue
308,183
183,461
• Change in RA
223,437
105,090
4,324
3,048
49,358
46,228
31,064
29,094
(31,064)
(29,094)
(223,437)
(105,090)
53,682
49,277
7,139
14,213
(12,852)
(10,669)
(5,713)
3,544
-
-
47,969
52,820
• Fulfilment cashflows
• CSM amortization
• Acquisition cost
Amortization of acquisition cost
Incurred losses
=
CSM at the end of the reporting period
Underwriting result
Investment income on underlying items
Interest expense on insurance obligations
Net investment income
BEL Expected Claims
Other Comprehensive Income
Comprehensive Income
Actual Claims Amounts
• Underwriting results reflect changes in RA and CSM
amortization when actual experience does not deviate from
assumptions
• Changes in assumptions does NOT affect UW result, as it is
absorbed into CSM
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19
From Non-participating to Participating contracts
General Model and Variable Fee model
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IFRS 17 proposed simplified accounting model overview
(Applicable for policies with contract boundary 1 year will
require using Building Block
Approach (Similar to Life)
• CF > 1 year will be required
to be discounted
• Additional process/effort
• Remove PAD - Moving to best
estimates may make results
more volatile
Confidential — All Rights Reserved — EY
• Additional process work to
determine time value of
money (More significant for
long-tailed liability insurers)
• Need to explain to
stakeholders
• More explicit margin
information available for
market for comparison
across companies
Internal accounting
systems
• Changes, in particular for
longer duration liabilities
• New processes and
information to be recorded
will involve substantial
system updates
• For multinational groups may
help with consistency —
although US will be different
IFRS17: latest news, implications and challenges faced by insurers |
27
Some additional areas of challenges for Indonesian (life) insurers
Revenue recognition
•
Many contracts are Unit Link with contain a
large investment component (RPUL, SPUL)
•
Regulatory changes
•
•
Investment components will be stripped out, which
will have a material impact on “revenue”
•
Measurement model
•
•
Insurers will have to use a VFA model for Unit
Link contracts. This is different from the current
Unit Reserve / UPR Non Unit Reserve approach
and require enhancement
Determination of “current discount rate” might
be challenging due to lack of market data, and
may result in multiple approaches
•
This is different from the current GPV discount
approach
Confidential — All Rights Reserved — EY
The IFRS 17 model is different compared to
Tax, OJK regulations
•
•
Parts of current Indonesian GPV / RBC models
can be used for the new IFRS-17, such as BEL,
RA, DAC, experience studies
Some components are new, such as CSM and
Insurance Contract Revenue
OJK / Tax / PSAK regulations may differ
significantly from IFRS 17, forcing insurers
to report on multiple bases
Actuaries will be in high demand.
•
•
•
In addition to Liabilities, actuaries will also be
involved in Revenue Recognition
We need to work together with accountants to
implement the necessary changes.
Actuarial Systems (Prophet/MoSes) and Finance
Systems (SUN/Oracle) will both have to be
enhanced
IFRS17: latest news, implications and challenges faced by insurers |
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04
Numerical
Example
Case study: background
Term product sold in Singapore, pure protection with death and TPD coverage
Total 132 policies incepted since January 2016
No future new business
First valuation at the end of 2016
Approach
All policies are considered homogeneous, hence CSM is aggregated at product level
Amortization of CSM is performed at product level by remaining coverage and number of policies in force
Risk adjustment is set similarly as PAD under current Singapore RBC framework
Economic assumptions remain unchanged for same calendar year
Accretion of interest is calculated based on lock-in yield curve of 2016 at product level
Changes related to future estimates are adjusted directly to CSM
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Presentation title
31
At inception
Insurance contract liabilities are equal to zero at inception
Best estimate liability
Contractual
Service Margin
Expected contract profit
=-
+
Risk adjustment
BEL = - 713
RA = 250
CSM = 463
Insurance contract liability = BEL + RA + CSM = 0
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Scenario 1: changes related to future estimates
Changes related to future estimates are absorbed by CSM
►
►
At the end of year 1 (31 Dec 2016)
► The company expected 126 policies to remain in force mainly due to lapse
► In fact, 130 contracts remain in force at the end of 2016.
► This is due to good lapse experience but worsening mortality experience.
The company has decided to revise mortality assumptions to be heavier at the end of 2016.
Analysis:
Term product (Year 1)
Inception
463
Projected
end Year 1 415
Experience
adjustment435
Change in
non-economic
assumption
359
►
CSM is expected to reduce to 415 at
the end of 2016 due to amortization
►
More contracts remaining in-force at
the end of 2016 have resulted in higher
CSM than expected (i.e. 435 vs 415)
►
Heavier mortality assumption has
resulted in lower CSM in order to
maintain the level of ICL
►
Overall insurance contract liabilities
remain unchanged
(109)
(109)
(109)
-
Inception
Projected end Year
1
Experience
adjustment
Change in noneconomic
assumptions
BEL
(713)
(769)
(799)
(757)
RA
250
246
255
289
CSM
463
415
435
359
-
(109)
(109)
(109)
ICL
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33
Sample P&L presentation
Insurance contract revenue replaces premium approach
A simplified statement of comprehensive income is presented below (when experience is similar to assumptions):
IFRS 4 Phase 2
Current
Premium Income
Year 1
Year 2
178,486
169,688
Year 1
Year 2
Insurance contract revenue
308,183
183,461
• Change in RA
223,437
105,090
4,324
3,048
49,358
46,228
31,064
29,094
(31,064)
(29,094)
(223,437)
(105,090)
53,682
49,277
7,139
14,213
(12,852)
(10,669)
(5,713)
3,544
-
-
47,969
52,820
• Fulfilment cashflows
• CSM amortization
• Acquisition cost
Amortisation of acquistion cost
Claims & Expenses
Increase in Reserves
252,685
105,090
-
44
Incurred losses
Underwriting result
Investment income on underlying items
(156)
354
Investment income on underlying items
Interest expense on insurance obligations
Net investment income
Other Comprehensive Income
Comprehensive Income
• Reserves are zeroised at the end of year 1
(74,355)
• Initial strain on surplus due to high acquisition expenses
64,909
Comprehensive Income
• No initial strain, less volatile
• Underwriting results reflect changes in RA and CSM amortization
when actual experience does not deviate from assumptions
• Drop in CSM amortization due to change in mortality
assumptions
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36
Sample profit signature
Smoother profit signature under IFRS 4 phase 2
Comparison of profit signature
120
100
80
60
40
20
Y1
Y6
Y11
Y16
Y21
Y26
Y31
Y36
Y41
Y46
Y51
Y56
Y61
Y66
Y71
Y76
Y81
(20)
(40)
(60)
(80)
(100)
Current
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IFRS 4 Phase 2
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Some practical challenges we encountered
►
Data
►
►
►
Assumptions
►
►
►
►
Calculation
Mechanism
►
►
►
Confidential — All Rights Reserved — EY
Availability / granularity of historical data
Defining homogeneity and grouping of policies (“Level of Aggregation”)
Ability to capture historical data for all periods in storage element
Setting of assumptions which are not required under the current RBC framework, e.g. split acquisition expense by
directly attributable vs non-directly attributable, liquidity premium, risk adjustment, etc
Storage of locked-in economic assumptions for all historical years (for CSM)
Storage of non-economic assumptions for previous period
Interest accreting rate basis – forward rate?
Asymmetrical treatment of CSM due to experience change
Aggregate level calculation complexity – CSM amortization, accreting interest, etc
Onerous contract treatment and its subsequent measurement
Discounting approach – forward or shifted spot rate?
IFRS17: latest news, implications and challenges faced by insurers |
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05
Implementation
implications
IFRS 17/IFRS 9 High Level Roadmap
Involve both Actuaries and Accountants
Potential IFRS 4 Phase
II final standard
Jan 2018
IFRS 9 effective date*
2017
Program High
set up
level
impact
analysis
1
1
2018
General
implementation
vision
Selected
deep
dive
analysis
2nd
impact
analysis
3
4
2
2
• Central and local team structure
3
• Program governance: decision
making and technical support
• Work streams and overall plan
• Budget assessment
• Business case
2
• Impacts on statements and
accounting policies, reporting and
other processes of Risk and
Finance, data and technology
• 2nd analysis when final ED
available
Confidential — All Rights Reserved — EY
Jan 2020
Potential IFRS 4
Phase II start
of comparative period
Design
smart
tailored
solution
2019
Solution implementation
5
• Big bang, incremental or minimum efforts
5
• Depends on general
implementation vision
and deep dive analysis
• Deep dive analysis in key areas
• Unit of account
6
• Participating contracts
• New data gathered,
validated and stored
• Enrichment policy data
• Central vs. local approach
• Adjustment cash flow models
• Implementation strategy
• Impact on processes
• System changes built
(reports & engines)
• Training of Finance, Risk
and other personnel
2021
Restatements
and
comparatives
7
• Accounting & reporting choices
4
2020
Dry run
6
Q1 2021
Potential IFRS 4
Phase II first
reporting
Full phase II
reporting
8
7
• Preparation of opening
equity adjustments and
comparative information
(IFRS 4 Phase II and IFRS 9
elements)
8
• Dry run of IFRS 4 Phase II
and IFRS 9 reporting
elements on 30 June 2019
numbers
• Assessment of data gaps and system changes
IFRS17: latest news, implications and challenges faced by insurers |
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EY has helped clients perform initial Gap analysis on a number of
themes around IFRS17, to help clients prepare for the change
The themes of analysis
we observe ..
… to ensure an optimal implementation strategy
1. Starting question to be
analyzed is the unit of
account at which
reporting will take place
What is the unit of account:
• Loss recognition
• CSM allocation
Given the unit of account, which historically information
will be available:
• Transition: Fully retrospectively, Moderate
retrospectively, Fair Value, participating contracts
2. Analyze how to treat
participation and unit link
contracts
3. Analyze different ways
to enrich (policy) data
(depending on unit of
account)
4. Analyze the pros and
cons of centrally
(finance) or locally
(actuarial) driven
solutions
Confidential — All Rights Reserved — EY
• Which contracts fit within the variable fee model?
• How to apply BBA for indirect participating contract?
• How to treat company profit sharing?
Enrichment of data could take place at different places:
• Source systems
• Data warehouse
• The pros and cons should be analyzed in different areas:
data, models, output, tools (e.g., reporting tools (CSM),
general ledger.
• It should also be analyzed whether a hybrid approach is
feasible (including pros and cons).
Potential bottlenecks
• Current design for IFRS/EEV/RBC is not appropriate for
the level of granularity required for IFRS 4 (unit of
account) — data — models — reporting.
• Additional storage and enhancements to actuarial
systems will be required
• At transition date a number of legacy source systems
will exist, which could impact the unit level of account.
Within some insurers different types and variations in profit
sharing exist for and within different products. All these
types of profit sharing (and their variations) should be
analyzed.
• Companies should determine first whether the ‘optimal’
solution is to enrich data and results in the source
systems or within data warehouses.
• Although the optimal solution could be source systems,
probably some legacy systems can’t adjusted in an
appropriate way.
• A hybrid approach could affect auditability.
In the centrally finance driven solution, more functionality
is necessary with the General Ledger. This functionality is
currently not available.
IFRS17: latest news, implications and challenges faced by insurers |
43
EY has helped clients perform initial Gap analysis on a number of
themes around IFRS17, to help clients prepare for the change
The themes of analysis
we observe …
5. In which way should the
cash flow models (eg
Prophet) and reporting
(output) be adjusted?
6. Which implementation
strategies can be
identified?
… to ensure an optimal implementation strategy
• Requirement regarding cash flow models and reporting
tools
• How could (source) systems, models and reporting tools
be adjusted to required output?
Potential bottlenecks
Current IFRS/EV/RBC models are not sufficient to meet the
requirements for IFRS4 (speed — interaction — level of
output necessary).
• What are the criteria regarding target architecture (how
much manual effort is acceptable)?
Based on the outcome of the previous steps, the following
questions should be answered:
• Is the implementation strategy dependent on the unit of
account
The number of products, source systems, models
complicate the choice (s) regarding the implementation
strategy.
• Which implementation steps should be performed
sequentially or in parallel
• In which way can be leveraged on previous projects
optimization?
7. What is the impact on
the processes (including
controls) under the
different implementation
strategies?
8. What accounting changes
need to be considered?
Confidential — All Rights Reserved — EY
• What is the optimal process (depending on the
implementation strategy)?
• Which (new) risks and controls should be defined. Which
current risks and related controls could be removed?
• Which part of the process could be outsourced?
•
•
Accounting choices will need to be made and updated
policies will need to be formalised.
Including extra risks and controls in the closing path
because of IFRS17 reporting without reducing the current
risks and controls, will severely impact the manageability of
the process.
Prophet models to be updated to allow for changes to
liability valuation methods and accounting policy decisions.
Examples include whether to accrete interest on
liabilities through OCI or P&L, when to apply BBA, PAA,
VFA, Contract Boundaries, Onerous Contracts.
IFRS17: latest news, implications and challenges faced by insurers |
44
Potential approaches for implementing IFRS 4 Phase II
01
Pros
Cons
Minimum efforts
approach
02
Incremental
approach
• Only implement those changes that are
unavoidable
• Focus on the changes that benefit the
existing process
• Step by step process by which the
existing infrastructure is amended
towards the desired infrastructure
• Easiest to implement
• Built primarily on SII/RBC approach
• Minimal investment required
• Build upon SII/RBC efforts
• Higher flexibility of the implementation
process (easier to prioritize key
bottlenecks)
• Can be broken down in subprojects to
make it more manageable
• Lower critical path risk
• Potentially does not fit the current
reporting timelines
• Inefficient system setup
• Likely to have considerable manual
steps, resulting in higher cost and higher
risk of errors
• More complex setup leads to complex
audit trail
Confidential — All Rights Reserved — EY
• Takes longer to realize benefits from
migration
• Risk of a less (cost) efficient project
03
Big Bang
approach
• All lines of businesses and processes are
migrated to new system in a single
operation
• Redesign the existing modelling
infrastructure and process
• Opportunity to implement the most
efficient system setup
• Benefits of migration are realized
immediately
• Complexity of the process leads to major
implementation risks
• Huge upfront cost
• Critical path risk
IFRS17: latest news, implications and challenges faced by insurers |
45
Thank You!
For more information, please contact:
Sumit Narayanan, FIA
Partner
Advisory Services
Sumit.Narayanan@sg.ey.com
+65 6309 6452
Kelvin Yap, FIA
Associate Director
Actuarial Services
Kelvin.Yap@sg.ey.com
+65 6309 6203
Ponno Jonatan, FSAI
Senior Manager
Performance Improvement
Ponno.Jonatan@id.ey.com
+62 21 5289 5307
About EY: We have the market leading insurance advisory and
actuarial practice in ASEAN
We have the largest insurance advisory team in
ASEAN and Asia Pacific:
1
3
We have the most globally connected insurance
advisory team:
►
We have a very strong presence in the insurance industry in Asia
Pacific with over 2,000 insurance professionals working in over
70 offices.
►
We have a global insurance sector dedicated to offering industry
insight and coordinating a network of more than 9,500
insurance professionals
►
Our Asia Pacific team advises our clients on a wide range of advisory
services, ranging from M&A transactions to operational performance
improvement.
►
Our areas of expertise include accounting compliance and reporting,
financial accounting advisory services to work with regulators and
private sectors on the introduction of new and revised requirements
►
Our teams are able to connect globally and access any relevant
expertise from around the globe
2
►
►
We have the largest actuarial team in ASEAN
and Asia Pacific:
EY’s Actuarial Advisory team in ASEAN has around 30 actuaries, the
largest actuarial team in the ASEAN region, serving many life and
non-life insurers in all ASEAN markets. We are part of a wider Asia
Pacific Actuarial Advisory team which has 300+ actuaries, and we
work closely with our actuarial teams in Hong Kong, China, Korea,
Australia etc. to assist project delivery in the rest of Asia
Our team has worked on a variety of projects including appointed
actuary work, Prophet and MoSes development, product development
and regulatory approval, actuarial transformation, fund management,
asset liability management, actuarial reviews, transition support,
customer analytics and distribution, and model reviews
Confidential — All Rights Reserved — EY
EMEIA
3,900 insurance
professionals
238 offices
Americas
3,500 insurance
professionals
Actuaries
300 in Asia Pacific
Over 1,200 globally
Asia Pacific
2,000 insurance
professionals
70+ offices
IFRS17: latest news, implications and challenges faced by insurers |
47
EY | Assurance | Tax | Transactions | Advisory
About EY
EY is a global leader in assurance, tax, transaction and
advisory services. The insights and quality services we
deliver help build trust and confidence in the capital
markets and in economies the world over. We develop
outstanding leaders who team to deliver on our
promises to all of our stakeholders. In so doing, we
play a critical role in building a better working world
for our people, for our clients and for our
communities.
EY refers to the global organization, and may refer to
one or more, of the member firms of Ernst & Young
Global Limited, each of which is a separate legal entity.
Ernst & Young Global Limited, a UK company limited
by guarantee, does not provide services to clients.
For more information about our organization,
please visit ey.com.
© 2017 Ernst & Young Advisory Pte. Ltd.
All Rights Reserved.
UEN 198905395E
This material has been prepared for general
informational purposes only and is not intended to be
relied upon as accounting, tax, or other professional
advice. Please refer to your advisors for specific
advice.
ey.com
2nd Indonesian Actuaries Summit
21 April 2017
Kelvin Yap
EY Actuarial Services, ASEAN
The objectives of today
To outline
particular issues
the Indonesian
industry may be
face
To provide an
overview of main
changes and
rationale for
IFRS17
To outline the
impact to the
insurance industry
under IFRS17
Confidential — All Rights Reserved — EY
To discuss
operational
challenges to
insurers
To understand what
other insurers are
doing
IFRS17: latest news, implications and challenges faced by insurers |
2
Agenda
1. Introduction
2. Key features of IFRS 17
3. Challenges of IFRS 17
4. Numerical Example
5. Implementation implications
This material has been prepared for general informational purposes only
and is not intended to be relied upon as accounting, tax, or other
professional advice. Please refer to your advisors for specific advice.
01
Introduction
Why are changes needed to Insurance Accounting?
IFRS17 brings insurance more in line with other accounting standards
It is believed that the existing insurance contracts accounting does not provide investors, lenders and other creditors
with the information they need to understand the financial statements of entities that issue insurance contracts or
make meaningful comparisons between such entities.
•
Little or no Comparability between
entities
•
•
Does not always reflect the
economic and risks in a timely
manner
•
•
•
•
Accrual accounting basis
Confidential — All Rights Reserved — EY
IFRS 4 allows entities to maintain their existing accounting practices
Current FS not comparable (1) across insurers due to different reserving
practices (NPV, GPV wo PAD, GPV w PAD); or (2) across industries, eg
Banking and Wealth Management even for similar products
Long duration contracts measured using outdated information (eg NPV)
Economic risks such as options and guarantees embedded in insurance
contract are not reflected (eg Minimum Surrender Guarantees)
Time value of money is not reflected (eg GI Chain Ladder)
Little information is given about the sources of profit reported in current
period or expected in future periods (Analysis of Surplus)
Information about underwriting activity is often reported on cash / cash-like
basis even when services is delivered in a different period, “change in
liability” item which is needed to reconcile cash-based amounts to the
accruals-based result of the period
IFRS17: latest news, implications and challenges faced by insurers |
5
Simplified Example: Insurance vs Asset Management accounting
IFRS17 results in a more comparable P&L vs other financial institutions
Insurance Company
Simplified Example
•
•
•
•
•
5 Year Single Premium Unit Link, $10,000,000
•
Mutual Fund
Year 1
Premium Income
10,000,000
Commissions
SPUL Initial Allocation of 97.5% OR
•
IFRS 4 Phase 1
(100,000)
Increase in Reserves
Initial Charges of 2.5% (Asset Manager)
Acquisition Cost of 1% ($100,000) which is DAC over
5 years
(1,000,000)
Investment income on underlying items
250,000
Comprehensive Income
150,000
Yr 1 UL Returns of 2.56% ($250,000)
Ignore mortality, lapse
IFRS 17
Year 1
Insurance Contract Revenue
50,000
• Fulfilment cashflows
0
• Change in RA
• CSM amortization
Asset Management Company
IFRS 15 (Revenue Recognition)
Revenue (from initial charge)
Distribution Costs
Comprehensive Income
0
Year 1
250,000
(100,000)
150,000
30,000
• Acquisition cost
20,000
Amortisation of Deferred Acquisition Cost
Incurred losses
0
Underwriting result
30,000
Investment income on underlying items
Note: IFRS 15 may require the initial charge to be spread out over several
years if it is determined that the performance obligation is satisfied over
time
Interest expense on insurance obligations
250,000
(250,000)
Net investment income
0
Other Comprehensive Income
-
Comprehensive Income
Confidential — All Rights Reserved — EY
(20,000)
30,000
IFRS17: latest news, implications and challenges faced by insurers |
6
A Standard that better meets the needs of financial statements users
The new standard is expected to improve financial reporting by providing more transparent and comparable information.
The new standard is also seen as more in line with other IFRS standards for other industries.
Provides up-to-date market
consistent information of obligation
including value of options
& guarantees
Reflects time value
of money
Treats services provided by
underwriting activity as revenue and
expenses in comparable way to other
non insurance business
Single
accounting
approach
Provides separate information
about the investment and
underwriting performance
Reflects the characteristics of the
insurance contract rather than the risk
related to asset/investment activity
Confidential — All Rights Reserved — EY
IFRS17: latest news, implications and challenges faced by insurers |
7
IFRS 9 (Financial Instruments) and 17 (Insurance Contracts) are
highly interdependent for insurers, hence timing of the standards is
aligned by the IASB
IFRS 9 and 15
IFRS 9 and IFRS 15 Effective
date 1 Jan 2018 (*)
Possible IFRS 9 deferred
implementation date
First IFRS 9 annual financial
statements (*)
2016
2017
IFRS 17
Potential IFRS 17 Final
standard
2018
2019
2020
2021
Potential IFRS 17 start
of comparative period (**)
Potential IFRS 17 effective
date 1 Jan 2021 (**)
Ongoing IASB deliberations
Implementation period
Reporting
(*) IASB has proposed an option to either defer the effective date of IFRS 9 for insurers or to apply a temporary ‘overlay’ method to mitigate the PL impacts of IFRS 9
(**) Effective date tentatively set by IASB
Confidential — All Rights Reserved — EY
IFRS17: latest news, implications and challenges faced by insurers |
8
Adoption in Asia
Country
IFRS 17
aligned with IFRS
IFRS 9
delay in adoption
aligned with IFRS
Not adopting
delay in adoption
Indonesia
Note 1
1 January 2019
Taiwan
Note 1
Note 1
1 year later than
effective date of IFRS
1 January 2019
Thailand
China
Note 2
Malaysia
Sri Lanka
Laos
Note 2
Note 2
Korea
Philippines
Japan
Note 3
Note 1 – Local GAAP has not decided the date of adoption, but we are expecting the date to be later than the effective date of IFRS.
Note 2 – possible adoption but effective date of local GAAP is not known as of now
Note 3 - IFRS is not applied mandatory in Japan, and insurance/financial instruments accounting of JGAAP are different from IFRS4/9. However, listed companies can use IFRS.
Confidential — All Rights Reserved — EY
IFRS17: latest news, implications and challenges faced by insurers |
9
02
Key Features of
IFRS 17
IFRS 17 ED
Key areas of the proposed model will require Actuarial involvement
Definition and
scope
Building block approach/
variable fee approach
Reserves
Regulatory capital standards
Contractual service margin
Risk adjustment
Discount rate
Presentation /
disaggregation
Expected value of future
cash flows
Separation
Premium allocation
approach
Reinsurance
Disclosure
Risk
adjustment
Liability for
remaining
coverage
Discount rate
Transition
Cash flows of
claim liability
Financial Instruments and other accounting changes
Confidential — All Rights Reserved — EY
IFRS17: latest news, implications and challenges faced by insurers |
11
Sample P&L presentation: Term Insurance
Actuarial Involvement
Insurance Contract Revenue replaces Premium approach
A simplified statement of comprehensive income is presented below (when experience is similar to assumptions):
Future IFRS 17
Current IFRS 4
Premium Income
Year 1
Year 2
178,486
169,688
Year 1
Year 2
Insurance contract revenue
308,183
183,461
• Change in RA
223,437
105,090
4,324
3,048
49,358
46,228
31,064
29,094
(31,064)
(29,094)
(223,437)
(105,090)
53,682
49,277
7,139
14,213
(12,852)
(10,669)
(5,713)
3,544
-
-
47,969
52,820
• Fulfilment cashflows
• CSM amortization
• Acquisition cost
Amortisation of acquistion cost
Claims & Expenses
Increase in Reserves
252,685
105,090
-
44
Incurred losses
Underwriting result
Investment income on underlying items
(156)
354
Investment income on underlying items
Interest expense on insurance obligations
Net investment income
Other Comprehensive Income
Comprehensive Income
• Reserves are zeroised at the end of year 1
(74,355)
• Initial strain on surplus due to high acquisition expenses
64,909
Comprehensive Income
• No initial strain, less volatile
• Underwriting results reflect changes in RA and CSM amortization
when actual experience does not deviate from assumptions
• Drop in CSM amortization due to change in mortality
assumptions
Confidential — All Rights Reserved — EY
IFRS17: latest news, implications and challenges faced by insurers |
12
General model — overview
Contracts with no participation features
PV of
expected
future
cash inflows
Confidential — All Rights Reserved — EY
Fulfilment cash
flows
An explicit, unbiased
and probabilityweighted estimate (ie
expected value) of the
present value of the
future cash outflows
less the present value
of the future cash
inflows that will arise
as the entity fulfils the
insurance contract,
including a risk
adjustment
Contractual
service margin
A component of the measurement of the
insurance contract representing the unearned
profit that the entity recognizes as it provides
services
Risk adjustment
The compensation that an entity requires for
bearing the uncertainty about the amount and
timing of the cash flows
Time value of
money
An adjustment that converts future cash flows
into current amount
Best Estimate Liabilities (BEL)
(very similar to GPV wo PAD)
Future cash flows
Expected cash flows from future premiums,
expenses, claims and benefit payments
IFRS17: latest news, implications and challenges faced by insurers |
13
General model – Future Cash Flows
Contracts with no participation features
Contractual
service
margin
• The estimates of CFs used to determine the fulfilment CFs shall include all cash inflows and outflows that
relate directly to the fulfilment of the portfolio of contracts:
• Current and explicit (separate from discount rate and risk adjustment)
• Market variables as consistent as possible with observable market prices
• Incorporate all available information in an unbiased manner (including trends), eg Best Estimate
• Possibly use stochastic models if cashflows are asymmetric
Risk
adjustment
• Include all CFs within contract boundary
Coverage period
Cash inflows
Time value
of money
Confidential — All Rights Reserved — EY
Premium
Time
Cash flows within contract boundary
Cash outflows
Future cash
flows
Premium
Other
expenses/taxes
Claims
payments
Claims payments
including claim
handling cost
Acquisition
costs
IFRS17: latest news, implications and challenges faced by insurers |
14
Contracts with no participation features
General model - time value of money
• Adjust the estimates of future cash flows for the time value of money using discount rates that:
Contractual
service
margin
Risk
adjustment
• Reflects characteristics of fulfilment cash flows
• Consistent with observable market prices for instruments with cash flows that have consistent
characteristics with insurance contract, e.g., with respect to timing, currency and liquidity
• Adjust observed market prices to reflect the characteristics of the liability/the factors that are relevant for
the contracts, e.g., exclude irrelevant risks, estimate the rate beyond the period of observable data
• Consistent with other estimates used to measure the insurance contract (e.g., inflation, discount rate for
participating contracts)
• Top-down approach or bottom-up approach
Time value
of money
• Bottom Up approach possibly: Risk Free Rate + Illiquidity Premium
• No need to discount cash flows which are expected to be paid or received in one year or less (UPR)
• Together with the Future Cash Flow, this is commonly referred to as the BEL
Future cash
flows
Confidential — All Rights Reserved — EY
IFRS17: latest news, implications and challenges faced by insurers |
15
Contracts with no participation features
General model - risk adjustment
Contractual
service
margin
Risk
adjustment
Time value
of money
Future cash
flows
Confidential — All Rights Reserved — EY
• Compensation that an entity requires for bearing the uncertainty about the amount and timing of the cash
flows that arise as the entity fulfils the insurance contract
• RA shall be included in the measurement in an explicit way (i.e., uncertainty/PfAD should not be included in
the Future Cash Flows)
• No prescribed technique so different companies may use different techniques
• Disclosure on the confidence-level is required if the entity uses a technique other than the confidence level
Low
Low
frequency
frequency
but
buthigh
highrisk
risk
severity
severity
Uncertainty
Uncertainty
due
duetotolack
lackofof
experience
experience
Knowledge
Knowledge
about
aboutcurrent
current
estimate
estimate
and
and
trend
trend
Risk
Adjustment
Duration
Duration
of
of
contract
contract
Width
Widthofof
probability
probability
distribution
distribution
IFRS17: latest news, implications and challenges faced by insurers |
16
Contracts with no participation features
General model - contractual service margin
• At initial recognition, the CSM is defined as the negative of fulfilment cash flow, floored by zero.
Contractual
service
margin
• Purpose of recognizing a positive initial CSM:
• To eliminate any day 1 gains (if initial Fulfilment Cash Flow is negative / CSM is positive)
• Represents the unearned profit that the entity will recognize in future, as it provides services under the
insurance contract.
Risk
adjustment
• If CSM is floored by zero at inception, the insurance contract is onerous. All loss should be recognized in P&L
at inception
Time value
of money
• The level of aggregation for determining CSM is therefore a key topic as it determines the cross-subsidy
between different policies.
• Subsequently after day 1, future changes in assumptions and experience adjustments will affect the level of
CSM, instead of flowing thru P&L
• Each cohort consists of:
• Similar product lines with similar risks (Whole Life, Annuities, …)
• Contracts issued within the same year
Future cash
flows
• Divided into the following groups at sale: Onerous (Loss Making),
Profitable and no significant risk of being Onerous, Other Profitable
Contracts
• This could have implications on:
• Cross-subsidy, for eg charging a single male / female premium rate
• Many separate CSM cohorts to track
Confidential — All Rights Reserved — EY
IFRS17: latest news, implications and challenges faced by insurers |
17
General model — contractual service margin
Contracts with no participation features
• Subsequently, the roll-forward calculation of CSM is summarized as follows:
Contractual
service
margin
Risk
adjustment
Time value
of money
CSM at the beginning of the reporting period
+
Accreted interest
—
Amount recognised for services provided in the period
+/—
Changes in the estimates of future cash flows (eg changes in mortality assumptions)
=
CSM at the end of the reporting period
• Locked-in interest rate at the inception of contract is used for accreting interest.
• An entity should recognise the remaining contractual service margin in profit or loss over the
coverage period in a systematic way that best reflects the remaining transfer of the services.
For contracts with no participating features, the service represented by the
contractual service margin is insurance coverage that:
• Is provided on the basis of the passage of time; and
Future cash
flows
Confidential — All Rights Reserved — EY
• Reflects the expected number of contracts in force
IFRS17: latest news, implications and challenges faced by insurers |
18
Sample P&L presentation: Term Insurance
Insurance Contract Revenue replaces Premium approach
A simplified statement of comprehensive income is presented below (when experience is similar to assumptions):
IFRS 17
CSM at the beginning of the reporting period
+
—
Accreted interest
Amount recognised for services provided in the period
+/—
Changes in the estimates of future cash flows (eg
changes in mortality assumptions)
Year 1
Year 2
Insurance contract revenue
308,183
183,461
• Change in RA
223,437
105,090
4,324
3,048
49,358
46,228
31,064
29,094
(31,064)
(29,094)
(223,437)
(105,090)
53,682
49,277
7,139
14,213
(12,852)
(10,669)
(5,713)
3,544
-
-
47,969
52,820
• Fulfilment cashflows
• CSM amortization
• Acquisition cost
Amortization of acquisition cost
Incurred losses
=
CSM at the end of the reporting period
Underwriting result
Investment income on underlying items
Interest expense on insurance obligations
Net investment income
BEL Expected Claims
Other Comprehensive Income
Comprehensive Income
Actual Claims Amounts
• Underwriting results reflect changes in RA and CSM
amortization when actual experience does not deviate from
assumptions
• Changes in assumptions does NOT affect UW result, as it is
absorbed into CSM
Confidential — All Rights Reserved — EY
IFRS17: latest news, implications and challenges faced by insurers |
19
From Non-participating to Participating contracts
General Model and Variable Fee model
Confidential — All Rights Reserved — EY
IFRS17: latest news, implications and challenges faced by insurers |
20
IFRS 17 proposed simplified accounting model overview
(Applicable for policies with contract boundary 1 year will
require using Building Block
Approach (Similar to Life)
• CF > 1 year will be required
to be discounted
• Additional process/effort
• Remove PAD - Moving to best
estimates may make results
more volatile
Confidential — All Rights Reserved — EY
• Additional process work to
determine time value of
money (More significant for
long-tailed liability insurers)
• Need to explain to
stakeholders
• More explicit margin
information available for
market for comparison
across companies
Internal accounting
systems
• Changes, in particular for
longer duration liabilities
• New processes and
information to be recorded
will involve substantial
system updates
• For multinational groups may
help with consistency —
although US will be different
IFRS17: latest news, implications and challenges faced by insurers |
27
Some additional areas of challenges for Indonesian (life) insurers
Revenue recognition
•
Many contracts are Unit Link with contain a
large investment component (RPUL, SPUL)
•
Regulatory changes
•
•
Investment components will be stripped out, which
will have a material impact on “revenue”
•
Measurement model
•
•
Insurers will have to use a VFA model for Unit
Link contracts. This is different from the current
Unit Reserve / UPR Non Unit Reserve approach
and require enhancement
Determination of “current discount rate” might
be challenging due to lack of market data, and
may result in multiple approaches
•
This is different from the current GPV discount
approach
Confidential — All Rights Reserved — EY
The IFRS 17 model is different compared to
Tax, OJK regulations
•
•
Parts of current Indonesian GPV / RBC models
can be used for the new IFRS-17, such as BEL,
RA, DAC, experience studies
Some components are new, such as CSM and
Insurance Contract Revenue
OJK / Tax / PSAK regulations may differ
significantly from IFRS 17, forcing insurers
to report on multiple bases
Actuaries will be in high demand.
•
•
•
In addition to Liabilities, actuaries will also be
involved in Revenue Recognition
We need to work together with accountants to
implement the necessary changes.
Actuarial Systems (Prophet/MoSes) and Finance
Systems (SUN/Oracle) will both have to be
enhanced
IFRS17: latest news, implications and challenges faced by insurers |
28
04
Numerical
Example
Case study: background
Term product sold in Singapore, pure protection with death and TPD coverage
Total 132 policies incepted since January 2016
No future new business
First valuation at the end of 2016
Approach
All policies are considered homogeneous, hence CSM is aggregated at product level
Amortization of CSM is performed at product level by remaining coverage and number of policies in force
Risk adjustment is set similarly as PAD under current Singapore RBC framework
Economic assumptions remain unchanged for same calendar year
Accretion of interest is calculated based on lock-in yield curve of 2016 at product level
Changes related to future estimates are adjusted directly to CSM
Confidential — All Rights Reserved — EY
IFRS17: latest news, implications and challenges faced by insurers |
Presentation title
31
At inception
Insurance contract liabilities are equal to zero at inception
Best estimate liability
Contractual
Service Margin
Expected contract profit
=-
+
Risk adjustment
BEL = - 713
RA = 250
CSM = 463
Insurance contract liability = BEL + RA + CSM = 0
Confidential — All Rights Reserved — EY
IFRS17: latest news, implications and challenges faced by insurers |
32
Scenario 1: changes related to future estimates
Changes related to future estimates are absorbed by CSM
►
►
At the end of year 1 (31 Dec 2016)
► The company expected 126 policies to remain in force mainly due to lapse
► In fact, 130 contracts remain in force at the end of 2016.
► This is due to good lapse experience but worsening mortality experience.
The company has decided to revise mortality assumptions to be heavier at the end of 2016.
Analysis:
Term product (Year 1)
Inception
463
Projected
end Year 1 415
Experience
adjustment435
Change in
non-economic
assumption
359
►
CSM is expected to reduce to 415 at
the end of 2016 due to amortization
►
More contracts remaining in-force at
the end of 2016 have resulted in higher
CSM than expected (i.e. 435 vs 415)
►
Heavier mortality assumption has
resulted in lower CSM in order to
maintain the level of ICL
►
Overall insurance contract liabilities
remain unchanged
(109)
(109)
(109)
-
Inception
Projected end Year
1
Experience
adjustment
Change in noneconomic
assumptions
BEL
(713)
(769)
(799)
(757)
RA
250
246
255
289
CSM
463
415
435
359
-
(109)
(109)
(109)
ICL
Confidential — All Rights Reserved — EY
IFRS17: latest news, implications and challenges faced by insurers |
33
Sample P&L presentation
Insurance contract revenue replaces premium approach
A simplified statement of comprehensive income is presented below (when experience is similar to assumptions):
IFRS 4 Phase 2
Current
Premium Income
Year 1
Year 2
178,486
169,688
Year 1
Year 2
Insurance contract revenue
308,183
183,461
• Change in RA
223,437
105,090
4,324
3,048
49,358
46,228
31,064
29,094
(31,064)
(29,094)
(223,437)
(105,090)
53,682
49,277
7,139
14,213
(12,852)
(10,669)
(5,713)
3,544
-
-
47,969
52,820
• Fulfilment cashflows
• CSM amortization
• Acquisition cost
Amortisation of acquistion cost
Claims & Expenses
Increase in Reserves
252,685
105,090
-
44
Incurred losses
Underwriting result
Investment income on underlying items
(156)
354
Investment income on underlying items
Interest expense on insurance obligations
Net investment income
Other Comprehensive Income
Comprehensive Income
• Reserves are zeroised at the end of year 1
(74,355)
• Initial strain on surplus due to high acquisition expenses
64,909
Comprehensive Income
• No initial strain, less volatile
• Underwriting results reflect changes in RA and CSM amortization
when actual experience does not deviate from assumptions
• Drop in CSM amortization due to change in mortality
assumptions
Confidential — All Rights Reserved — EY
IFRS17: latest news, implications and challenges faced by insurers |
36
Sample profit signature
Smoother profit signature under IFRS 4 phase 2
Comparison of profit signature
120
100
80
60
40
20
Y1
Y6
Y11
Y16
Y21
Y26
Y31
Y36
Y41
Y46
Y51
Y56
Y61
Y66
Y71
Y76
Y81
(20)
(40)
(60)
(80)
(100)
Current
Confidential — All Rights Reserved — EY
IFRS 4 Phase 2
IFRS17: latest news, implications and challenges faced by insurers |
37
Some practical challenges we encountered
►
Data
►
►
►
Assumptions
►
►
►
►
Calculation
Mechanism
►
►
►
Confidential — All Rights Reserved — EY
Availability / granularity of historical data
Defining homogeneity and grouping of policies (“Level of Aggregation”)
Ability to capture historical data for all periods in storage element
Setting of assumptions which are not required under the current RBC framework, e.g. split acquisition expense by
directly attributable vs non-directly attributable, liquidity premium, risk adjustment, etc
Storage of locked-in economic assumptions for all historical years (for CSM)
Storage of non-economic assumptions for previous period
Interest accreting rate basis – forward rate?
Asymmetrical treatment of CSM due to experience change
Aggregate level calculation complexity – CSM amortization, accreting interest, etc
Onerous contract treatment and its subsequent measurement
Discounting approach – forward or shifted spot rate?
IFRS17: latest news, implications and challenges faced by insurers |
38
05
Implementation
implications
IFRS 17/IFRS 9 High Level Roadmap
Involve both Actuaries and Accountants
Potential IFRS 4 Phase
II final standard
Jan 2018
IFRS 9 effective date*
2017
Program High
set up
level
impact
analysis
1
1
2018
General
implementation
vision
Selected
deep
dive
analysis
2nd
impact
analysis
3
4
2
2
• Central and local team structure
3
• Program governance: decision
making and technical support
• Work streams and overall plan
• Budget assessment
• Business case
2
• Impacts on statements and
accounting policies, reporting and
other processes of Risk and
Finance, data and technology
• 2nd analysis when final ED
available
Confidential — All Rights Reserved — EY
Jan 2020
Potential IFRS 4
Phase II start
of comparative period
Design
smart
tailored
solution
2019
Solution implementation
5
• Big bang, incremental or minimum efforts
5
• Depends on general
implementation vision
and deep dive analysis
• Deep dive analysis in key areas
• Unit of account
6
• Participating contracts
• New data gathered,
validated and stored
• Enrichment policy data
• Central vs. local approach
• Adjustment cash flow models
• Implementation strategy
• Impact on processes
• System changes built
(reports & engines)
• Training of Finance, Risk
and other personnel
2021
Restatements
and
comparatives
7
• Accounting & reporting choices
4
2020
Dry run
6
Q1 2021
Potential IFRS 4
Phase II first
reporting
Full phase II
reporting
8
7
• Preparation of opening
equity adjustments and
comparative information
(IFRS 4 Phase II and IFRS 9
elements)
8
• Dry run of IFRS 4 Phase II
and IFRS 9 reporting
elements on 30 June 2019
numbers
• Assessment of data gaps and system changes
IFRS17: latest news, implications and challenges faced by insurers |
42
EY has helped clients perform initial Gap analysis on a number of
themes around IFRS17, to help clients prepare for the change
The themes of analysis
we observe ..
… to ensure an optimal implementation strategy
1. Starting question to be
analyzed is the unit of
account at which
reporting will take place
What is the unit of account:
• Loss recognition
• CSM allocation
Given the unit of account, which historically information
will be available:
• Transition: Fully retrospectively, Moderate
retrospectively, Fair Value, participating contracts
2. Analyze how to treat
participation and unit link
contracts
3. Analyze different ways
to enrich (policy) data
(depending on unit of
account)
4. Analyze the pros and
cons of centrally
(finance) or locally
(actuarial) driven
solutions
Confidential — All Rights Reserved — EY
• Which contracts fit within the variable fee model?
• How to apply BBA for indirect participating contract?
• How to treat company profit sharing?
Enrichment of data could take place at different places:
• Source systems
• Data warehouse
• The pros and cons should be analyzed in different areas:
data, models, output, tools (e.g., reporting tools (CSM),
general ledger.
• It should also be analyzed whether a hybrid approach is
feasible (including pros and cons).
Potential bottlenecks
• Current design for IFRS/EEV/RBC is not appropriate for
the level of granularity required for IFRS 4 (unit of
account) — data — models — reporting.
• Additional storage and enhancements to actuarial
systems will be required
• At transition date a number of legacy source systems
will exist, which could impact the unit level of account.
Within some insurers different types and variations in profit
sharing exist for and within different products. All these
types of profit sharing (and their variations) should be
analyzed.
• Companies should determine first whether the ‘optimal’
solution is to enrich data and results in the source
systems or within data warehouses.
• Although the optimal solution could be source systems,
probably some legacy systems can’t adjusted in an
appropriate way.
• A hybrid approach could affect auditability.
In the centrally finance driven solution, more functionality
is necessary with the General Ledger. This functionality is
currently not available.
IFRS17: latest news, implications and challenges faced by insurers |
43
EY has helped clients perform initial Gap analysis on a number of
themes around IFRS17, to help clients prepare for the change
The themes of analysis
we observe …
5. In which way should the
cash flow models (eg
Prophet) and reporting
(output) be adjusted?
6. Which implementation
strategies can be
identified?
… to ensure an optimal implementation strategy
• Requirement regarding cash flow models and reporting
tools
• How could (source) systems, models and reporting tools
be adjusted to required output?
Potential bottlenecks
Current IFRS/EV/RBC models are not sufficient to meet the
requirements for IFRS4 (speed — interaction — level of
output necessary).
• What are the criteria regarding target architecture (how
much manual effort is acceptable)?
Based on the outcome of the previous steps, the following
questions should be answered:
• Is the implementation strategy dependent on the unit of
account
The number of products, source systems, models
complicate the choice (s) regarding the implementation
strategy.
• Which implementation steps should be performed
sequentially or in parallel
• In which way can be leveraged on previous projects
optimization?
7. What is the impact on
the processes (including
controls) under the
different implementation
strategies?
8. What accounting changes
need to be considered?
Confidential — All Rights Reserved — EY
• What is the optimal process (depending on the
implementation strategy)?
• Which (new) risks and controls should be defined. Which
current risks and related controls could be removed?
• Which part of the process could be outsourced?
•
•
Accounting choices will need to be made and updated
policies will need to be formalised.
Including extra risks and controls in the closing path
because of IFRS17 reporting without reducing the current
risks and controls, will severely impact the manageability of
the process.
Prophet models to be updated to allow for changes to
liability valuation methods and accounting policy decisions.
Examples include whether to accrete interest on
liabilities through OCI or P&L, when to apply BBA, PAA,
VFA, Contract Boundaries, Onerous Contracts.
IFRS17: latest news, implications and challenges faced by insurers |
44
Potential approaches for implementing IFRS 4 Phase II
01
Pros
Cons
Minimum efforts
approach
02
Incremental
approach
• Only implement those changes that are
unavoidable
• Focus on the changes that benefit the
existing process
• Step by step process by which the
existing infrastructure is amended
towards the desired infrastructure
• Easiest to implement
• Built primarily on SII/RBC approach
• Minimal investment required
• Build upon SII/RBC efforts
• Higher flexibility of the implementation
process (easier to prioritize key
bottlenecks)
• Can be broken down in subprojects to
make it more manageable
• Lower critical path risk
• Potentially does not fit the current
reporting timelines
• Inefficient system setup
• Likely to have considerable manual
steps, resulting in higher cost and higher
risk of errors
• More complex setup leads to complex
audit trail
Confidential — All Rights Reserved — EY
• Takes longer to realize benefits from
migration
• Risk of a less (cost) efficient project
03
Big Bang
approach
• All lines of businesses and processes are
migrated to new system in a single
operation
• Redesign the existing modelling
infrastructure and process
• Opportunity to implement the most
efficient system setup
• Benefits of migration are realized
immediately
• Complexity of the process leads to major
implementation risks
• Huge upfront cost
• Critical path risk
IFRS17: latest news, implications and challenges faced by insurers |
45
Thank You!
For more information, please contact:
Sumit Narayanan, FIA
Partner
Advisory Services
Sumit.Narayanan@sg.ey.com
+65 6309 6452
Kelvin Yap, FIA
Associate Director
Actuarial Services
Kelvin.Yap@sg.ey.com
+65 6309 6203
Ponno Jonatan, FSAI
Senior Manager
Performance Improvement
Ponno.Jonatan@id.ey.com
+62 21 5289 5307
About EY: We have the market leading insurance advisory and
actuarial practice in ASEAN
We have the largest insurance advisory team in
ASEAN and Asia Pacific:
1
3
We have the most globally connected insurance
advisory team:
►
We have a very strong presence in the insurance industry in Asia
Pacific with over 2,000 insurance professionals working in over
70 offices.
►
We have a global insurance sector dedicated to offering industry
insight and coordinating a network of more than 9,500
insurance professionals
►
Our Asia Pacific team advises our clients on a wide range of advisory
services, ranging from M&A transactions to operational performance
improvement.
►
Our areas of expertise include accounting compliance and reporting,
financial accounting advisory services to work with regulators and
private sectors on the introduction of new and revised requirements
►
Our teams are able to connect globally and access any relevant
expertise from around the globe
2
►
►
We have the largest actuarial team in ASEAN
and Asia Pacific:
EY’s Actuarial Advisory team in ASEAN has around 30 actuaries, the
largest actuarial team in the ASEAN region, serving many life and
non-life insurers in all ASEAN markets. We are part of a wider Asia
Pacific Actuarial Advisory team which has 300+ actuaries, and we
work closely with our actuarial teams in Hong Kong, China, Korea,
Australia etc. to assist project delivery in the rest of Asia
Our team has worked on a variety of projects including appointed
actuary work, Prophet and MoSes development, product development
and regulatory approval, actuarial transformation, fund management,
asset liability management, actuarial reviews, transition support,
customer analytics and distribution, and model reviews
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EMEIA
3,900 insurance
professionals
238 offices
Americas
3,500 insurance
professionals
Actuaries
300 in Asia Pacific
Over 1,200 globally
Asia Pacific
2,000 insurance
professionals
70+ offices
IFRS17: latest news, implications and challenges faced by insurers |
47
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About EY
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