©2014 Deloitte LLP. All rights reserved.
Deloitte Finance ClubThe community for FinancialControllers and senior financialexecutives
Wednesday, 19th November 2014
©2014 Deloitte LLP. All rights reserved.
Deloitte Finance ClubA few facts
• Established in May 1997 as the Financial Controllers’ Club, and renamedDeloitte Finance Club in 2013
• Provides an annual programme of technical updates and hot topic briefings
• Connects our members to relevant experts as well as over 2,200 membersacross the country
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)2
©2014 Deloitte LLP. All rights reserved.
Deloitte Finance ClubUpcoming programme
• Holiday finance checklist 2014Wednesday, 10 December 2014 – 8:30am-10:30am (arrivals from 8am)
2015 programme to be released soon
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)3
©2014 Deloitte LLP. All rights reserved.
Key trends and developments in UK insuranceAgenda
• Alex Arterton – opening remarks
• Peter Evans – Insurance disrupted
• Kush Patel – IFRS 9
• Derek Haynes – IFRS for Insurance Contracts
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)4
©2014 Deloitte LLP. All rights reserved.
How technology is changingthe traditional UK generalinsurance model
Insurance disrupted
Peter Evans
©2014 Deloitte LLP. All rights reserved.
Insurance disruptedKey messages
• The internet causes major disruption to business models
• Price comparison websites have eroded profit margins…
… creating big issues for the CFO
• Customers continue to rely on the phone to communicate with their insurers, theywill move to the internet
• Is telematics the future?
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)6
©2014 Deloitte LLP. All rights reserved.7
The use of price comparison websites (PCWs)has grown rapidly
Yes58%
No38%
Don’tknow
4%
% customers who use pricecomparison websites
Moneysupermarket
Confused.comGocompare
Comparethemarket
1999 2000 2001 2005 2006 2007
Source: Deloitte Insight/YouGov, 10-16 April 2014. Sample: 2,849
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)8
Customers switch general insurer frequently% motor, buildings or contents customers who switched froma different insurer at last renewal
Source: Deloitte Insight/YouGov, 10-16 April 2014. Sample: 2,849
41%
51%
5%2%
Yes – I switched from adifferent insurer
No – I renewed with thesame insurer
Can’t remember Not applicable – it was myfirst policy
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)9
Price is the overriding reason customers switch% motor, buildings or contents customers who switched froma different insurer at last renewal – by reason (respondentschose multiple reasons)
Source: Deloitte Insight/YouGov, 10-16 April 2014. Sample: 1,180
7%
1%
0%
1%
1%
1%
2%
2%
2%
3%
3%
4%
4%
4%
4%
4%
28%
80%
Other
Don’t know
I was refused cover by my insurer
My insurer was slow (e.g. issuing documents)
My insurer’s website was hard to use
I wanted an insurer that was better known
I wanted a type of policy my insurer didn’t offer
My broker or financial adviser suggested I should switch to a different…
My insurer made mistakes (e.g. inaccurate policy documents)
My insurer’s staff were rude and unhelpful
I didn’t trust my insurer (e.g. to pay claims)
I wanted an insurer that was less hassle
I wanted more generous cover (e.g. protected no claims discount)
My insurer tried to sell me things I didn’t want
My policy no longer met my needs
I had a poor experience when I claimed
My insurer tried to put my premium up even though I hadn’t claimed
I found a cheaper premium with a different insurer
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)10
PCWs make customers more likely to switch onprice% motor, buildings or contents customers who switched froma different insurer at last renewal because they found acheaper premium – by PCW users
69%
84%
Non PCW users PCW users
Source: Deloitte Insight/YouGov, 10 – 16 April 2014. Sample: 1,160
©2014 Deloitte LLP. All rights reserved.
Source: ABI Statistics
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)11
Price comparison websites have put already-lowmotor insurance margins under pressureUK domestic motor insurance underwriting results 1993-2013(£m)
Financial Year
-2000
-1500
-1000
-500
0
500
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)12
PCWs are most widely used for motor insurance,use for other products is likely to increase% motor, buildings or contents customers who used a pricecomparison website before buying current policy – by type ofpolicy
Source: Deloitte Insight/YouGov, 10-16 April 2014. Sample: 1,435 (Motor); 717 (Buildings); 697 (Contents)
63%
53% 51%
33%
43% 44%
3% 5% 5%
Motor Building Contents
Yes, I did No, I didn't Can't remember
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)13
Customers will interact with their insurers more indigital channels% motor, buildings or contents customers who communicatewith their insurer – by channel
Source: YouGov survey for Deloitte – Sample: 238
79%24%
25%
telephone
website
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)14
Insurers have not yet created good enough webexperiences for wider digital channel adoptionLikelihood of customers communicating via digital channelswith insurer to recommend it vs. average across all customersat insurer
Digital channels: website, e-mail, online chat facility, smartphone app (all samples above 30)
-12%
-8%
-8%
-8%
10%
11%
18%
-15% -10% -5% 0% 5% 10% 15% 20%
Building or contents insurers
-24%
-6%
-2%
-2%
-1%
8%
15%
-30% -20% -10% 0% 10% 20%
Motor insurers
less likely than average to recommend more likely than averageto recommend
less likely than average torecommend
more likely than average to recommend
©2014 Deloitte LLP. All rights reserved.
Insurance disruptedWhere next?• Telematics is the name for technology that captures and analyses data on driving,
replacing demographic and postcode-based risk assessment
Two types:
‒ Pay-As-You-Drive: GPS device monitors distances driven; insurer charges based ondistance driven
‒ Pay-How-You-Drive/Usage Based Insurance: monitors driving behaviour. GPS devicewith integrated accelerometer that monitors:
• Location – motorways vs. neighbourhood, city vs. suburbs, distance from home
• Frequency – daily vs. occasional, mileage, rush-hour vs. off-peak
• Behaviour – acceleration, speed vs. limit, braking, cornering, crash data, lanechanging
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)15
Device collects data onlocation, time and driving
behaviours
Data is transmitted overnetworks
Data is collected and storedin databases
Data is processed usingalgorithms and insights aregenerated for insurer as well
as customer
How it works
©2014 Deloitte LLP. All rights reserved.
All change! Major accountingchanges for InsurersIFRS 9
Kush Patel
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)17
OverviewThe IASB has issued the final version of IFRS 9Financial Instruments on 24 July 2014
Classification and measurement
Impairment
General hedge accounting
Macro hedge accounting Separate project
©2014 Deloitte LLP. All rights reserved.
No need to restate priorperiods
Application of allrequirements ofIFRS 9 (2014)
Exemption: Financialliabilities designated atfair value through profitor loss
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)18
Transition and effective date
01.01.2018retrospective
IFRS 9 shall be applied forannual periods beginning on orafter
Early applicationpermitted
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)19
Classification of financial assets
Contractual cash flow characteristics
PrincipalInterest on the principal
amount outstanding
Business Model
Held to collect contractual cash flows
Held to collect contractual cash flowsand for sale
Timevalue ofmoney
Creditrisk
Other basiclending risks or
costs
Fair Value(∆ OCI)
AmortisedCost
Fair Value(∆ P&L)
Fair Value Optionin case of an accounting
mismatch
FVTOCI-Optionfor investments in equityinstruments that are not
held for trading
Measurement basis
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)20
Measurement of financial assets
Statement offinancialposition
P&L
OCI
Recycling
Amortised costFair value through
OCIFair value through
P&LFair value through
OCI
Effective interestmethod, impairment& foreign exchange
differences
(all)Fair value changes
Dividends
---(other)
Fair value changes---
(all)Fair value changes
--- Yes --- No
Effective interestmethod, impairment& foreign exchange
differences
Initialrecognition
Fair Value measurement
Certain equityinvestment
Certain debtinstruments, equity
investments &derivatives
Certain debtinstrument
Certain debtinstrument
©2014 Deloitte LLP. All rights reserved.
AC FVTOCIFVTPL/
FVTOCI Option forcertain equity instruments
Within the scope of the impairment model
Outside the scope ofthe impairment model
Financial assets in the scope of IFRS 9
Loancommit-ments
(unless @FVTPL)
Financialguarantees
(unless @FVTPL)
Leasereceivables
Contractassets
(IFRS 15)
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)21
Impairment – scope
Subsequent measurement …
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)22
Expected loss modelGeneral impairment model
Lossallowance
Apply effectiveinterest rate to…
Initialrecognition Stage 2
Lifetime expectedcredit losses
Gross carryingamount
Stage 3
Lifetime expectedcredit losses
Net carryingamount
Stage 1
12-month expectedcredit loss
Gross carryingamount
Objectiveevidence ofimpairment?
Significantincrease incredit risk?
Change in credit risk since initial recognition
©2014 Deloitte LLP. All rights reserved.
Policy choice
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)23
Transfer out of Stage 1Assumptions and approximations
Stage 2Stage 1
Significant increase in credit risk?
Approximation
Low credit riskMore than 30days past due
12-month-PD
Rebuttableassumption
Assessment on borrowerlevel
Consistent thresholds onportfolio level Latest point of
transfer to stage 2e.g. investment grade
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)24
Exemptions from the general model
Special provisions
•No loss allowance on initial recognition
•Apply a credit-adjusted effectiveinterest rate (based on theexpected cash flows at inceptionincluding expected credit losses)
Stage 3Purchased or originated credit-impaired financial assets
General model
Stage 2 Stage 3Stage 1
• Trade receivables with asignificant financingcomponent
• Contract assets withsignificant financingcomponent
• Lease receivablesPolicychoice
• Trade receivables without asignificant financingcomponent
• Contract assets withoutsignificant financingcomponent
Simplified model
Stage 2 Stage 3
©2014 Deloitte LLP. All rights reserved.
All change! Major accountingchanges for InsurersIFRS for Insurance Contracts
Derek Haynes
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)26
Background to the newIFRS for insurancecontracts
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)27
New IFRS for Insurance Contracts – backgroundConsistent, transparent method of accounting
Consistent measuresof cash flows
Existing issues
Reflects currentmarket conditions
Use of market-consistent measures
Greater comparabilitywith other insurers
Discounting reflectstime value of money
Inconsistent measuresof adverse deviation
Reflect uncertainty incash flows
Reflects all risks
Reflect full range ofpossible outcomes
Reflect discountingwhere significant
Discount rate reflectscontract characteristics
Reflect current market-based information
Consistent accountingfor all contracts
Little information aboutoptions guarantees
Lack of discounting forsome contracts
IASB’s objectives Impact on insurers
Discount rate does notreflect economic risks
Variety of accountingtreatments
Long duration contractsestimates not updated
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)28
New IFRS for Insurance Contracts – backgroundLatest estimate of timeline
20 June 2013
RevisedExposure Draft
25 Oct 2013
Commentletter deadline
2014 andH1 2015
Board re-deliberates issues
H2 2015?
Publishesnew IFRS
Effective date2019?
~3 years afterfinal Standard
©2014 Deloitte LLP. All rights reserved.
New IFRS for Insurance Contracts – backgroundA tough few years, but you should see benefits• A sequence of demanding changes to reporting requirements
• Early planning will:
‒ minimise the impacts on your business; and
‒ enable you to maximise the benefits
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)29
2014 2015 2016 2017 2018
Current IFRS
IFRS 9
IFRS 4 Phase 2
Solvency I
Solvency II
• Accounting policychoices
• Avoid accountingmismatches withPhase II
• Solvency I reporting ceasesBUT
• May need to use these systemsfor financial reporting
• Solvency II reporting increases,timescales reduce.
• Proliferation of reporting will putstrain on working day timetable
• Implementationdate unknown
• Likely to be laterthan IFRS 9
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)30
IFRS 4 Phase II –progress to date
©2014 Deloitte LLP. All rights reserved.
IFRS 4 Phase IIProgress to date – major topicsDescription of the topic ( ** re-exposed) Redeliberation complete?
Definition and Scope Yes
Unbundling Yes
Which Cash-Flows? Yes
Contractual Service Margin ** Yes, subject to participating contracts
Level of aggregation Yes
Discount rate and OCI solution ** Yes
Risk Adjustment Yes
Participating Contracts ** To be completed early 2015?
Reinsurance assets Yes
Premium Allocation Approach Yes
Presentation ** Yes
Disclosure Yes
Transition ** Yes, subject to participating contracts
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)31
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)32
IFRS 4 Phase IIProgress on re-deliberating 2013 Exposure Draft
Exposed topics
• Unlocking the CSM – DONE
• Insurance revenue – DONE
• OCI solution – DONE
• Transition - DONE
Non-targeted issues (all DONE)
• CSM earning pattern
• Gains on reinsurance contracts
• Level of aggregation and portfoliodefinition
• Non-observable discount rates
• Significant insurance risk
• Fixed fee service contracts
• Portfolio transfers and businesscombinations
• PAA – revenue and interest expense
All decisions reached for contractswith NO participating features onlyat this stage
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)33
IFRS 4 Phase IIoverview
©2014 Deloitte LLP. All rights reserved.
• The value of the insurance contractsconsists of the present value of thefulfilment cash-flows and acontractual service margin
• The present value of the fulfilmentcash-flows includes a riskadjustment, which reflects theuncertainty in the cash-flows
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)34
Building Block ApproachOverview of measurement
Contractual Service Margin(CSM)
(Expected profit of the contract)
Fulfillment cash-flows
Expected cash-flows(Premiums, claims and
expenses)
Risk adjustment(Assessment of the
uncertainty of the amountof future cash-flows)
Discounting(Adjustment that converts
cash-flows into currentamounts)
©2014 Deloitte LLP. All rights reserved.
Building Block Approach – fulfilment cash-flowsCash flows
Current estimate of all cash-flows that will arise, being:
• Premiums;
• Claims and benefits paid to policyholders, plus associated costs;
• Cash-flows resulting from options and guarantees;
• Costs (successful and unsuccessful) of selling, underwriting and initiatingcontracts; and
• Fixed and variable overheads directly attributable to fulfilling the portfolio.
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)35
©2014 Deloitte LLP. All rights reserved.
Building Block Approach – fulfilment cash-flowsRisk adjustment
• An adjustment to reflect uncertainty in the estimate of fulfilment cash-flows
• Measures compensation required to make the entity indifferent between:
‒ fulfilling an insurance liability with a range of possible outcomes; and
‒ fulfilling a liability that will generate fixed cash-flows with the same expected presentvalue as the insurance contract
• Re-measured at each reporting period
• Effects of diversification between portfolios is allowed
• No technique specified
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)36
©2014 Deloitte LLP. All rights reserved.
Building Block Approach – fulfilment cash-flowsDiscounting
• Adjusts cash-flows for time value ofmoney
• Discount rate based on characteristics ofthe insurance liability:
‒ Currency, duration, and liquidity
‒ Consistent with observable current market inputs for instruments with similar cash flowcharacteristics
‒ Rates should exclude factors not relevant to the insurance liability
• Updated each reporting period
• If amount, timing or uncertainty of cash-flows depend on return from underlyingitems the discount rate should reflect thatdependency
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)37
Tentative decisions
June 2014 – Developunobservable inputs using bestinformation available, reflectinghow market participants wouldassess such inputs
July 2014 – Contracts withoutparticipating features – use ratelocked-in at inception to accreteinterest and calculate presentvalue of cash flows that unlockthe CSM
September 2014 – Contractswith participating features – userate locked-in at date claimincurred to determine interestexpense
©2014 Deloitte LLP. All rights reserved.
Building Block ApproachContractual Service Margin (CSM)
• Risk-adjusted expected profit from a contract
• Eliminates any gain at inception of the contract
• Unlocked for changes to actuarial assumptions
• Interest calculated using locked-in discount rate
• CSM cannot be negative, i.e. the present valueof losses must be charged immediately to profitor loss
• Amortised over remaining coverage period in asystematic way that best reflects the transfer ofservices
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)38
Tentative decisions
May 2014
• CSM unlocks forchanges to actuarialassumptions
• CSM unlocks forchanges to the riskadjustment due tochanges in actuarialestimates
• Past losses should berecovered from arestored CSM
©2014 Deloitte LLP. All rights reserved.
Premium Allocation ApproachEligibility
• Measurement of the liability for the remaining coverage may be simplified if:
‒ doing so is a reasonable approximation to the BBA, or
‒ the coverage period at initial recognition is less than one year
• An approximation is reasonable if the components of the BBA would not havesignificant variability during the period before a claim is incurred
• Variability increases with
‒ the existence of options and guarantees in the insurance contract, and
‒ the length of the coverage period
• Liability for claims incurred should be calculated using the BBA. Discounting notrequired if cash-flows are expected to be paid in less than one year
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)39
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)40
PresentationPresentation of insurance revenue and expenses
Contractual ServiceMargin
Expected future cashflows
Risk adjustment forfuture cash flows
Discounting Effect ofchange indiscount rate
Unwind of thediscount rate
All otherchanges
Changedue toactuarialestimates
Changedue toactuarialestimates
All otherchanges
©2014 Deloitte LLP. All rights reserved.
PresentationEffect of changes in discount rates
Non participating contracts (tentative decision)
Accounting policy choice
• The effect of changes in discount rate can either be presented in:
‒ Profit or loss; or
‒ OCI
• This is an accounting policy choice for each portfolio
• Where there is a change in accounting policy, the requirements of IAS 8 have tobe complied with (but see transition requirements)
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)41
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)42
PresentationDisclosure requirements
Tentative decision (May 2014)Confirmed all disclosure requirementswill be as per the 2013 ED
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)43
Participating contracts –current status
©2014 Deloitte LLP. All rights reserved.
Contracts with participating featuresCurrent status of IASB debate
• 2013 ED proposed a “mirroring approach” which has been widely rejected
• Using the BBA with the following adaptations is being considered:
‒ “Unlocking” the CSM to take into account the changes in the insurer’s future share of returns generated by the underlying items
‒ An accounting policy option to present the discounting separately between OCI and profit or loss, using an asset dependent yield curve based on projected crediting rates
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)44
©2014 Deloitte LLP. All rights reserved.
Contracts with participating featuresEuropean CFO Forum alternative proposal
• Would apply to all contracts that offer a variable return linked to a specified poolof assets irrespective of whether such assets are held by the insurer
• Broad scope which would capture investment contracts which includes adiscretionary return derived from underlying items
• The key features are:
‒ No bifurcation of cash flows
‒ Single discount rate curve for all cash flows for balance sheet measurement
‒ Book yield rate for the presentation of the time value of money in profit or loss, with the difference presented in OCI
‒ CSM represents the insurer’s share of future profits from the underlying items, with full unlocking of all variables
‒ Profit recognition based on delivery of the service to the policyholder
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)45
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)46
The impacts andchallenges of Phase II
©2014 Deloitte LLP. All rights reserved.
The impacts and challenges of Phase IITransition – contracts with no participatingfeatures
• Full retrospective application of the new requirements is required, unless thisis impracticable
• Where impracticable, the simplified approach in the 2013 ED must be applied
• Where impracticable to apply the simplified approach, a fair value approach isapplied from the date of transition
• The above will require analysis and judgment
• Differing methods of transition are likely to be applied to different portfolios ofinsurance contracts within the same company
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)47
©2014 Deloitte LLP. All rights reserved.
The impacts and challenges of Phase IIPractical, commercial and strategic implications
• Many years of changes – Solvency II, IFRS 9 and IFRS 4 Phase II
• Consequential impacts on e.g. working day timetable, management information,budgets and forecasts, dividends and executive remuneration
• Process, technology and information
‒ Technology and data
‒ Finance and actuarial systems
‒ Solvency II systems need the functionality to produce Phase II measures
• Consider impact on the Target Operating Model
• Communication with stakeholders
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)48
©2014 Deloitte LLP. All rights reserved.
The impacts and challenges of Phase IIBasis of financial reporting for Life Insurers afterSolvency I
• Life insurers currently use the modified statutory solvency basis
• Most likely option is to maintain existing Solvency I systems to enable financialstatements to be prepared using consistent measurement bases
• A change in accounting policies is permitted if the financial statements morerelevant and no less reliable, or more reliable and no less relevant
• Could base insurance liabilities on Solvency II values, but changes in accountingpolicies in 2016 and again when Phase II is implemented
• Would require assessment of:
‒ the adjustments required to the Solvency II values
‒ cost and effort; and
‒ loss of comparability over a relatively short timescale
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)49
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)50
IFRS 9 FinancialInstruments interactionwith Phase II
©2014 Deloitte LLP. All rights reserved.
IFRS 9 – interaction with Phase IIWhat are the implications for insurers?
• FVTOCI is notable because an insurer often undertakes regular buying andselling activity to rebalance its portfolio of assets to meet cash flow needs
• FVTPL is an option available on initial recognition if this would eliminate orreduce an accounting mismatch
• An assessment of the measurement impacts of the combination of IFRS 9 andPhase II will be needed to minimise volatility in profit or loss
• Investments of sufficient duration to match insurance liabilities may not beavailable, therefore insurers may hedge this mismatch by entering intoderivatives (which must be accounted for at FVTPL)
• An accounting mismatch will result if the accounting policy is to present in OCIthe effect of a change in discount rate on the insurance contract liability
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)51
©2014 Deloitte LLP. All rights reserved.
Assets
Liabilities
Financial assetat FVOCI
Interest rateswap
Financial derivativeat FVTPL
20 years 30 years
Changes in current interestrates presented in OCI
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)52
IFRS 9 – interaction with Phase IIMismatches of duration between assets andliabilities
©2014 Deloitte LLP. All rights reserved.
Insurance liabilities Financial assets
Present Valueof expected
fulfilment cashflows
ContractualService Margin
Risk adjustment
P&L
OCIEffect of change in
discount rate toOCI
P&L
OCI
Amortised cost- business
model- contractualcash flows
characteristics
Fair Value –not at
amortised cost
Change in CSM
Investment Income,realised gains and
losses andimpairments
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)53
IFRS 9 – interaction with Phase IIPotential accounting mismatches
Unrealised gainsand losses
Pro
spective
change
inC
SM
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)54
Next steps for Insurers
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)55
Next steps for InsurersOpportunity for more cost effective delivery
Maximise the synergybenefits with Phase II
Optimise the use of existingresources / knowledge
Optimise IFRS investment ina cost effective way
Learn lessons fromSolvency II journey
Earlier and smootheradoption into BAU
Establish a moresustainable delivery model
Costs
Effectivenessand efficiency
High level understanding ofbusiness impact
IFRSimplementation
©2014 Deloitte LLP. All rights reserved.Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)56
Questions?
©2014 Deloitte LLP. All rights reserved.
Deloitte Finance ClubUpcoming programme
• Holiday finance checklist 2014Wednesday, 10 December 2014 – 8:30am-10:30am (arrivals from 8am)
2015 programme to be released soon
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)57
©2014 Deloitte LLP. All rights reserved.
Deloitte Finance ClubContacts and resources• Alex Arterton – 020 7303 5996 [email protected]
• Derek Haynes – 020 7007 5740 [email protected]
• Kush Patel – 020 7303 7155 [email protected]
• Peter Evans – 020 7303 0010 [email protected]
• James Bates – 020 7303 0094 [email protected]
Resources:
• Deloitte Finance Club home page: www.deloitte.co.uk/financeclub
• UK Accounting Plus (formerly IAS Plus): www.ukaccountingplus.co.uk
• Future of UK GAAP: www.deloitte.co.uk/futureofukgaap
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)58
©2014 Deloitte LLP. All rights reserved.
©2014 Deloitte LLP.Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each ofwhich is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.
Deloitte LLP is the United Kingdom member firm of DTTL.
This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend uponthe particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of thispublication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLPaccepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.
Deloitte Finance Club – Key trends and developments in the UK insurance market (19 Nov 2014)59