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IFRS 17 Insurance Contracts
Why actuaries need to care
1 August 2017
Joint Regional Seminar - Taipei
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Q&A
Introduction
Getting the numbers right
Getting the numbers on time
Business implications
Agenda
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The IFRS insurance contracts standard – 20 years in the making
Mandatory for annual periods beginning on or
after 1 January 2021
Opening balance sheet requiredas of 1 January 2020
Early adoption possible
The story so far – now the interesting part really starts
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1997 Kick-off§ IASC starts the Insurance Contracts project
May 2017§ Publication of IFRS 17 Insurance Contracts
July 2013§ Re-Exposure Draft Insurance Contracts
May 2002§ Insurance project split into Phase 1 and Phase 2
July 2010§ Exposure Draft Insurance Contracts
May 2007§ Discussion Paper: Preliminary views
March 2004§ IFRS 4 Insurance contracts ‘Phase I’ issued
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Introduction Getting the numbers on time Q&AGetting the
numbers right Business implications
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Current Balance Sheet Overview and where IFRS 17 fits in?
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FinancialInstruments
ShareholderEquity
Property
IntangibleAssets
IFRS 4 Insurance Contracts
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IAS 39 Financial instruments: Recognition and Measurement
IAS 18 Revenue
IAS 38 Intangible Assets
IAS 40 Investment Property
IAS 39 Financial instruments: Recognition and Measurement
IAS 32: Financial Instruments: Presentation
IFRS 7 Financial Instruments: Disclosures
Assets Liabilities
Other IAS 12 Income Taxes IAS 19 Employee Benefits
Debt
OtherIAS 37 Provision, Contingent Liabilities and Contingent Assets
DACIAS 18 Revenue IFRS 4 Insurance Contracts
IAS 37 Provision, Contingent Liabilities and Contingent Assets
In 2014 standards finalised for: § IFRS 9 to replace IAS 39§ IFRS 15 to replace IAS 18In 2017 standards finalised for: § IFRS 17 to replace IFRS 4
“Insurance” liabilities
“Investment” liabilities
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Why is it being introduced?
§ IFRS 4 was always intended to be replaced§ It allowed a wide variety of approaches some of which were deemed
to not adequately reflect the underlying financial performance of insurance contracts
Objectives for IFRS 17Globally consistent approach Explicit risk measurement and
allowance for the time value of guarantees and options
More useful and understandable information for the users of financial statements
Use of current estimates for all cash flows and maximum use of observable market data
Exclude distinct investment components from insurance revenue
Insurance revenue recognised as performance obligations fulfilled
Introduction Getting the numbers on time Q&AGetting the
numbers right Business implications
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Publication of IFRS 17 is a starting gun not a finishing line
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2021
Final insurance contracts standard
published as IFRS 17
2017 2018
Gap analysis, assessment of options, implementation, modification and testing
2020
Dry run 2018/19IFRS 17
IFRS 9 Effective
For insurance entities, two options apply:Overlay Approach or Deferral Approach
IFRS 9 or/andIAS 39 and
IFRS 4
IFRS 9 or/andIAS 39 and
IFRS 4
IFRS 9 + IFRS 17IFRS 9 + IFRS 17
Opening balance
sheet
Fullfinancial
statements
Dry Run
Implementation
2019
Q1 reporting
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2021 IFRS financial statements under IFRS 17 with comparatives for 2020
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Getting the numbers right
Getting the numbers on time
Business implications
Key implementation challengesMore than a compliance exercise
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Applying judgement in a principles-based standard
Complexity of implementation within a tight timeframe
Setting-up and running complex actuarial cash-flow models
Aligning processes, including increased automation
Dealing with multiple metrics
Managing stakeholder expectations
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General model – measurement of fulfilment cash flows
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§ Explicit§ Unbiased§ Entity perspective§ Within contract boundary
Cash Flows
§ Reflect liquidity characteristics of cash flows§ Consistent with
observable market prices§ Exclude factors not
relevant to the cash flows
Time Value of Money
§ Compensation the insurer requires for bearing uncertainty§ May reflect diversification
within and between portfolios§ Disclosure of confidence
level
Risk Adjustment
Expected cash flows
Risk adjustment
CSM
TotalInsurance ContractLiability
Fulfilment cash flows are updated each reported period:§ Actual vs expected cash flow variances for current period flow through to P&L§ Changes in estimates of future cash flows related to future coverage adjusts CSM§ ALM mismatches flow through to either the P&L or Other Comprehensive Income
Fulfilment cash flows
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Building block approach – contractual service margin
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§ Effectively a balancing item that eliminates day one gain§ Cannot be negative except for reinsurance
held§ Released as services are provided§ Adjusted to reflect impact of changes in
best estimate assumptions in respect of future service thereby reducing profit variability§ CSM discount rate “locked” at inception
except for directly participating business
Contractual Service Margin
Expected cash flows
Risk adjustment
CSM
TotalInsurance ContractLiability
A modified “variable fee” approach applies for direct participation business
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Grouping of contracts
Each portfolio is then divided into three groups:
Contracts in each group need to be sub-divided into annual cohorts
Contracts initially to be split into “portfolios”, meaning contracts that are subject to similar risks and managed together.
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Contracts that are onerous at initial recognition
Contracts that at initial recognition have no significant possibility of becoming onerous subsequently
The remaining contracts in the portfolio
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Discount rates – alternative approaches
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Introduction Getting the numbers on time Q&AGetting the
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Liquid risk-free curve
Illiquidity premium
Gross yield on reference
portfolio
Allowance for
uncertainty
Elimination of credit risk and any other, not relevant factors
Consistency with observable market prices of financial
instruments with consistent characteristics as liabilities such as
timing, currency and liquidity
Bottom-up
Top-down
Expected defaultIFRS 17
discount rate
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Risk adjustment principle very different from current approachesMarkets and insurers likely to make different choices on implementation
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Purpose of the Risk AdjustmentTo reflect the compensation that the entity requires for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risk
§ Required to disclose equivalent confidence level§ What risk measure (VaR, TVaR, CoC), which percentile?§ How to account for and allocate diversification benefits?§ How to achieve consistency with other requirements?
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Statement of Comprehensive IncomeSo what happened to written premiums?
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§ Insurance contract revenue and service expenses exclude any deposit components
§ Revenue and expense are recognised as earned or incurred
§ Insurance contract revenue represents the transfer of promised services and comprises:§ Expected claims and expenses§ Risk adjustment§ CSM§ Acquisition cash flows
§ Insurance finance expense is excluded from insurance service (underwriting) result
§ Accounting policy choice to present insurance finance expense either§ fully in P&L or § in P&L and OCI
Statement of Comprehensive Income
2021
Insurance contract revenue X
Insurance service expenses (X)
Insurance service result X
Investment income X
Insurance finance expense X
Net financial result X
Profit/Loss X
Discount rate changes on insurance liability (optional) X
Total comprehensive income X
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Complex transitional requirements
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Can a full retrospective approach be
applied?
Full retrospective approach
If possible
Modified retrospective approach
Fair value approach
If impracticalChoice of transition approach
decided at group of contract level
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Implementing IFRS 17 requires a holistic approach …
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PEOPLE
TECHNICAL DECISIONS
TOOLS
PROCESSES
IFRS
+
+
+
Target operating model
Training
Board sponsorship
Software solutions
Process automation & governance
Actuarial models/ reserving
Data requirements
Impact analysis
Technical decisions
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… with actuaries needing to take a major interest in implementation
Technical judgements and decisions will impact equity, profit emergence and implementation complexity
Requires new actuarial models – dealing with CSM retrospective assumptions, calculations and analysis
Further pressure on reporting processes, requiring new systems, people and target operating model
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Introduction Getting the numbers on time Q&AGetting the
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Introduction Getting the numbers on time Q&AGetting the
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IFRS 17 will require new, slicker financial reporting processes and models
Calculation engines and reporting systems need more flexibility but also ensure robust, reliable, repeatable and timely delivery of required figures
Risk adjustment
Contractual service margin
Reporting and disclosure requirements
Cash flows and discount rates
Par business Variable Fee Approach
Segmentation and contract boundaries
Model Capabilities / IFRS Requirements
More granularity and complexity in B/S and P&L for Life and General Insurers
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Actuarial model processes need to be industrialized
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Asset data
DeterministicLiability model
Input
Liability data
Assumptions
Otherreports
Outputdata
Reporting templates
StochasticModel
§ Various sources§ Different responsibilities§ Different formats /
interfaces
§ Separate models§ (Unnecessarily) complex coding ?§ Ongoing reconciliation
§ Various reports§ Spreadsheet cascades§ Manual adjustments
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Implement the new IFRS 17 content at the right placeDesign and orchestrate seamless “End-to-End” process through workflow engine
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Life Cash Flows & Results
P&C Cash Flows & Results
Third Party Calculation Tools
Input Data
P&C
Life
Reporting systems
MCEV / NBV
Financial Reporting
IFRS Accounts
General Ledger
Consolidation
Capital / Regulator
…
…ETL
Pricingdata
Actual claims
Actual costs
Actual premium
Cessiondata
Pricingdata
Actual claims
Actual costs
Actual premium
Cessiondata
ETL
ETL
ETL
Third PartyData
Warehouse
Store
IFRS / capital … Results
Feeder systems
AdminP&C
AdminLife
Assets
ESG
Re-Insurance
ETL
ETL
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More than just accounting: significant commercial impacts likely
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The different equity and profit emergence and revised presentation requirements should lead insurance companies to review or revise:
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2
4
3
Key metrics used
Asset-liability management
Product strategy and pricing
Capital and risk management
5 Investor engagement
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Impact of IFRS 17 on key insurer metrics
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Metric Impact
Profit § IFRS profit top metric for insurers§ Will become more complex under IFRS 17
Distributablecash flow
§ Top priority for investors§ Impact of IFRS 17 on dividend paying capacity
unclear; may vary by country
Value § Mix of IFRS, EV & Solvency reporting used§ Use of IFRS equity as Value starting point?§ CSM and EV VIF / NB margin reconciliation?
Capital § Current focus on RBC§ No direct impact of IFRS 17 but maybe indirect
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ALM: update framework
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Introduction Getting the numbers on time Q&AGetting the
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RBC ratio RBC balance sheet
IFRS Profits
Ratio
Time
100% SCR
Profit
Time
? IFRS Equity / Value
A L
A L
§ Update ALM framework and governance to reflect:§ KPI approach/Investor
messaging§ Projected and stress
tested ALM-related constraints and volatilities
§ Clear delegations
§ Critical factors may include:§ IFRS distributable reserve
or earning constraints, dividend payout ratio
§ P&L or OCI for market assumption changes
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Engaging with investors
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Plan the investor communication – the earlier the better!
One of the biggest investor
communication challenges
we have ever seen
Book Value
Market based
approachIFRS 17
Revenueexcluding deposits
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Statement of Comprehensive Income
2021
Insurance contract revenue X
Insurance service expenses (X)
Insurance service result X
Investment income X
Insurance finance expense X
Net financial result X
Profit/Loss X
Discount rate changes on insurance liability (optional) X
Total comprehensive income X
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Start now
Maximise synergy
Industrialise
Key messagesMore than a compliance exercise
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Adopting IFRS 17 is a significant task, now is the time to plan and budget
Get the most out of past investments
Consider what else updated tools can be applied to
Look to what else you may need to do in the future
Reduce process risk
Produce results on a timely basis
`
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Introduction Getting the numbers on time Q&AGetting the
numbers right Business implications
Communication will be key to managing internal and external expectations
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Any questions
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About Willis Towers WatsonWillis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 40,000 employees serving more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential.
The information in this publication is of general interest and guidance. Action should not be taken on the basis of any article without seeking specific advice.
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Willis Towers Watson is uniquely placed to help both Life and P&C insurers interpret and implement the new standard developed by the IASB. We:
§ Advise more than three-quarters of the world's leading insurers
§ Are the industry's leading risk specialist and a leader in financial modelling
§ Are the largest provider of actuarial software in the world
§ Have more actuaries and chartered enterprise risk analysts (CERAs) serving the insurance industry than any other professional services company.
Willis Towers Watson and IFRS 17
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More from our website
§ IASB issues IFRS 17 Insurance Contracts, starting the
countdown to 2021
§ International Financial Reporting Standards
§ How we can help you turn IFRS 17 into a success story
§ Software Solutions for Life Insurers
§ Software Solutions for Property & Casualty Insurers
§ Solvency II One Year On
For more information about how we can help you turn IFRS 17 into a success story, please contact your Willis Towers Watson consultant, email our IFRS Lead for insurers, John Nicholls, at [email protected] or Dion Heijnen, at [email protected]