IFRS 4 Insurance Contracts: Participating contracts and update on key issues.Hosted by the EY Global Insurance Center
18 June 2015
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Today’s moderator
Kevin GriffithErnst & Young LLP (UK)Partner
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Today’s agenda
► Timelines ► General model► Participating contracts► The road ahead
Join today’s Twitter discussion: #EY_Insurance
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Today’s presenters
Darrel ScottIASB member
Hans van der VeenErnst & Young
Accountants LLP (NL)Senior Manager
Richard OlswangPrudential plcGlobal Actuarial Lead for IFRS 4 Phase II
Member of EFRAG’s Insurance Accounting Working Group
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Today’s agenda
► Timelines► General model► Participating contracts► The road ahead
Join today’s Twitter discussion: #EY_Insurance
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Timelines - New IFRS for insurance contracts
Ongoing IASB deliberations Implementation period Reporting
IFR
S 4
Ph
ase
II
IFR
S 9
Potential IFRS 4 Phase II Final standard
Potential IFRS 4 Phase II effective date 1 Jan 2020
Potential IFRS 4 Phase II first annual financial statements
IFRS 4 Phase II Re-exposure Draft
Potential IFRS 4 Phase II start of comparative period
Start of IFRS 9 comparative period
IFRS 9Final Standard
2013
IFRS 9 Effective date 1 Jan 2018
Possible revised IFRS 9 classification from IFRS 4 Phase II transition
First IFRS 9 annual financial statements
2014 2015 2016 2017 2018 2019 2020
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Today’s agenda
► Timelines► General model► Participating contracts► The road ahead
Join today’s Twitter discussion: #EY_Insurance
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IASB proposalGeneral model
Expected value of future cash flows
Discount rate
Risk adjustment
Contractual service margin
Reinsurance
Disaggregation
PresentationSeparation
Definition and scope
Disclosure
Regulatory Frameworks
Financial Instruments and other accounting changes
Transition
Simplified approach
Bu
ild
ing
Blo
ck
Ap
pro
ac
h
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IASB proposalKey issues for remaining re-deliberations
► Non-participating contracts:► Reconciliation with the model for participating contracts► Scope► Sweep issues
► Participating contracts
► Transition: application issues raised
► Effective date: timing of the final standard and link with IFRS 9
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Today’s agenda
► Timelines► General model► Participating contracts► The road ahead
Join today’s Twitter discussion: #EY_Insurance
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Participating contractsBackground from the ED
Performance reporting
Options & Guarantees
Shareholder’s share in
underlying items
Scope
Interest expense in PL
Fin
anci
al I
nst
rum
ents
(I
FR
S 9
)Level of aggregation
IFRS 4 Insurance Contracts: Participating contracts and update on key issues 18 June 2015
Adaptations for Participating contractsIASB direction
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How to view the insurer’s economic interest in underlying items (shareholder’s share):► View 1: Share in the economic return in underlying items
► Accounted for under applicable standards (e.g., IFRS 9)
► View 2: Variable fee► Obligation under the contract to pay the policyholder an amount
equal to the value of underlying items less a variable fee► Variable fee = shareholder’s share less cost of guarantees,
accounted for through the CSM
Scope of variable fee approach: ► 3 criteria to be met, no reassessment after inception
IFRS 4 Insurance Contracts: Participating contracts and update on key issues 18 June 2015
Adaptations for Participating contractsIASB direction (continued)
Page 13
Interest expense in profit or loss► Current period book yield approach:
► Interest expense on the insurance contract liability will be equal and opposite to investment income on the underlying items
► Difference with the interest expense determined based on current rates would be reported in OCI
► Scope of current period book yield approach: ► Criteria for variable fee approach, and► Underlying items are held (to be reassessed after inception)
► Effective yield approach: ► For participating contracts not in scope of the book yield
approach► Several variations discussed by Board in educational sessions
IFRS 4 Insurance Contracts: Participating contracts and update on key issues 18 June 2015
Participating contractsScope
Page 14
► Where will the lines between each of the areas be?► How many models/variations will there be?
current period book yield
Non participatingDirect
participatingIndirect
participating
General model Variable fee model
Continuum of insurance contracts
Measurement
General model –interest expense (OCI/PL)
Current period book yield
Interest expense
Type of contract
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Participating contractsResolving the model
Critical issues
► Scope► ‘Cliff effect’ between the accounting for indirect
and direct participating contracts► Level of aggregation
► Application to participating contracts, including mutualisation
► Hedging► Preventing accounting mismatch
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Today’s agenda
► Timelines► IASB proposal► Model for participating contracts► The road ahead
Join today’s Twitter discussion: #EY_Insurance
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The road ahead
► The IASB is committed to finalise the project, but uncertainties around next steps and timing remain
► Resolving the issues of participating contracts and level of aggregation will be key
► It is likely middle ground needs to be found for some key areas
Effective date of the final standard will not be 2018 How much later then 2018? Alignment with IFRS 9 is an important issue for insurers
Phase II will have a huge impact on insurers, not only for financial reporting but also for operations Preparation should pick up momentum, whilst remaining flexible
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Contact us
Follow us on Twitter: @EY_Webcasts
Kevin Griffith Ernst & Young LLP (UK)
Evan BogardusErnst & Young LLP (US)
Dana D’AmelioErnst & Young LLP (US)
+ 44 (0)20 7951 0905 [email protected]
+ 1 (212) 773 [email protected]
+ 1 (212) 773 [email protected]
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Resources
► Global Insurance websitewww.ey.com/insurance
► IFRS Insurance Insightswww.ey.com/insuranceifrs
► Solvency IIwww.ey.com/solvencyii