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Adoption of IFRS in the Insurance Sector Catherine Guttmann 15 March 2006

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... uncertain futur event (the insured event) adversely affects the policyholder ' ... a right to compensation under an insurance contract if an insured event occurs ' ... – PowerPoint PPT presentation

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Title: Adoption of IFRS in the Insurance Sector Catherine Guttmann 15 March 2006


1
Adoption of IFRS in the Insurance
SectorCatherine Guttmann15 March 2006
  • REPARIS Workshops on Accounting and Audit
    Regulation, Vienna, March 2006


2
What does IFRS 4 Phase I mainly say
3
IFRS 4 Phase I Insurance Contracts
  • Main features of the IFRS
  • The IFRS on insurance contracts applies to all
    insurance contracts (including reinsurance
    contracts) and only to insurance contracts
  • Financial assets and liabilities of insurers
  • are treated by IAS 39
  • All IFRS standards apply to insurance companies
  •  Insurance contract  definition is a definition
    in substance and not a legal one
  • The standard on insurance contracts should then
    be used for example in the banking industry

4
IFRS 4 Phase I Insurance Contracts
  • Definition of an insurance contract
  • An insurance contract is a contract
  •  under which one party (the insurer) accepts
    significant insurance risk from another party
    (the policyholder) by agreeing to compensate the
    policyholder if a specified uncertain futur event
    (the insured event) adversely affects the
    policyholder 
  • The  policyholder  is defined as  a party
    that has a right to compensation under an
    insurance contract if an insured event occurs 

5
IFRS 4 Phase I Insurance Contracts
  • Definition of financial risk
  • An insurance risk is a  risk , other that
    financial risk, transferred from the holder of a
    contract to the issuer 
  • A financial risk is  the risk of a possible
    future change in one or more of a specified
    interest rate, financial instrument price,
    commodity price, foreign exchange rate, index of
    prices or rates, credit rating or credit index or
    other variable, provided in the case of a
    non-financial variable that the variable is not
    specific to a party to the contract 

6
IFRS 4 Phase I Insurance Contracts
  • Examples of insurance contracts

Are insurance contracts Are not insurance contracts
Insurance against theft or damage to property Insurance against product liability, professional liability, civil liability Disability and medical cover Life contingent annuities Death benefit Catastrophe bond if the triggering event includes a condition that the issuer of the bond suffered a specified loss Financial contracts which dont expose the insurer to significant insurance risk (investment contracts, financial reinsurance) Fronting Own insurance for example product warranty is issued directly by a manufacturer dealer or retailer Catastrophe bond triggered by an external event for which the issuer doesnt incure a specific loss
7
IFRS 4 Phase I Insurance Contracts
First consequence classification of the
contracts and valuation principles
  • IAS 39 for the financial component and liability
    adequacy test
  • Local GAAP for the insurance component
  • No need to separate

Significative insurance risk ?
yes
yes
no
Embedded derivative to separate
Financial Component ?
yes
no
Separate and Fair value the Embedded derivative
Discretionary Participating Feature ?
no
  • Local GAAP and Liability adequacy test

Non discretionary
discretionary
IAS 39 / IFRS 4
IAS 39
8
Second Consequence an insurer balance sheet
9
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10
Orientations for Phase II
11
IntroductionThe objectives of Phase II
  • By splitting the insurance project into 2 phases,
    the IASB board has postponed several key subjects
  • Valuation of insurance contracts keeping
    current accounting principles
  • Qualification and treatment of discretionary
    participating features (shadow accounting)
  • Embedded derivatives
  • Revenue recognition
  • Phase II will have to deal with all these issues
    with the following underlying purpose
  • To get a better financial reporting
  • To reach a global consistency between all IAS
    standards (IAS 39, IAS 18, IAS 37, ) and the
    IFRS framework (comparability, reliability,
    substance over form,)

12
Agenda of the Phase II project
  • A working group has been set up by the IASB board
  • Meeting every 2 month
  • Participants
  • CFO of major insurance groups
  • Allianz
  • Axa
  • Prudential
  • AIG
  • Nippon Life
  • IASB board members
  • Members of IOSCO, IAIS,EFRAG
  • Actuaries (Chairman of IAA)
  • Analysts (Standard Poors, DZ Bank AG)
  • Public debate
  • Regular publications

13
Agenda of the Phase II project
  • Agenda
  • A Working Paper should be published by the
    Working Group Phase II before year end 2006
  • An Exposure Draft should be published in 2008
  • Final standard could be published before year end
    2008

Endorsement of phase II standard
Working paper published
ED published
Working Group meetings
14
Some valuation approaches
  • Approach C Current Entry Value
  • Principles Approach C measures the insurance
    liability at the amount that the insurer would
    charge to a policyholder today for entering into
    a contract with the same remaining rights and
    obligations as the existing contract.
  • Initial measurement
  • Discounting of future projected cash flows
    using current yield curve (best estimate value)
  • Valuation of an implicit margin, equal to the
    difference between premiums and the best
    estimate value
  • Next measurements
  • Best estimate value is calculated on current
    assumptions (economic and non economic)
  • The initial margin is amortised among the
    duration of the contract with the release of the
    risk

15
Some valuation approaches
  • Approach D Current Exit Value
  • Principles Approach D measures the insurance
    liability at the amount that the insurer would
    expect to have to pay today to another entity if
    it transferred all its remaining contractual
    rights and obligations immediately to that
    entity.
  • Because there is no secondary market for most
    insurance liabilities, that amount would need to
    be estimated.
  • Specifically, approach D
  • Measures the insurance liability as the present
    value of future cash flows arising from the
    contract (Uses a current risk-free discount
    rate).
  • Does not defer acquisition costs as a separate
    asset.
  • The measurement of the liability includes the
    margin that market participants would require for
    contractually assuming risks and providing
    services
  • Margin for risks and uncertainty AND
  • Margin for the servicing part included in the
    insurance contract (servicing margin)
  • Profit at inception is limited
  • by the level of the MRI and
  • by the level of the Servicing margin

16
Some valuation approaches
  • Approaches C D

Approach C "Business to Customers
Approach D "Business to Business
Asset
Asset
Net equity
Net equity
No gain at inception
Some gain at inception but limited by the SM and
the MRI
Global Margin
Servicing margin
  • Separation and valuation of the 3 parts of the
    contracts
  • exit value "best estimate"
  • Margin for risks
  • Servicing margin

MRU
Global margin Premiums Exit Value best
estimate
Exit Value best-estimate
Exit Value best-estimate
17
Some valuation approaches
  • IAIS is working on a similar model so that the
    same valuation for liabilities could be taken for
    solvency purposes and accounting
  • Questions still to be solved
  • Definition of the MRU (level of confidence
    Cost of capital), or pattern of amortisation
  • Definition and level of the servicing margin
    (market reference ?)
  • Policyholder behaviour ?
  • Paragraph 49 of IAS 39 for investment contracts

18
(No Transcript)
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