2008 general meeting assemblée générale 2008 toronto, ontario
DESCRIPTION
Canadian Institute of Actuaries. L’Institut canadien des actuaires. 2008 General Meeting Assemblée générale 2008 Toronto, Ontario. Agenda. IFRS Background IFRS 4 Phase I – Insurance Contracts IFRS 1 – First-time Adoption of IFRS. IFRS Background. - PowerPoint PPT PresentationTRANSCRIPT
2008 General MeetingAssemblée générale 2008
Toronto, Ontario
2008 General MeetingAssemblée générale 2008
Toronto, Ontario
Canadian Institute
of Actuaries
Canadian Institute
of Actuaries
L’Institut canadien desactuaires
L’Institut canadien desactuaires
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Agenda
1. IFRS Background
2. IFRS 4 Phase I – Insurance Contracts
3. IFRS 1 – First-time Adoption of IFRS
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IFRS Background
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Recent IFRS Developments Where are we now
• Transition from Canadian GAAP to IFRS– On February 13, 2008 the AcSB confirmed that the use of IFRS will be required
in 2011 for publicly accountable profit-oriented enterprises.
• Canadian Securities Administrators– On February 13, 2008, the CSA announced its proposal to allow domestic issuers
to early-adopt IFRS for financial years beginning on or after January 1, 2009.
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Recent IFRS Developments Where are we now
• Office of the Superintendent of Financial Institutions Canada– On April 25, 2008, OSFI issued a letter to all Federally Regulated
Financial Institutions which clarified:• All FRFIs will be considered publicly accountable enterprises and required to
adopt IFRS in 2011;• Early adoption of IFRS will not be permitted; and• A progress review will be required from each FRFI on a semi-annual basis.
– On Oct 31, 2008, OSFI issued a letter to Federally Regulated Insurers which clarified:
• Do not expect companies to make changes to accounting policies for insurance contracts relating to IFRS 4 – Insurance Contracts on initial adoption (other than impacts related to product classifications)
• Actuarial standards should continue being used under IFRS 4 Phase I– Update from Auditors Advisory Meeting
• Currently working on revised Capital model
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2009 and 2010 statements filed under local standards
Statements restated under IFRS but to be filed in 2011
IFRS statements are published with comparatives for 2010
Fiscal2009
Fiscal2010
Fiscal2011
Q1 Q2 Q 3 Q4 Q1 Q2 Q 3 Q4 IFRS
transitiondate
IFRS transition
date Filing date of
IFRS accounts Filing date of
IFRS accounts
Fiscal2008
IFRSconvergence
plan disclosure
IFRSconvergence
plan disclosure
IFRS detailed
plan disclosure
IFRS detailed
plan disclosure
Fiscal2007
Training and knowledgeof IFRS
Preparation ofconvergence plan
New IFRS standards
Timeline for IFRS Adoption – 5 Key Dates
Project Structure and Governance(budget implications, resourcing, etc.)
1 2 4 53
Disclose IFRS implementation plan and qualitative impact analysis
Disclose IFRS quantitative impact analysis
Opening IFRS balance sheet and transition adjustments
First full year of IFRS income statement (internal only)
First external quarterly IFRS financial statements including comparatives
1
2
3
4
5
Assess System Change Impact and Implementation
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IFRS 4 – Phase I
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High Impact Standards - IFRS 4 – Life Insurance
IFRS requirement
s
Financial Line itemRelated IT
SystemFinancial
Impact H/LDisclosure Impact H/L
Potential IT impact Y/N
Standard Volatility
H/L
Overall Impact
assessment
IFRS 4 Insurance Contracts
H H Y L H
Scope (Opening Balance)
1. Actuarial Liabilities2. Policy Loans 3. Policyholders’ Funds on Deposit, Reinsurers’ Funds on Deposit4. Provision for claims, provision for PHD and ERR5. Premium income6. Fee and other income7. Policyholder benefits (Life and health claims, Cash value of surrendered policies)8. Increase in actuarial liabilities
Actuarial Systems, Investment Systems, General Ledger
H H Y L H
Definitions (selected) H H Y L H
Embedded Derivatives H H Y L H
Unbundling of Deposit components H H Y L H
Recognition and Measurement H H Y L H
Current market interest rates H H Y L H
Disclosure
H H Y L H
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• There is a phased approach to insurance contracts.
• Phase I implements some components of the insurance project in 2005
• Phase II will be new insurance measurement standard
IFRSINSURANCE
PROJECT
IFRSINSURANCE
PROJECT
Phase I – Implemented 2005Phase I – Implemented 2005
Phase II – Implement by 2013?Phase II – Implement by 2013?
Phased approach for insurance
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Insurance Assets – IFRS 4
Non-Insurance Financial Assets - IAS 39
Insurance Liabilities – IFRS 4
Non-Insurance Financial Liabilities, Including
Investment Contracts IAS 39
Key standards for insurance“IFRS 4: Insurance Contracts and IAS 39: Financial Instruments are the key standards that will apply to insurance contracts”
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IASB Phase I• Phase I: IFRS 4, Insurance Contracts, issued in 2004
– Interim standard
– Allows insurers to retain existing accounting policies, with some modifications, for:
• Contracts which meet its definition of insurance
• Investment contracts with discretionary participation features
• Investment contracts – IAS 39
– DAC amortization model
– Onerous contracts
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2008 Phase I
(2005)
Phase II (2013??)
Assets Liabilities
IAS 39 for Invested Assets
IFRS 4 Status Quo
IAS 39 and some
aspects in IAS 32 and
IAS 18Phase II
All Insurance Contracts and Investment Contracts with Discretionary Participation
Features
Other Investment Contracts and All Service Contracts
IFRS 4 - Insurance Contracts
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Issues
• Contract classification
• Embedded derivatives
• Insurance contract measurement
• Disclosure Requirements
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Contract classification defines accounting treatment
Phase I
Investment contracts
Discretionary Participation Investment
contracts
Insurance contracts
*Subject to certain modifications
ExistingAccounting*
ExistingAccounting*
ExistingAccounting*
ExistingAccounting* Amortised Cost
-or-Fair Value
Amortised Cost-or-
Fair Value
Contract classification - Why is it important?
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• Tends to be a more complicated issue for Life and Health Insurance as a number of products may have been created primarily for investment purposes
• Due to the somewhat liberal definitions in IFRS 4 – Insurance Contracts, most of the Life and Health Insurance contracts are expected to meet the insurance contract threshold (but an insurer still needs to conduct an analysis of its contracts!)
Contract classification
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Classification flowchart
Is there significantinsurance risk present
in the contract?
Is there adeposit component to the
contract? If so, is the deposit componentindependent of the insurance
cash flows?
Are any elements ofthe benefit driven by discretionary
participation
Insurancefeatures present
in contract
Classified as aninvestment contract
Deposit component
Yes
No
Insurance and depositcomponents of contract must, ifnot recognised, be unbundled
and valued separately
Yes
No
Insurancecomponent
Product is an InvestmentContract without discretionary
participation features
Product is anInsurance Contract
Product is an InvestmentContract with discretionary
participation featuresYes
No
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Definition of insurance
“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 future event (the insured event) adversely affects the policyholder.”
IFRS 4.Appendix A
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• 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.
• Insurance risk is risk, other than financial risk, transferred from the holder of a contract to the issuers
• If both financial risk and significant insurance risk are present, contract is classified as insurance.
IFRS 4.Appendix A
Insurance versus financial risk
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• ‘Significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance.’
• Additional benefits must be for pre-existing risk and do not include:– Charges that would be made on cancellation or surrender– Loss of ability to charge policyholder for future services– Possible reinsurance recoveries (these are classified separately)
IFRS 4.Appendix B22 - B28
Significant insurance risk
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Significant insurance risk• Additional benefits include timing risk
– Whole life contract (payment known, timing unknown) has additional benefits
– Contract where death benefit is equivalent to maturity benefit (I.e. maturity benefit adjusted for time value of money) does not have additional benefits
• Classification on a contract by contract basis– Contracts entered into simultaneously with the same policyholder
count as one contract– Products may be classified homogeneously on materiality grounds
IFRS 4.Appendix B22 - B28
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• No quantitative guidance given• Rules of thumb currently being adopted for internal
consistency– Benefit paid on death exceeds benefits payable on survival by more
than x% (term assurance)– Plausible scenario exists under which the death benefit exceeds the
survival benefit by x% or more at any time during the policy term (guaranteed minimum death benefit in unit-linked contract)
– Benefit payable on survival exceeds the benefit payable on death by more than x% (Pure Endowment, life contingent annuity)
Quantitative measures
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Testing for significant insurance risk
Feature Significant
Significant additional benefits payable on insured event
Costly and feasible event in scenario of commercial substance even if it is extremely unlikely
Waiver on death of surrender charges
Loss of ability to charge for future services
Unfeasible event in any scenario
Contingent amount is insignificant in all scenarios of commercial substance
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• Once insurance, always insurance, but can go from investment to insurance
• Investment may change to insurance through:
– Switch between funds, first fund has no insurance risk – second fund has insurance risk
– Take up of option to increase insurance risk
IFRS 4.Appendix B.29-30
INVESTMENT INSURANCE
Change in level of insurance risk
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Unbundling
Is there significantinsurance risk present
in the contract?
Is there adeposit component to the
contract? If so, is the deposit componentindependent of the insurance
cash flows?
Are any elements ofthe benefit driven by discretionary
participation
Insurancefeatures present
in contract
Classified as aninvestment contract
Deposit component
Yes
No
Insurance and depositcomponents of contract must, ifnot recognised, be unbundled
and valued separately
Yes
No
Insurancecomponent
Product is an InvestmentContract without discretionary
participation features
Product is anInsurance Contract
Product is an InvestmentContract with discretionary
participation featuresYes
No
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When do you unbundle?
• Unbundling is required when:– The insurer’s existing accounting policies do not require recognition of
the deposit component
– The insurer can independently measure the deposit component from the insurance component
• Unbundling is allowed when the insurer can independently measure the deposit component from the insurance component– Consistent treatment of unit-linked products where some contracts
have rider benefits
IFRS 4.10 - 12
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Embedded derivatives in Insurance Contracts
• Certain embedded derivatives have to be separated from insurance contracts, investment contracts with Discretionary Participation Features and investment contracts without Discretionary Participation Features measured at amortised cost
• If separated, measured under IAS 39:– Fair value– Changes in fair value through profit and loss
IFRS 4.7-9
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Embedded derivative flowchart
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Insurance contract measurement
• During Phase I, existing accounting policies apply with certain modifications– Prohibited – certain accounting policies are prohibited as they do not
meet the IFRS framework– Mandated – certain accounting policies must be implemented if they are
not already in the existing accounting policies– Allowed to continue, but not start – certain accounting policies that do
not meet the IFRS framework can continue, but cannot be implemented.– Can be started – certain accounting policies can be introduced.
• Existing accounting policies are those in the current financial statements
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Prohibited policies
• The following accounting policies are prohibited– Setting up catastrophe provisions
– Setting up claims equalisation provisions
– Offsetting of reinsurance assets and direct liabilities
IFRS 4.14
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Mandated policies
• The following accounting policies are mandated if they are not already present– Liability adequacy testing
– Impairment of reinsurance assets
IFRS 4.14
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Policies that may continue
• The following accounting policies may continue but companies may not switch to these where they are not already applied– Using an undiscounted liability basis
– Measuring future investment management fees at a value greater than the acquisition costs
– Using non-uniform accounting policies for subsidiaries
– Using excessive prudence in the valuation of liabilities
IFRS 4.25
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Policies that may be started• The following accounting policies can be started subject
to certain restrictions
– Use of current market discount rates
– Use of shadow accounting
– Use of asset based discount rates
• Only if part of a comprehensive accounting policy which makes financial statements more relevant and reliable
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Insurance disclosure requirements
• Principle 1 - Explanation of recognised amounts
An insurer shall disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts
• Principle 2 – Nature and extent of risks arising
An insurer shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from insurance contracts
•IFRS 7 (S.3862): Financial Instruments incorporates similar risk disclosures to financial instruments
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Life Insurance Contracts
Individual Insurance
Annuities
Group Insurance
Term Par Universal Life
Variable Universal
Life
Life Contingent Payout
Annuities
Fixed Payout Annuity
Fully Insured
Plan
Experience Rated Refund
Administrative Services Only
Insurance Not InsuranceBifurcation or TBD?
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IFRS 1 – Insurance Contracts Implications:• A first-time adopter may apply the transitional provisions in IFRS 4.
• That standard limits an insurer to changing ‘its accounting policies for insurance contracts if, and only if, the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs.
• An insurer shall judge relevance and reliability by the criteria in IAS 8.’185
• As noted above OSFI does not want companies to initially change their existing accounting policies
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