Economic Valuation of Life Insurance Liability Preparer s View. Hiroaki Tonooka Meiji Yasuda Life

Transcription

1 Economic Valuation of Life Insurance Liability Preparer s View Hiroaki Tonooka Meiji Yasuda Life

2 Insurance Contracts Project Interim Standard in IFRS IFRS4 developed in 2004 permits a wide range of accounting practice. Phase 2 Current phase under discussion. 2

3 Phase 2 of the Project Current Situation Accounting practices for insurance contracts vary in each country. Measurement of Insurance liabilities might not appropriately reflect subsequent economic changes after contract inception. 3

4 Phase 2 of the Project Aim of the Project Developing a full fledged IFRS on insurance contracts. Reflecting subsequent economic changes after contract inception into measurement of Insurance liabilities. I support the aim. 4

5 Time table of the Insurance Contracts Project May 2007 Discussion paper (DP) on Phase 2 September 2008 Restarting discussion after DP December 2009 Publication of ED 5

6 Key Proposals by the DP

7 Economic Valuation Lock in approach Valuation based on assumptions at contract inception Lock free approach Valuation based on current assumptions at reporting date 7

8 Lock in Valuation Decline in Interest rates Rise in Interest rates Pattern of liability valuation is determined at contract inception Valuation on Endowment insurance Contract inception The pace of increase in liabilities would not change, even though current situation, including mortality table and interest rates, does change. 8

9 Lock free Valuation Decline in Interest rates Rise in Interest rates Pattern of liability valuation is unpredictable at contract inception Valuation on Endowment insurance Contract inception The level of liabilities drastically changes at every reporting date, as current assumptions, including mortality table and interest rates, change. 9

10 Three building blocks Economic valuation consists of three building blocks Estimating future cash flows Discounting the estimated future cash flows Adding risk and other margins to the discounted future cash flows 10

11 Calculating insurance liabilities 2.Discounting Insurance liabilities Future cash outflow minus Future cash inflow Future cash outflow; benefit and expense 1.Estimating cash flow Future cash inflow; premium and inv. income 3.Adding margins 2.Discounting Calculated separately from cash flow 11

12 Current Issues

13 Measurement approach Candidate 1 Candidate 2 Candidate 3 Candidate 4 Candidate 5 Exit value as proposed by the DP Current fulfillment value including risk margin based on the cost of bearing risk Current fulfillment value including risk margin and an additional margin Current fulfillment value including a single margin calibrated to the premium Unearned premium for the pre claims liabilities of short duration contracts 13

14 Measurement approach February 2009 Board meeting Tentatively decided no day one gains should be recognised in profit or loss June 2009 Board meeting Tentatively decided to remove current exit value, therefore current fulfillment value must be adopted I support both decisions. 14

15 Future premium May 2009 Board meeting Tentatively decided that measurement of insurance contracts should include expected future premiums, therefore the guaranteed insurability concept must be abandoned I also support the decision. 15

16 My concern and recommendation

17 Participating contract Preliminary view in the DP The cash flows used in measuring a participating insurance liability should incorporate an unbiased estimate of the policyholder dividends to satisfy a legal or constructive obligation. My concern The definition of the preliminary view is relatively narrow and will not result in faithful representation. 17

18 Participating contract My recommendation My recommendations are: should not limit to a legal or constructive obligation. should enlarge the definition to capture economic reality. should defer to preparers which cash flow to be included into insurance liability because IFRS are principle based standards and how to estimate insurance cash flow should be left up to preparers. 18

19 Credit standing Preliminary view in the DP If an insurer measures its insurance liabilities at current exit value, that measurement should reflect the liability s credit characteristics. My concern If an insurer s reported insurance liabilities decline with an impairment of their credit characteristics, users may find it more difficult to assess the insurer s financial strength. 19

20 Credit standing My recommendation My recommendation is: should NOT reflect the insurance liability s credit characteristics (I think the Board will abandon the credit characteristics because the Board abandoned the exit value) The fulfillment value is defined as excluding credit characteristics and has been tentatively decided as a measurement approach for insurance liabilities. 20

21 Presentation Preliminary view in the DP Profit or loss should include all changes in the carrying amount of insurance liabilities. My concern Profit or loss which include all changes of insurance liabilities does not provide any relevant and reliable information for users. 21

22 Presentation My recommendation My recommendation is: should exclude re measurement from profit or loss and include it into OCI In Revenue Recognition project, re measurement is excluded from revenue. In Insurance Contract project, it is natural that re measurement is excluded from profit or loss. I prefer to include it only in comprehensive income. 22

23 Meiji Yasuda s actions to economic valuation

24 Actions to economic valuation Issues to be resolved We are deliberating at the executive management level the following actions to economic valuation ; Reducing economic mismatch Evolving product features Improving accountability We must prepare to respond to economic valuation accounting in middle term horizon. 24

25 Reducing economic mismatch Volatility issue Re measurement of insurance liabilities causes volatility of the liability measurement, when interestrate changes. We should change our asset management to be sensitive about volatility of insurance liabilities. 25

26 Our action 1 We have increased bond investment and decreased equity investment in our general account portfolio and strengthen our grip to ALM. 26

27 Our action 2 We have lengthened duration of our general account bond portfolio and have reduced duration mismatch. March 2004 March years and beyond less than 10 years 27

28 Our action 3 We have tried to use hedge accounting for a portfolio hedge of interest rate risk in life insurance liabilities. This action of our company is a trial stage. We intend to expand its amount gradually. Our action 4 We have raised insurance liabilities additionally since fiscal year 2007 for specified individual annuity products which have guaranteed relatively high interest rates. 28

29 Evolving product feature Guarantee issue Typically, whole life products guarantee long term interest rate with predetermined surrender value. Under economic valuation accounting, we might not be able to manage economic mismatch. We have introduced products with mitigation features. 29

30 Current assumption We have introduced current assumption products which will offer relatively high interest rates when market interest rate is high and mitigate guaranteed interest rate risk. But, so far, the introduction of the products has not necessarily worked as planned. Our current interest credits have been equal to minimum level of guaranteed interest rates because of the long lasting low market interest rate in Japan. 30

31 Market value adjustment We have introduced group pension products with market value adjustment which offer a surrender value linked to market interest rates based on the adjustment clause Gradually, our group pension products have been transferred to market value adjustment type products. By this transfer, our company has been reducing interest rate risk 31

32 Improving accountability Characteristic of income Rise in interest rates increases comprehensive income of life insurance companies. But, dividend based on such income should not be paid to shareholders or policyholders because such income would be countered if interest rates turn to decline. We must sophisticate our accountability for quality of income. 32

33 Supervision and Audit

34 Supervision IAIS & IFRS The IAIS has developed standards and guidance on insurers solvency assessment. The IAIS believes that it is most desirable that the IFRS can be used for regulatory reporting purposes, with as few changes as possible to satisfy regulatory reporting requirements. I also believe that it is most desirable that IFRSs are used for regulatory reporting. 34

35 Audit Auditability Economic valuation of life insurance liabilities is so complicated that preparers are concerned whether audit of the valuation is feasible. Preparers, ourselves, are so afraid that the phase 2 standard might require us to be engaged in heavy workload. I hope that the IASB consider auditability of the phase 2 standard. 35