International Financial Reporting Standards Project to replace IFRS 4 Insurance contracts (IFRS x) Executive IFRS workshop for Regulators Diplomatic Academy of Vienna Darrel Scott, IASB member Andrea Pryde, IASB staff The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.
The IASB will shortly publish a revised exposure draft on insurance contracts 2 Revised Exposure Draft proposes a new accounting standard for insurance contracts which aims to: Increase comparability in the accounting for insurance contracts between and within entities Increase transparency about the effects that insurance contracts have on financial statements Revised Exposure Draft is next step in the process to a final standard: Builds on the responses received on previous consultations Reflects the IASB s final conclusions on some aspects of proposals Seeks feedback on limited range of issues with significant changes since the 2010 ED Particular focus on operationality and cost benefit assessment 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Our timeline to a new IFRS for insurance contracts 3 H1 2013 Revised Exposure Draft Earliest effective date 1 January 2018? H2 2014 Issue IFRS 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
We propose to improve existing accounting issues as follows 4 Existing accounting issues Variety of accounting treatments depending on the type of contract and entity that issues the contracts Estimates for long duration contracts not updated through the life of the contract How our standard improves the accounting Consistent accounting for all types of insurance contracts Estimates updated to reflect current market-based information Discount rate based on estimates of investment returns not reflecting economic risks of the insurance liability Measurement of insurance contract provides information about risk and uncertainty of obligation Lack of discounting for some contracts Little information about economic value of embedded options and guarantees Contracts should reflect discounting where significant Measurement reflects the value of embedded options and guarantees 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
International Financial Reporting Standards Principles underpinning IASB s proposals The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Current measurement of insurance liability. 6 Total liability Contractual service margin Risk adjustment Time value of money Unearned profit from the contract that the insurer expects to earn as it fulfils the contract Quantifies the value difference between the certain and uncertain liability An adjustment that reflects the time value of money Cash flows The amounts the insurer expects to collect from premiums and pay out as it acquires, services and settles the contract, estimated using up-to-date information 6 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
1 leading to information about underwriting margin Net contract position Statement of Comprehensive Income Contractual service margin 20 Insurance contracts revenue Fulfilment cash flows Expected cash flows from premiums (inflow) and claims and benefits (outflow) Adjust for degree of uncertainty (risk) 2 3 Incurred claims and expenses Operating result Investment income Interest on insurance liability Investment result Profit or loss () () Adjust for time value of money 4 Effect of discount rate changes on insurance liability Total comprehensive income () 1. Changes in estimates relating to future services 2. All other expected cash flow changes 3. Based on a cost view 4. Based on a current view
Applications for short-duration contracts 8 Balance sheet Statement of Comprehensive Income Disclosures Simplifications Measurement during the coverage period Discounting expedients Consistent with Revenue Recognition principles/ notions and also with building block approach Current practice for non-life contracts Relief from some disclosures 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
International Financial Reporting Standards Judgements and estimates The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Characteristics of insurance contracts leads to subjectivity Long durations No active markets Entity s discretion over outcomes Inherent uncertainty about cash flows Accounting depends on judgements and assumptions Complex actuarial techniques 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Relevant information may not be verifiable 11 Explicit estimates Unbiased use of all available information Current information Marketconsistent estimates 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Comprehensive disclosures 12 Amounts Judgements Risks Expected present value of future payments & receipts Changes in risk during the period Changes in unearned profit during the period Effects of new contracts written in period Processes for estimating inputs and methods used Effect of changes on methods and inputs used Explanation of reason for change, identifying type of contracts affected Nature and extent of risks arising from insurance contracts Extent of mitigation of risks arising from reinsurance and participation features Quantitative information about exposure to credit, market and liquidity risk 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
International Financial Reporting Standards Information provided by the proposals The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
What will the balance sheet show? 14 Assets Statement of Financial Position Reinsurance assets Other assets Total assets Liabilities Insurance contract liabilities Other liabilities Total liabilities Equity Total equity and liabilities 20x1 Reinsurance assets measured consistently with insurance liabilities Reinsurance assets measured consistently with underlying insurance liabilities Other assets measured consistently with other IFRS entities Insurance liabilities reflect: Current information about amount, timing and uncertainty of all expected cash flows Expected profit to be earned Insurance liabilities reflect: Current information about amount, timing and uncertainty of all expected cash flows Expected profit to be earned Other liabilities measured consistently with other IFRS entities 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
What will revenue and expenses show? 15 Statement of Comprehensive Income Insurance contracts revenue Incurred claims and expenses Underwriting result Investment income Interest on insurance liability Net interest and investment Profit or loss Effect of discount rate changes on insurance liability Total comprehensive income 20x1 () () () Revenue Consistent with commonly understood notions of Revenue Reflects revenue earned from fulfilling obligations under contract Excludes deposit-like amounts Expenses Consistent with commonly understood notions of expenses Reflects the costs incurred to provide services Reflects any changes in expectations for past services and when the contract is onerous Excludes deposit-like amounts 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
What will underwriting result show? 16 Statement of Comprehensive Income Insurance contracts revenue Incurred claims and expenses Underwriting result Investment income Interest on insurance liability Net interest and investment Profit or loss Effect of discount rate changes on insurance liability Total comprehensive income 20x1 () () () Underwriting result reflects: Changes in measurement of uncertainty. Profit(loss) for services provided in the period Changes in cash flows for past services 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
What will net profit or loss show? 17 Statement of Comprehensive Income Insurance contracts revenue Incurred claims and expenses Underwriting result Investment income Interest on insurance liability Net interest and investment Profit or loss Effect of discount rate changes on insurance liability Total comprehensive income 20x1 () () () Net spread Investment income reported applying other IFRS (not within the scope) For services provided, the cost view of the time value of the money Reflects the investment returns provided to policyholders, if any Underwriting result + Net spread = Net profit or loss 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Two views of performance 18 Statement of Comprehensive Income Insurance contracts revenue Incurred claims and expenses Underwriting result Investment income Interest on insurance liability Net interest and investment Profit or loss Effect of discount rate changes on insurance liability Total comprehensive income 20x1 () () () Net profit or loss reflects the performance of providing services using a cost view of the time value of money (ie reflecting time value at inception) OCI Reconciles both Reflects amounts that self reverse Total comprehensive income reflects the performance of providing services using a current view of the time value of money 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
International Financial Reporting Standards 19 Your views on our proposals The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
IASB seeks feedback on the following targeted issues 20 Presentation proposals Measurement proposals Approach to transition Presenting information on insurance contract revenue Presenting the effects of changes in the liability due to discount rates changes in OCI Adjusting the unearned profit to reflect changes in cash flows for future services Measuring and presenting cash flows from contracts with contractual link to underlying items Apply standard as if always effective Some simplifications and relief provided 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
21 Presentation proposals (information in SCI) Measurement proposals (measuring liability) Approach to transition Insurance contract revenue and expenses Adjusting the unearned profit (contractual service margin) Apply standard as if always effective Interest expense in profit or loss and OCI Accounting for contracts when there is no economic mismatch Some simplifications and relief provided SCI Statement of comprehensive income IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Presenting insurance contract revenue and expenses 22 Statement of Comprehensive Income 20 Insurance contracts revenue Incurred claims and expenses () Revenue Consistent with commonly understood notions of revenue Reflects revenue earned from fulfilling obligation under contract Excludes deposit-like amounts Operating result Operating result reflects: Changes in measurement of uncertainty Profit(loss) for services provided in the period Changes in cash flows for past services Investment income Interest on insurance liability Net interest and investment Profit or loss Effect of discount rate changes on insurance liability Total comprehensive income () () Expenses Consistent with common understood notions of expense Reflects the costs incurred to provide services in the current period Reflects any changes in expectations for past services and when the contract is onerous Excludes deposit-like amounts 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Changes in the net insurance contract liability 23 Insurance contract revenue Expected claims and expenses Net Liability at start of year Premiums received (incl deposit component) Unwind of discount Release of contractual service margin Repayment of deposit component Net Liability at end of year Elements of both the unwinding of discount rate used for liability in beginning of the year and the current rate at reporting date Release of risk adjustment Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Contrasting the alternatives insurance contract revenue and expenses 24 Our proposal Present insurance contract revenue and incurred claims Exclude deposit-like components This enables the results from insurance services to be compared to results of other services provided or goods sold (by insurance or noninsurance entities) Proposal in 2010 ED Disaggregate operating results (underwriting margin) into main sources of profit or loss, being: Change in uncertainty (risk) Profit or loss from services provided (contractual service margin) Changes in expected cash flows for past service (experience adjustments) This alternative is simple to apply and highlights the drivers of performance Which proposal do you prefer and why? IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Presentation of interest expense in profit or loss and OCI 25 Statement of Comprehensive Income Investment income Interest expense (on insurance liability) Net interest and investment Profit or loss Effect of discount rate changes on insurance liability* Total comprehensive income 20 () () Net profit or loss Reflects the profit or loss from services using a cost view of the time value of money Total comprehensive income Reflects the profit or loss of providing services using a current view (discount rate at reporting date) of the time value of money *This effect of discount rate changes reconciles the two views of performance being the current view and the cost view. IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Contrasting the alternatives interest expense in profit or loss and OCI 26 Our proposal Presenting the changes in the liability arising from changes in the discount rate in other comprehensive income ensures that the results from underwriting and investing activities are clearly separated from changes that reverse over time Proposal in 2010 ED Presenting the changes in the liability arising from changes in the discount rate in profit or loss is simple to calculate and simple users to understand information Which proposal do you prefer and why? IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
27 Presentation proposals (information in SCI) Measurement proposals (measuring liability) Approach to transition Insurance contract revenue and expenses Adjusting the unearned profit (contractual service margin) Apply standard as if always effective Interest expense in profit or loss and OCI Accounting for contracts when there is no economic mismatch Some simplifications and relief provided SCI Statement of comprehensive income IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Profit or loss associated with contractual service margin Reporting changes in unearned profits associated with future services 28 Our proposal Adjust the unearned profits (contractual service margin) for changes in estimates of expected cash flows if related to future services Alternative proposal All changes in estimates are recognised immediately in profit or loss Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Our proposal Alternative proposal IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Contrasting the alternatives reporting changes in expected profits 29 Our proposal Adjusting the contractual services margin for changes in future cash flows (related to future services) better reflects that these changes affect the unearned profit for providing future services The proposal results in consistency between initial and subsequent measurement of the margin, ie updated for current estimates of profitability of contract Proposal in 2010 ED Changes in estimates (both past and future) represent economic events during the period and should immediately be recognised in profit or loss Immediately recognising in profit or loss changes in expected future profits provides transparent, relevant information of changes in estimates since entering into the contract Which proposal do you prefer and why? IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Accounting for contracts that have no economic mismatch 30 A contract has no economic mismatch when the contract specifies a link to the underlying items and the cash flows vary directly with those underlying items Example: Entity writes a contract that promises to pay to policyholder 85% of returns on underlying pool of assets (Cash flows A) Contract promises to pay benefits in case of loss (Cash flows B) We propose to measure the contract as follows Cash flows that vary directly with the returns on assets are adjusted to be measured on a consistent basis with underlying items (Cash flows A) Cash flows that do not vary directly with the return on assets are accounted for in accordance with remainder of proposed standard (Cash flows B) Ensures market-consistent reporting for options and guarantees embedded in insurance contracts IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Contrasting the alternatives cash flows from contracts that have no economic mismatch 31 Our proposal Measuring the applicable cash flows by reference to the underlying items reflects the extent to which the entity will fulfil the obligation by delivering the underlying item to the policyholder. Eliminates all mismatches between the measurement of the insurance liability and the underlying assets. Proposal in 2010 ED Measuring the insurance contract liability using fulfilment cash flows (with no adjustment to reflect contractual linkage to underlying items) would result in measuring all insurance contracts on the same basis substantially eliminate measurement mismatches when underlying items are measured at fair value Which proposal do you prefer and why? IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
32 Presentation proposals (information in SCI) Measurement proposals (measuring liability) Approach to transition Insurance contract revenue and expenses Adjusting the unearned profit (contractual service margin) Apply standard as if always effective Interest expense in profit or loss and OCI Accounting for contracts when there is no economic mismatch Some simplifications and relief provided SCI Statement of comprehensive income IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Our proposals on how to apply the new standard for the first time 33 Apply requirements of proposed standard as if it had always been effective for existing contracts: Introduce some simplifications and relief to assist in transition Discount rate at inception The risk adjustment Changes in estimates of certain cash flows Option to redesignate certain financial assets on application of new standard Net contract position Contractual service margin [would need to be derived] Fulfilment cash flows [Can be measured directly on transition date] IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Contrasting the alternatives transition requirements 34 The challenge for the first time application of the proposals is measuring the contractual service margin at the date of transition. Our proposal Estimating and recognising the contractual services margin on transition enables users to compare the existing contracts profitability with new contracts written after transition Proposal in 2010 ED Setting the contractual service margin to zero and measuring the liability as the fulfilment cash flows would be simple, cost little and would not involve subjective information in determining the margin Which proposal do you prefer and why? IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org
Thank you 35 2013 IFRS Foundation. 30 Cannon Street London EC4M 6H UK. www.ifrs.org