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© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved.
IASB Exposure Draft
Insurance Contracts
Jeremy Hoon
23 September 2010
KPMG LLP, SINGAPORE
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 2
OECD – Bank Negara Malaysia
OECD-Asia Regional Seminar:
Enhancing transparency and monitoring of insurance markets
23-24 September 2010
Kuala Lumpur, Malaysia
(sponsored by the Government of Japan)
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 3
Challenges and issues in insurance statistics and insurance sector
monitoring
Implications of
Exposure Draft Insurance Contracts (issued by the IASB on 30 July 2010)
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
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Components of an insurance contract
Historical diversity of contract types across geographies, resulting in
accounting diversity - but tends to follow regulatory requirements
Basic insurance concept – small premiums contributed by many to an
insurance pool are used to pay large losses of a few
Contract coverage:
Insurance risks (life and non-life); handling claims and servicing
contracts
Can include:
financial risks
services (asset management, custody, pension administration)
guarantees and options
supply of goods
Can be a combination of the above
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 5
5
So what are we really accounting for?
Service component
Insurance component
Insurance contract
Financial component
Financial Instrument
Discretionary participation
feature
Supply of goods Embedded
derivative IAS 39 or IFRS 9
IAS 18 or Revenue Proposals
Insurance Proposals
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 6
Background
Insurance Contracts Project
Joint project between IASB and FASB
1997 Insurance contracts project initially started in 1997
Project phases
2007 Discussion paper (Current Exit Value Approach)
2010 IASB Exposure Draft July 2010 (Fulfilment Approach)
2010 FASB Discussion Paper (September 2010?)
2011/2012 IASB standard expected by June 2011; (Final FASB standard expected in 2012?)
2013? First time application to be established (Boards’ intent is to align effective date with IFRS 9 Financial Instruments - 2013?)
Comment deadline on ED ends 30 November 2010
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 7
Insurance Project Scope
Insurance and reinsurance contracts issued
Reinsurance contracts held
Investment contracts containing a discretionary
participation feature (DPF) provided that there also
exist insurance contracts that provide similar
contractual rights to participate in the performance
of the same pool or entity
Financial guarantee contracts issued by an entity
(and financial guarantee reinsurance contracts
held) that meet the definition of an insurance
contract.
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 8
Scope Exemptions
Product warranties issued directly by a manufacturer, dealer or retailer
Fixed fee service contracts that have as their primary purpose the provision of services, but that expose the service provider to risk because the level of service depends on an uncertain event
Policyholder accounting (other than reinsurance held)
Others
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 9
Definition of an Insurance Contract
“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.”
Consistent with existing definition, but with minor changes to guidance
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
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Significant insurance risk
Insurance risk is 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
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 11
Recognition
An insurance contract liability or asset is recognised at the earlier
of:
(1) the date when the insurer is bound by the terms of the contract;
and
(2) the date when the insurer is first exposed to risk under the
contract. This is when the insurer can no longer withdraw from
its obligation to provide coverage and no longer has the right to
reassess the risk of the policyholder and as a result can no
longer change the price to fully reflect that risk.
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved.
Derecognition
12
An insurance contract liability (or a part thereof) is derecognised from the
statement of financial position when, and only when, it is extinguished, i.e.
when the obligation specified in the insurance contract is discharged or
cancelled or expires. At that point, the insurer is no longer at risk and is
therefore no longer required to transfer economic resources to satisfy the
insurance obligation.
The purchase of reinsurance does not trigger derecognition of
an insurance liability unless it is extinguished.
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 13
The Measurement Model
Measurement model is based on a principle that insurance contracts create a bundle of rights and obligations that work together to create a package of cash inflows (premiums) and outflows (benefits, claims and costs). The model uses certain “building blocks” in measuring that package of cash flows.
Premiums Insurance
Contract
Claims handling and costs to service
Participating benefits paid
Acquisition costs
Guarantees and options
Claim benefits/Payments
Incremental Cash Inflows Incremental Cash Outflows
Discounting
Co
ntra
ct M
arg
ins
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
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Proposed Measurement Models
The 4 IASB (or 3 FASB) „building blocks‟
IASB Preference
(modified to exclude day one gains)
FASB Preference
(modified to exclude day one gains)
Cash Flows - Explicit, unbiased and
probability-weighted estimates of future
cash outflows less future cash inflows *
Discount Rates - Discounted using current
rates to reflect the time value of money *
Risk Adjustment - To adjust for the effects
of uncertainty about the amount and timing
of future cash flows *
Residual margin –
(to remove any profit at inception and
released over time)
Composite margin –
(to remove any profit at inception and released
over time)
Cash Flows - Explicit, unbiased and
probability-weighted estimates of future cash
outflows less future cash inflows *
Discount Rates - Discounted using current
rates to reflect the time value of money *
* Re-measured subsequent to inception through profit or loss
The sum of the first three building blocks in the IASB model (discounted cash flows with risk adjustment) is
referred to as the present value of fulfilment cash flows
Contract liability measurement
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
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Level of measurement
Measure present value of the fulfilment cash flows
(includes risk adjustment) at a portfolio level of
aggregation for insurance contracts.
A portfolio of contracts are contracts that are
subject to broadly similar risks and managed
together as a single pool. The definition is
consistent with IFRS 4.
The residual margin should be determined by
grouping insurance contracts by portfolio and,
within the same portfolio, grouping contracts
by similar date of inception
by similar coverage period
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 16
Building Block 1:
What inputs are considered?
Market variables
Consistent with observable market prices at the end of reporting period – e.g. Equity prices and interest rates
Reflect risk preferences of market participants
Fair value of replicating assets
Non-market variables
Reflect all available evidence, both external and internal
Historical data on costs including frequency and severity of claims and mortality
Current price information for reinsurance contracts and other instruments covering risks
Views on future trends and inflation rates
Industry data
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
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Building Block 1:
Using current estimates and future events
Use all available current information in estimating the probability of each
cash flow scenario relating to non-market variables
Consider estimates made at the end of the previous reporting period and
update if previous estimates are no longer valid
May not be identical to recent experience
Investigate changes in experience and develop new probability weighted
estimates for possible outcomes
Consider trends, future inflation rates, and future events that might affect
the cash flows without changing the nature of the obligation
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
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Claims and benefits paid to +
policyholders (including IBNR)
Payments to current or future
policyholders as a result of a
contractual participation feature +
Claims handling costs +
Salvage and subrogation -
Costs of servicing the contract (policy
administration and maintenance) +
Incremental cash flows within boundary of a contract that are incremental
at portfolio level
Building Block 1:
Which contractual cash flows?
Incremental* costs of selling,
underwriting, and initiating an
insurance contract (acquisition costs)
but only for contracts issued +
Premiums -
Transaction-based taxes and levies +
Contractual benefits paid in kind +
+ Indicates an obligation * Incremental at contract rather than portfolio level
– Indicates a right
Options or guarantees +
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
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Acquisition Costs
Non incremental acquisition costs
An insurer should recognise all acquisition costs as an expense when incurred.
Incremental acquisition costs
Should be recognised in the present value of the estimated fulfilment cash flows
at initial recognition.
Excluded from the residual margin.
Identified at individual contract level.
Not recognised in profit or loss under summarised margin approach.
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 20
Building Block 2:
Discounting
What discount rate should be used in measurement?
If the amount, timing or uncertainty of cash flows for the insurance contracts depends on the performance of specific assets measurement shall reflect that fact
Should be consistent with observable current market prices for instruments whose characteristics reflect the insurance liability (e.g. timing, currency and liquidity)
Discount rate is yield curve with no or negligible credit risk, adjusted for differences in liquidity, if cash flows are not dependent on specific assets
Should not include own credit risk
Should not include factors not relevant (i.e. risks not present in liability but present in the instrument with observable market price)
Should not capture characteristics of assets actually held to back the insurance liability, unless the contract shares those characteristics
Should not include any risk that is included in other parts of measurement
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 21
Building Block 3:
Risk Adjustment
Risk Adjustment: “The maximum amount that the insurer would rationally pay to be relieved of the risk that the ultimate fulfilment cash flows may exceed those expected."
An insurer shall use only the following techniques for estimating the risk adjustment:
Confidence level
Conditional Tail Expectation (CTE)
Cost of Capital (CoC)
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 22
Building Block 3: Composite Margin
4: Residual Margin
Arises when the present value of the fulfilment cash flows* is less than zero
If the present value of fulfilment cash flows is greater than zero, this amount should be recognised in profit or loss at inception (i.e. a day one loss)
Systematic release over coverage period based on the passage of time
If an insurer expects to incur benefits and claims in a pattern that differs significantly from passage of time the residual margin should be released on the basis of the expected benefits and claims to be incurred
Classified as part of the insurance liability
Interest accretion using “locked in” rate
Arises when the present value of future cash outflows less the present value of future cash inflows is less than zero.
If the present value of future cash outflows less the present value of future cash inflows is greater than zero, this amount should be recognised in profit or loss at inception (i.e. a day one loss)
Release over both the coverage period and the claims handling period (during which the insurer is expected to pay claims)
Percentage of completion amortisation reflecting the decline of risk based on actual and expected cash flows
Classified as part of the insurance liability
No interest accretion
Residual Margin Composite Margin
Unit of account at cohort level – grouping insurance contracts by portfolio and within the same portfolio, by
similar date of inception of the contract and by similar coverage period.
* defined as the expected present value of the future outflows plus risk adjustment less cash inflows
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 23
Modified Approach :
“Premium Allocation Model”
The modified approach is required for pre-claim liabilities
for contracts that meet both of the following definitions:
The coverage period is approximately 12 months or less
The contract does not contain embedded options or other derivatives
that significantly affect the variability of cash flows
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
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Reinsurance Ceded
Negative Difference Positive Difference
Input Measurement Input Measurement
Reinsurance premium paid
(Expected present value of premiums ceded to
reinsurer)
(100) Reinsurance premium paid
(Expected present value of premiums ceded to
reinsurer)
(110)
Reinsurance commission received 7 Reinsurance commission received 10
Expected present value of reinsurance
recoverable cash inflows (after
allowance for expected credit losses)
80 Expected present value of reinsurance
recoverable cash inflows (after allowance
for expected credit losses)
80
Risk adjustment 15 Risk adjustment 15
Gain at inception 2 Residual margin (5)
If the cash inflows under the building block measurement approach is greater than the cash outflows (consideration
paid by the cedant), the cedant recognises that difference as a gain in profit or loss at initial recognition of the
reinsurance contract.
If the cash inflows under the building block measurement approach is less than the cash outflows (consideration paid
by the cedant), the cedant treats that negative amount as the residual margin at initial measurement.
At initial recognition of a reinsurance contract, a cedant measures the reinsurance asset under the building
block approach, taking account of the risk of non-performance by the reinsurer.
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 25
Unbundling
Investment and service components of an insurance contract should be unbundled and accounted for separately if the components are not closely related to the insurance coverage specified in the contract.
The following are the most common examples of unbundling applying this principle:
An investment component reflecting an account balance that is credited with an explicit return at a rate based on the investment performance of a pool of underlying investments (e.g. unit-linked contracts; index-linked contracts; and universal life contracts). The rate should pass on all investment performance but may be subject to a minimum guarantee.
An embedded derivative that is separated under existing bifurcation guidance in IAS 39. and
Goods and services that are not closely related to the insurance coverage, but have been combined in a contract with the insurance coverage for reasons that have no commercial substance.
Unbundling is not permitted unless required.
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 26
26
Unbundling
Service component
Insurance component
Insurance contract
Financial component
Financial Instrument
Discretionary participation
feature
Supply of goods Embedded
derivative IAS 39 or IFRS 9
IAS 18 or Revenue Proposals
Insurance Proposals
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 27
Other matters: Embedded Derivatives
IAS 39 applies to an embedded derivative in an insurance contract unless the
embedded derivative is itself an insurance contract.
If the economic characteristics and risks of the embedded derivative are not
closely related to those of the host insurance contract, the insurer is required to
separate the embedded derivative and measure it at fair value with recognition of
changes in fair value in profit or loss.
Surrendering an insurance contract generally leads to cancellation of the entire
contract (and therefore is often interdependent with other components). An
insurer would need to determine whether the surrender option is closely related
to the host contract in applying the guidance in paragraph AG33(h) of IAS 39.
This application guidance clarifies that an embedded derivative in an insurance
contract is closely related to the host contract if the embedded derivative and
host contract are so interdependent that an entity cannot measure the embedded
derivative separately.
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 28
Investment Contracts with a
Discretionary Participation Feature (DPF)
Investment contracts with discretionary participation features (DPF) are within scope of standard,
provided there also exists insurance contracts that provide similar contractual rights to participate in the performance of the same insurance contracts, the
same pool of assets or the profit or loss of the same company, fund or other entity.
Investment contracts with DPF not part of shared
pool are financial instruments in scope of financial
instruments standard.
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 29
Presentation:
Statement of financial position
The ED proposes that an insurer present each portfolio of
insurance contracts as a single item within insurance contract
assets or insurance contract liabilities.
It also proposes that an insurer present a pool of assets underlying
unit-linked contracts as a single line item separate from the
insurer‟s other assets and that the portion of the liabilities linked to
the pool be presented as a single line item separate from the
insurer‟s other liabilities.
Reinsurance assets are not offset against insurance contract
liabilities.
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 30
Presentation:
Statement of comprehensive income (SOCI)
The ED proposes a summarised margin presentation for the statement of comprehensive income.
This presentation approach treats all premiums as deposits and all claims and benefits as repayments to the policyholder; those elements are treated as movements in the insurance liability.
This presentation is supplemented by disclosures of premiums and expenses (as part of the reconciliation of opening and closing contract balances).
Exception:
For short-duration contracts that are eligible for the modified measurement approach, the underwriting margin is disaggregated in the statement of comprehensive income into:
Premium revenue (release of gross pre-claims obligation plus accreted interest)
Claims incurred
Expenses incurred
Amortisation of incremental acquisition costs included in the pre-claims obligation
plus
changes in additional liabilities for onerous contracts
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 31
Summarised Margin Presentation
Statement of comprehensive income Standard model – on face
of SOCI
Underwriting margin yes
• Change in risk adjustments
• Release of residual margins
disaggregation could be
included In notes
Gains and losses at initial recognition yes
• Losses on insurance contracts acquired in a portfolio transfer
• Gains on reinsurance contracts bought by a cedant
• Losses at initial recognition of an insurance contract
disaggregation could be
included In notes
Acquisition costs that are not incremental at individual contract level yes
Experience adjustments and changes in estimates yes
• Differences between actual cash flows and previous estimates
• Changes in estimates of fulfilment cash flows and discount rates
• Impairment losses on reinsurance contracts
disaggregation could be
included In notes
Interest on insurance liabilities yes
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 32
Disclosures
Under the proposals, an insurer is required to disclose quantitative and qualitative information in respect of:
the amounts arising from insurance contracts recognised in the financial statements; and
the nature and extent of risks arising from insurance contracts.
The IASB used the disclosure requirements in IFRS 4 (including the disclosures about financial risks in insurance contracts incorporated in IFRS 4 by cross reference to IFRS 7) as a basis for its proposals
Aggregation principle
Useful information should not be obscured by either the inclusion of a large amount of insignificant details or the aggregation of items that have different characteristics
Required disclosures include: reconciliation of contract balances; methods and inputs used to develop the measurements, including a measurement uncertainty analysis; the nature and extent of risks arising from insurance contracts; a risk sensitivity analysis; and claims development information.
Additional disclosure requirements from IFRS 4 were retained
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 33
Transition calculation
For each portfolio of insurance contracts that exist on the transition date, the insurer needs to measure the remaining cash inflows and outflows plus a risk adjustment.
Measurement both at transition and subsequently does not include a residual margin. The effect of not recognising a residual margin for contracts in existence at transition would be to depress the net income reported for those contracts in periods post-transition compared to a full retrospective application.
Transition Calculation (at beginning of the earliest period presented)
Previously recognised liability balances at transition 90
Previously recognised deferred acquisition costs at transition <5>
Previously recognised intangible assets arising from business combination at transition 1 <1>
Present value of fulfilment cash flows of insurance liabilities 2 <80>
Transition adjustment (increase to retained earnings) 3 4
1 Does not include intangible assets such as customer relationships and customer lists which relate to future contracts
2 Calculated at a portfolio level and subsequently re-measured
3 Both positive and negative differences are recorded in retained earnings
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. 34
Other transition considerations
The transition adjustment is calculated at the beginning of the earliest period presented and adjusted to retained earnings.
Proposals do not contain effective date as Board wants to align with other proposals and standards (e.g. IFRS 9 Financial Instruments).
An insurer is permitted, but not required, to redesignate a financial asset as measured at fair value through profit or loss at the start of the earliest period presented when it adopts the proposals if doing so would reduce a measurement or recognition inconsistency.
The reclassification is a change in accounting policy in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The insurer should recognise the cumulative effect of that redesignation as an adjustment to opening retained earnings of the earliest period presented and remove any balances from accumulated other comprehensive income.
Additionally, an insurer is exempt from disclosing previously unpublished information about claims development that occurred earlier than five years before the end of the first financial year in which it applies the proposals. An insurer is required to disclose if it is impracticable to prepare information about claims development that occurred before the beginning of the earliest period presented.
The transition requirements apply both to a first-time adopter of IFRS and to an insurer currently reporting under IFRS.
© 2010 KPMG LLP (Registration No. T08LL1267L) an accounting limited liability partnership registered in Singapore under the Limited Liability Partnership Act
(Chapter 163A), and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved.
Contact details:
Jeremy Hoon
Tel: +(65) 6213 2608
www.kpmg.com.sg