ifrs 4 insurance contracts: participating contracts and update on key issues

IFRS 4 Insurance Contracts: Participating contracts and update on key issues.Hosted by the EY Global Insurance Center

18 June 2015

IFRS 4 Insurance Contracts: Participating contracts and update on key issues 18 June 2015

Today’s moderator

Kevin GriffithErnst & Young LLP (UK)Partner


Today’s agenda

► Timelines ► General model► Participating contracts► The road ahead

Join today’s Twitter discussion: #EY_Insurance


Today’s presenters

Darrel ScottIASB member

Hans van der VeenErnst & Young

Accountants LLP (NL)Senior Manager

Richard OlswangPrudential plcGlobal Actuarial Lead for IFRS 4 Phase II

Member of EFRAG’s Insurance Accounting Working Group


Today’s agenda

► Timelines► General model► Participating contracts► The road ahead



Timelines - New IFRS for insurance contracts

Ongoing IASB deliberations Implementation period Reporting

IFR

S 4

Ph

ase

II

IFR

S 9

Potential IFRS 4 Phase II Final standard

Potential IFRS 4 Phase II effective date 1 Jan 2020

Potential IFRS 4 Phase II first annual financial statements

IFRS 4 Phase II Re-exposure Draft

Potential IFRS 4 Phase II start of comparative period

Start of IFRS 9 comparative period

IFRS 9Final Standard

2013

IFRS 9 Effective date 1 Jan 2018

Possible revised IFRS 9 classification from IFRS 4 Phase II transition

First IFRS 9 annual financial statements

2014 2015 2016 2017 2018 2019 2020


Today’s agenda




IASB proposalGeneral model

Expected value of future cash flows

Discount rate

Risk adjustment

Contractual service margin

Reinsurance

Disaggregation

PresentationSeparation

Definition and scope

Disclosure

Regulatory Frameworks

Financial Instruments and other accounting changes

Transition

Simplified approach

Bu

ild

ing

Blo

ck

Ap

pro

ac

h


IASB proposalKey issues for remaining re-deliberations

► Non-participating contracts:► Reconciliation with the model for participating contracts► Scope► Sweep issues

► Participating contracts

► Transition: application issues raised

► Effective date: timing of the final standard and link with IFRS 9


Today’s agenda




Participating contractsBackground from the ED

Performance reporting

Options & Guarantees

Shareholder’s share in

underlying items

Scope

Interest expense in PL

Fin

anci

al I

nst

rum

ents

(I

FR

S 9

)Level of aggregation


Adaptations for Participating contractsIASB direction

How to view the insurer’s economic interest in underlying items (shareholder’s share):► View 1: Share in the economic return in underlying items

► Accounted for under applicable standards (e.g., IFRS 9)

► View 2: Variable fee► Obligation under the contract to pay the policyholder an amount

equal to the value of underlying items less a variable fee► Variable fee = shareholder’s share less cost of guarantees,

accounted for through the CSM

Scope of variable fee approach: ► 3 criteria to be met, no reassessment after inception


Adaptations for Participating contractsIASB direction (continued)

Interest expense in profit or loss► Current period book yield approach:

► Interest expense on the insurance contract liability will be equal and opposite to investment income on the underlying items

► Difference with the interest expense determined based on current rates would be reported in OCI

► Scope of current period book yield approach: ► Criteria for variable fee approach, and► Underlying items are held (to be reassessed after inception)

► Effective yield approach: ► For participating contracts not in scope of the book yield

approach► Several variations discussed by Board in educational sessions


Participating contractsScope

► Where will the lines between each of the areas be?► How many models/variations will there be?

current period book yield

Non participatingDirect

participatingIndirect

participating

General model Variable fee model

Continuum of insurance contracts

Measurement

General model –interest expense (OCI/PL)

Current period book yield

Interest expense

Type of contract


Participating contractsResolving the model

Critical issues

► Scope► ‘Cliff effect’ between the accounting for indirect

and direct participating contracts► Level of aggregation

► Application to participating contracts, including mutualisation

► Hedging► Preventing accounting mismatch


Today’s agenda

► Timelines► IASB proposal► Model for participating contracts► The road ahead



The road ahead

► The IASB is committed to finalise the project, but uncertainties around next steps and timing remain

► Resolving the issues of participating contracts and level of aggregation will be key

► It is likely middle ground needs to be found for some key areas

Effective date of the final standard will not be 2018 How much later then 2018? Alignment with IFRS 9 is an important issue for insurers

Phase II will have a huge impact on insurers, not only for financial reporting but also for operations Preparation should pick up momentum, whilst remaining flexible


Contact us

Follow us on Twitter: @EY_Webcasts

Kevin Griffith Ernst & Young LLP (UK)

Evan BogardusErnst & Young LLP (US)

Dana D’AmelioErnst & Young LLP (US)

+ 44 (0)20 7951 0905 [email protected]

+ 1 (212) 773 [email protected]

+ 1 (212) 773 [email protected]


Resources

► Global Insurance websitewww.ey.com/insurance

► IFRS Insurance Insightswww.ey.com/insuranceifrs

► Solvency IIwww.ey.com/solvencyii

http://www.ey.com/insurance

http://www.ey.com/

http://www.ey.com/insurance

http://www.ey.com/solvencyii

ifrs 4 insurance contracts: participating contracts and update on key issues

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