insurance contracts slides july 2013

The views expressed in this presentation are those of the presenter,

not necessarily those of the IASB or IFRS Foundation.

International Financial Reporting Standards

Reflecting changes in expected profitability of

insurance contracts

Andrea Pryde IASB staff Izabela Ruta IASB staff

2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Agenda


2

What is the issue?

Alternative solutions in 2010 Exposure Draft and 2013 Exposure Draft

Proposal in the revised exposure draft

Understanding the proposals Prospective adjustment

Which cash flows?

Summary: comparison of proposals

More information about the project

What is the issue? 3

Balance Sheet

Fulfilment cash flows

Contractual service margin (Expected profit)

Discounting: An adjustment that converts future cash flows into

current amounts

Future cash flows: Expected cash flows from premiums and

claims and benefits

Risk adjustment: An assessment of the uncertainty about the amount of future cash flows

The balance sheet amount reflects:

the expected contract profit from the

insurance contract; and

a current estimate of the amount of

future cash flows from the insurance

contract, adjusted to reflect the timing

and uncertainty relating to those cash

flows.

Issue: How to account for changes in cash

flows?

Alternative solutions in 2010 Exposure Draft and 2013 Exposure Draft

IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

4

2010 Exposure Draft

Effect of change in estimates of cash flows

recognised immediately in profit or loss -

contractual service margin* not updated.

Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10

Pro

fit or

loss a

ssocia

ted w

ith

contr

actu

al serv

ice m

arg

in

Current proposal

Adjust contractual service margin for changes in

estimates of cash flows to better reflect future

profitability.

* In 2010 Exposure Draft named residual margin

Proposal in revised exposure draft

Subsequent measurement

30 The remaining amount of the contractual service margin at the end of the reporting period is the carrying amount at the start of the reporting period:

(a) (b) ()

c) plus a favourable difference between the current and previous estimates of the present value of future cash flows, if those future cash flows relate to future coverage and other future services (see paragraph B68);

(d) minus an unfavourable change in the future cash flows: (i) if the change arises from a difference between the current and previous estimate

of the present value of future cash flows that relate to future coverage and other

future services; and

(ii) to the extent that the contractual service margin is sufficient to absorb an

unfavourable change. The contractual service margin shall not be negative.

31 An entity shall recognise in profit or loss any changes in the future cash flows that, in accordance with paragraph 30, do not adjust the contractual service margin (see paragraph B68).


5

Understanding proposals - prospective adjustment


6

How does it work?

At the end of year 3, the remaining contractual service margin equals CU40. Entity revises estimate of cash flows and as a result there is unfavourable change in expected cash outflows of CU50. How to account for this change?

The entity account for the change as follows: increases fulfilment cash flows of CU50,

decreases remaining contractual service margin of CU40 to zero (because it

could not be negative) and recognises the difference of CU10 as an expense in

profit or loss.

Adjust contractual service margin for the difference between the current and previous estimates of the present value of future cash flows prospective adjustment!

Understanding proposals which cash flows?

Adjust margin

Change in expected cash inflows

Net changes related to delay or acceleration of repayment of

investment

When mirroring applies - cash flows that relate to future coverage such as

asset management fee

Do not adjust margin

Incurred claims because relate to past coverage

When mirroring applies - cash flows that vary directly with

underlying items unless relate to future coverage


7

Adjust contractual service margin for cash flows that relate to future coverage and other future service. Paragraph B68 provides examples of such cash flows, as follows:

Illustration 1: change in investment


8

Assume:

4 year contract that contain investment - promise of deposit repayment such as CSV

Expected cash outflows at inception equals CU200 each year

In year 2, there are changes in incurred cash flows and future estimates as follows:

Entity decreases the contractual service margin for CU5 - net increase from investment of CU10 and decrease in future insurance by CU15.

Entity presents change in insurance (CU5) immediately in profit or loss as part of incurred claims.

Year1 Year 2 Year 3 Year 4 Total

Expected cash outflows 200 200 200 200 800

Total change comprising: - 15 35 (40) 10

Change in investment - 10 20 (40) (10)

Change in insurance - 5 15 - 20

Frequently asked questions

Change in risk

Complexity need to split between changes (adjust margin) and relief from risk (recognised in p&l)

Transparency changes in risk important in assessing insurance performance

Change in discount rate

It doesnt affect future profitability of the contract

Would likely result in accounting mismatch


9

Question: Why not adjust for other changes in fulfilment cash flows such as changes in risk or changes in discount rate?

Summary: comparison of proposals


10

Current proposal

Adjust contractual service margin for changes in future cash flows related to future services

Meaning would better reflect profits recognised when the service is provided.

Consequence in the year of change, information about the change provided only in the notes.

Consistency - with revenue recognition model and premium-allocation approach

More difficult need to decide which cash flows relate to future coverage

Previous proposal

All changes in cash flows recognised immediately in profit or loss:

Meaning informs immediately about changes in circumstances.

Consequence - After change, profits recognised based on original estimates (could show profit for loss-making contracts). Also changes could be reversed next period.

Consistency with IFRS 9

Simpler there is no need to split cash flows between those that adjust the contractual service margin and those that do not.

More information about the project

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Thank you 12

insurance contracts slides july 2013

Documents

expected cash flows

estimates of cash flows

future profitability

future coverage

future services

exposure draft ifrs

exposure draft proposal

cannon street london