New Zealand Society of Actuaries

Update from the NZSA Life Insurance Committee - Hot Topics in NZ Life Insurance

Greg BirdConvenor, NZSA Life Insurance Committee

November 2006

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The hot topics are….

• Financial Reporting

• Solvency

• Taxation

• Regulation

• Anything else?

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Financial Reporting – Revision of PS3

• During the year a revised PS3 (“Determination of Life Insurance Policy Liabilities”) was adopted by Council.

• Overriding rationale for the revision was changes to IFRS, in particular:

• Insurance and Investment Contract Classification

• Risk Free Discount Rate

• Liability Adequacy Threshold

• Reinsurance

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Financial Reporting – Revision of PS3 (continued)

• We also took the opportunity to review a number of areas including:

• Updated Professional Standards Committee (PSC) requirements,

• Tightening up of definitions, and,

• Enhancing the Statement by the Actuary.

• We received feedback from 5 members, and responded individually to each of these members.

• We will be issuing short discussion documents providing some guidance on…

• Reinsurance disclosure, and

• Transition arrangements.

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Financial Reporting – Resolving the IAS12 issue

• Potential disclosure issue arising from interpretation of IAS12 – that taxes on historical smoothing and projection process undertaken in the life insurance policy liability calculation (on expenses, investment income etc.) are similar to a temporary difference as defined in IAS 12.

• The flow on effects is that these items may be required to be removed from the “life insurance policy liability” balance sheet item and transferred to the “deferred tax” balance sheet item.

• The issue is not isolated to NZ as various jurisdictions (e.g. Australia) have a smoothing mechanism relating to tax on cash flows within life insurance policy liabilities, although the differences in NZ tax basis for Term seem to cloud the issue.

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Financial Reporting – Resolving the IAS12 issue (continued)

• Our position remains that we must have global consistency for financial reporting, and have suggested that the Financial Standards Reporting Board (FRSB) formally raise the conflict with IFRS4 with the International Accounting Standards Board (IASB).

• Note that if it is determined it is required to separate out the taxes on historical smoothing and projection processes, this will require the LIC to issue guidance on this calculation, and potentially reissuing PS3.

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Financial Reporting – IFRS Phase 2

• Discussion document is due to be released by the IASB in early 2007:

• Definition of “Current Exit Value” (to be used as the basis of the calculation of Policy Liabilities), and

• Potentially redefining the Policy Liability to include a guaranteed component only.

• We will review the discussion document when available and determine at that point how it will affect our 2007 programme of work.

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Solvency – Revision of GN5

• During the year we also undertook a full review of the existing GN 5 - Prudential Reserving for Life Insurers

• As per PS3, overriding rationale for the revision was changes to IFRS, in particular

• Risk Free Discount Rate methodologies,

• Accounting Value alignment, and

• Tightening up of definitions.

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Solvency – Revision of GN5 (continued)

• Additional changes were also proposed:

• Updated Professional Standards Committee (PSC) requirements,

• 10 Year Government Bond replaced with Mid Swap, with changes to inflation methodologies,

• Look through requirements on Investment Entities,

• Credit considerations for Resilience calculations, and

• Enhancing the Statement by the Actuary.

• At the time of writing, we are working through feedback received from members on the PS5 exposure draft with a final version to be presented to Council by the end of November.

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Life Insurance Tax Changes

• The Inland Revenue Department (IRD) has released a high-level discussion document on Life Insurance Tax changes.

• The proposed timing for the review is very tight, with policy to be determined by January 2007, and then implemented in line with the implementation of the Portfolio Investment Entity (PIE) regime by October 2007.

• Two high level directions are proposed – either maintenance of the current framework of Life Office and Policy Holder Bases (with likely changes to the term business basis) or a more fundamental reform seeking to base taxable income on accounting results.

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Life Insurance Tax Changes (continued)

• Given the relatively high level nature of the discussion document, the LIC is following a relatively informal feedback process (however ensuring it is frequent) with the IRD. The key issues we have highlighted are as follows:

• Fully understand the impacts on policyholders from the changes, in particular affordability of premiums and consistency with other savings products, and

• Not to place too much reliance on accounting profits for tax calculations given uncertainties around IFRS Phase 2.

• Depending on the extent of the changes, this may require significant work from the LIC – in particular providing more formal feedback to the IRD and, if required, issuing guidance on the revised basis.

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MED review of Insurance Legislation

• Key points as they affect Life Insurance:

• More onerous solvency standards are proposed to be established (start-up and ongoing). Standard setting will be the responsibility of the “Enhanced Solvency Standards Board” with a linkage to the NZ Society of Actuaries.

• Foreign insurers can continue to operate as a branch or subsidiary subject to regulator approval. Additional reporting will likely be required (in particular Risk Management reporting), with likely exemption of foreign insurers.

• An annual FCR will be required, although not required to be submitted to the regulator.

• There will be a requirement for registration and fit and proper person tests for directors and senior management, as well as increased interventions by regulator at various levels.

• Amendments to product disclosure requirements.

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MED review of Insurance Legislation (continued)

• Key potential areas for discussion:

• There is no significant discussion on any Appointed Actuary or Policyholder Agent regime, which is a different approach to that detailed in the previous Law Commission discussions and the Australian Life Insurance Act.

• Whilst we are supportive of the enhanced Solvency regimes, however we want to understand how this regime can be enforced in a shock scenario with NZ branch-based insurers.

• We do not believe that financial ratings are required in the context of proposed changes, in particular enhanced risk management as well as fit and proper person requirements.

• The enforcement of the changes will require a significant increase in regulatory resources.

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Anything else?