Timeline 2005 2006 – 2009 2010 – 2011 2012 – 2015 IASB ......Dewald van den Berg Senior...
2
Exposure Draft: Insurance Contracts PwC – Helping you to navigate through the key changes and challenges of the new comprehensive IFRS proposal for insurance contracts Victor Muguto Insurance Industry leader PwC Southern Africa Tel: +27 11 797 5372 [email protected] Ilse French Consultant to PwC Southern Africa Tel: +27 11 797 4094 [email protected] Francois Kruger Insurance Technical Partner PwC Southern Africa Tel: +27 11 797 4717 [email protected] David Kirk Actuarial Partner PwC Southern Africa Tel: +27 11 797 4544 [email protected] Dewald van den Berg Senior Manager UK Accounting Consulting Services Tel: +44 (0) 20 7213 8496 [email protected] Tom Winterboer Financial Services Leader PwC Southern Africa Tel: +27 11 797 4094 [email protected] Hennie Nel Financial Services Leader Western Cape Tel: +27 21 529 2119 [email protected] IASB / FASB PwC initiatives on IFRS: Insurance Contracts Roadmap to develop and to implement a standard for insurance accounting 2005 2006 – 2009 2010 – 2011 2012 – 2015 Exposure Draft: Insurance Contracts July 2010 Insurance Contracts IFRS standard Expected mid 2011 Timeline FASB ED ? Mid 2011 IFRS: Insurance Contracts effective date of standard? To be determined Insurance Clubs – sharing of knowledge with PwC clients and non-clients. Discussion Paper Scope and definition of insurance contracts • Apply to all insurance contracts including reinsurance contracts. • The definition of insurance contracts was not considered and no changes were proposed. • Accounting by policyholders considered although it was not scoped in to the Exposure Draft. Measurement model • Guaranteed insurability test to determine inclusion of future cash flows. • Explicit, market consistent, unbiased, probability weighted estimates of the present value of future cash flows, based on the notion of transfer of insurance liabilities (i.e. Exit value approach). • Include an explicit and unbiased estimate of the margin that market participants require for bearing risk (i.e. risk margin). • Include a service margin for service components. • Recognition of some profits at inception. Unbundling • Require unbundling if components of cash flows are not interdependent. Presentation and disclosure • Deliberations on presentation in the statement of comprehensive income included whether premiums should be presented as revenue or deposits; which income and expenses to present and presentation of changes in insurance liabilities. • Disclosure requirements were not considered. Exposure Draft Scope and definition of insurance contracts • Apply to all insurance contracts including reinsurance contracts. • The definition could result in contracts issued by non-insurers being subject to the standard (e.g. financial guarantee contracts). • Fixed service fee service contracts that have as their primary purpose the provision of service will not be within the scope of the standard. • Additional guidance on significant insurance risk may result in disqualification of certain contracts meeting the definition of insurance. • Not applicable to policyholder accounting. Measurement model • Determine the future cash flows within the boundary of the existing contract. • Insurance contracts will be measured based on the present value of expected future cash flows to fulfil the contract obligations and re-measured at each reporting period (Fulfilment value approach). • Except for certain short duration contracts, the measurement model is based on the building blocks of discounted probability-weighted cash flows, a risk adjustment and a residual margin. • Recognises a residual margin at inception that eliminates profits at inception. Unbundling • Certain insurance contracts containing elements such as investment or service components or embedded derivatives will require unbundling and accounting for the components separately. • Components that are not closely related to the insurance coverage will trigger unbundling. Presentation and disclosure • The statement of comprehensive income presentation will be driven by the measurement model. • The summarised margin approach will be used to measure performance, which includes changes in the risk margin and release of the residual margin. • Premiums will not be recognised as revenue except where the premium allocation approach is used for short duration contracts. • Expanded disclosure to help users of financial statements understand the amount, timing and uncertainty of future cash flows arising from insurance contracts. Transition arrangements • Insurance contracts in force at the transition date will be measured at the present value of the expected cash flows and a risk adjustment, without any residual margin. • This will result in profit for contracts in existence at transition only arising from the release of the risk margin, experience variances and any subsequent changes in estimates. Will your data systems meet the new standards requirements? • Review of legacy systems for data quality. • Significant new data needs for reporting. • Assessment of completeness, quality and timelines of data. • Scoping, design and implementation of data warehouses. Where are the gaps? • A gap analysis which identifies gaps between current accounting practice and the new standard. • Development of an action plan to address gaps. Is your management system sufficiently integrated with your strategic business planning and reporting? • Review process to support management information. • Effectiveness of management information. • Design of management information and new key performance indicators. Are you aware of the similarities and differences between IFRS and Solvency and Assessment Management? • Assessment on the modelling impact, methodology and disclosure. • Process engineering to produce the required numbers. • Training and technical updates on differences. Are you prepared for the finance, actuarial and risk management changes? • Developing processes and controls, roles and accountabilities, and process mappings. • Design of operating models. • Integration of finance, actuarial and risk management departments. Do your key players have the necessary education and awareness? • Briefings and training for the board, non-executive directors, audit committees, and senior management. • People and change management as a result of a different measurement basis, including project structure and governance. IFRS 4: Insurance Contracts Phase I effective January 2005 IFRS 4 Scope and definition of insurance contracts • Apply to all insurance contracts including reinsurance contracts. • Not applicable to financial guarantee contracts. • Some fixed service fee contracts in scope where the level of service depends on an uncertain event. • Not applicable to policyholder accounting. Measurement model • Continue with existing accounting policies. • Required to perform a liability adequacy test. • Prohibit to introduce additional prudence. • No change in existing accounting policies, unless the change makes the financial statements more relevant and no less reliable. Unbundling • Permitted but not required. • Reference is made to deposit component in a contract to assess whether to unbundle or not. Presentation and disclosure • Implementation guidance provides minimum requirements to comply with IAS 1: Presentation of Financial Statements. • Disclose information that enables users of financial statements to evaluate the nature and extent of risks arising from insurance contracts. Insurance Derivatives Deposit Other services Raise awareness and build knowledge Implementation period ED: Insurance Contracts comment period closes November 2010 FASB discussion paper planned Q 3 2010 • Technical advice. • Gap analysis. • Assessing of disclosure requirements. • Training. Insurance Working Group meetings on insurance contracts 2010 2011 Q3 Q4 Q1 Q2 Q3 Q4 Insurance Club IFRS 4 Phase II discussion group Client visits Training Thought Leadership – Presentations; Articles; and Publications PwC comment letters ongoing ongoing ongoing ongoing ongoing • IFRS 4 Phase II discussion group – consider the proposals in the discussion paper and evaluate the impact of these proposals on the South African Insurance industry. • PwC comment letter on discussion paper submitted to IASB on November 2007. Thought Leadership through Presentations; Articles; and Publications. Preliminary Views on Insurance Contracts discussion paper published May 2007 Comment period closed November 2007 Insurance Working Group provides input responses to the discussion paper April 2008 FASB adds a project on insurance contracts to its agenda October 2008 Residual margin Risk margin Time value of money Current unbiased probability weighted estimates of future cash flows
Transcript of Timeline 2005 2006 – 2009 2010 – 2011 2012 – 2015 IASB ......Dewald van den Berg Senior...
Exposure Draft: Insurance ContractsPwC – Helping you to navigate through the key changes and challenges of the new comprehensive IFRS proposal for insurance contracts
Victor Muguto Insurance Industry leader PwC Southern Africa Tel: +27 11 797 5372 [email protected]
Ilse FrenchConsultant to PwC Southern Africa Tel: +27 11 797 4094 [email protected]
Francois KrugerInsurance Technical Partner PwC Southern Africa Tel: +27 11 797 4717 [email protected]
David KirkActuarial Partner PwC Southern Africa Tel: +27 11 797 4544 [email protected]
Dewald van den BergSenior Manager UK Accounting Consulting Services Tel: +44 (0) 20 7213 8496 [email protected]
Tom WinterboerFinancial Services Leader PwC Southern Africa Tel: +27 11 797 4094 [email protected]
Hennie NelFinancial Services Leader Western Cape Tel: +27 21 529 2119 [email protected]
IASB / FASB
PwC initiatives on IFRS: Insurance Contracts
Roadmap to develop and to implement a standard for insurance accounting
2005 2006 – 2009 2010 – 2011 2012 – 2015Exposure Draft:
Insurance Contracts
July 2010
Insurance Contracts IFRS
standard
Expected mid 2011
Timeline
FASB ED ?
Mid 2011
IFRS: Insurance Contracts effectivedate of standard?
To be determined
Insurance Clubs – sharing of knowledge with PwC clients and non-clients.
Discussion Paper
Scope and definition of insurance contracts
• Apply to all insurance contracts including reinsurance contracts.• The definition of insurance contracts was not considered and no changes
were proposed.• Accounting by policyholders considered although it was not scoped in to
the Exposure Draft.
Measurement model
• Guaranteed insurability test to determine inclusion of future cash flows.• Explicit, market consistent, unbiased, probability weighted estimates of
the present value of future cash flows, based on the notion of transfer of insurance liabilities (i.e. Exit value approach).
• Include an explicit and unbiased estimate of the margin that market participants require for bearing risk (i.e. risk margin).
• Include a service margin for service components.• Recognition of some profits at inception.
Unbundling
• Require unbundling if components of cash flows are not interdependent.
Presentation and disclosure
• Deliberations on presentation in the statement of comprehensive income included whether premiums should be presented as revenue or deposits; which income and expenses to present and presentation of changes in insurance liabilities.
• Disclosure requirements were not considered.
Exposure Draft
Scope and definition of insurance contracts
• Apply to all insurance contracts including reinsurance contracts.• The definition could result in contracts issued by non-insurers being subject to the standard (e.g. financial guarantee
contracts).• Fixed service fee service contracts that have as their primary purpose the provision of service will not be within the scope of
the standard.• Additional guidance on significant insurance risk may result in disqualification of certain contracts meeting the definition of
insurance.• Not applicable to policyholder accounting.
Measurement model
• Determine the future cash flows within the boundary of the existing contract.• Insurance contracts will be measured based on the present value of expected future
cash flows to fulfil the contract obligations and re-measured at each reporting period(Fulfilment value approach).
• Except for certain short duration contracts, the measurement model is based on the building blocks of discounted probability-weighted cash flows, a risk adjustment and a residual margin.
• Recognises a residual margin at inception that eliminates profits at inception.
Unbundling
• Certain insurance contracts containing elements such as investment or service components or embedded derivatives will require unbundling and accounting for the components separately.
• Components that are not closely related to the insurance coverage will trigger unbundling.
Presentation and disclosure
• The statement of comprehensive income presentation will be driven by the measurement model.• The summarised margin approach will be used to measure performance, which includes changes in the risk margin and
release of the residual margin. • Premiums will not be recognised as revenue except where the premium allocation approach is used for short duration
contracts.• Expanded disclosure to help users of financial statements understand the amount, timing and uncertainty of future cash flows
arising from insurance contracts.
Transition arrangements
• Insurance contracts in force at the transition date will be measured at the present value of the expected cash flows and a riskadjustment, without any residual margin.
• This will result in profit for contracts in existence at transition only arising from the release of the risk margin, experience variances and any subsequent changes in estimates.
Will your data systems meet the new standards requirements?
• Review of legacy systems for data quality.• Significant new data needs for reporting.• Assessment of completeness, quality and timelines of data.• Scoping, design and implementation of data warehouses.
Where are the gaps?
• A gap analysis which identifies gaps between current accounting practice and the new standard.
• Development of an action plan to address gaps.
Is your management system sufficiently integrated with your strategic business planning and reporting?
• Review process to support management information.• Effectiveness of management information. • Design of management information and new key performance
indicators.
Are you aware of the similarities and differences between IFRS and Solvency and Assessment Management?
• Assessment on the modelling impact, methodology and disclosure. • Process engineering to produce the required numbers.• Training and technical updates on differences.
Are you prepared for the finance, actuarial and risk managementchanges?
• Developing processes and controls, roles and accountabilities, and process mappings.
• Design of operating models.• Integration of finance, actuarial and risk management departments.
Do your key players have the necessary education and awareness?
• Briefings and training for the board, non-executive directors, auditcommittees, and senior management.
• People and change management as a result of a different measurement basis, including project structure and governance.
IFRS 4: Insurance Contracts
Phase I effective January 2005
IFRS 4
Scope and definition of insurance contracts
• Apply to all insurance contracts including reinsurance contracts.
• Not applicable to financial guarantee contracts.
• Some fixed service fee contracts in scope where the level of service depends on an uncertain event.
• Not applicable to policyholder accounting.
Measurement model
• Continue with existing accounting policies.
• Required to perform a liability adequacy test.
• Prohibit to introduce additional prudence.
• No change in existing accounting policies, unless the change makes the financial statements more relevant and no less reliable.
Unbundling
• Permitted but not required.• Reference is made to deposit
component in a contract to assess whether to unbundle or not.
Presentation and disclosure
• Implementation guidance provides minimum requirements to comply with IAS 1: Presentation of Financial Statements.
• Disclose information that enables users of financial statements to evaluate the nature and extent of risks arising from insurance contracts.
Insurance
Derivatives
Deposit
Other services
Raise awareness and build knowledge
Implementation period
ED: Insurance Contracts comment
period closes
November 2010
FASB discussionpaper planned
Q 3 2010
• Technical advice.
• Gap analysis.
• Assessing of disclosure requirements.
• Training.
Insurance Working Group
meetings on insurance contracts
2010 2011
Q3 Q4 Q1 Q2 Q3 Q4
Insurance Club
IFRS 4 Phase II discussion group
Client visits
Training
Thought Leadership – Presentations; Articles; and Publications
PwC comment letters
ongoing
ongoing
ongoing
ongoing
ongoing
• IFRS 4 Phase II discussion group – consider the proposals in the discussion paper and evaluate the impact of these proposals on the South African Insurance industry.
• PwC comment letter on discussion paper submitted to IASB on November 2007.
Thought Leadership through Presentations; Articles; and Publications.
Preliminary Views on Insurance Contracts discussion
paper published
May 2007
Comment period closed
November 2007
Insurance Working Group provides input responses to
the discussion paper
April 2008
FASB adds a project on insurance
contracts to its agenda
October 2008
Residual margin
Risk margin
Time value of money
Current unbiased probability weighted estimates of future cash flows
In the headlines Why PricewaterhouseCoopers?
• “The IASB’s exposure draft aims for big improvements through a single international financial reporting standard (IFRS) that all insurers, in all jurisdictions, could apply to all contract types on a consistent basis” InsuranceERM
• “Obviously, the changes introduced by the ED will have far-reaching implications on an insurer’s product design and pricing, operations, systems and processes, profit emergence, performance measure, financial reporting and people complement.” BusinessWorld
• “Insurance Sector: Important Changes on the Horizon.” “The International Accounting Standards Board’s (IASB) insurance contract project is again underway. A newly issued exposure draft has at its heart a re-focused P&L designed to present the underlying risk and profitability of the business.…Overall, these changes should contribute to improved investment potential and opportunity in the sector.” Seeking Alpha
• Our dedicated insurance practice in South Africa consists of 18 partners, 70 managers and 133 professional staff members. They are focussed on delivering assurance and advisory services across all sectors of the insurance industry.
• We have an understanding of the challenges our clients face in the ever-changing insurance industry.
• Our depth of skills in all key areas of insurance accounting enables us to deliver a seamless solution to your insurance accounting issues across all geographic locations.
• Our Actuarial and Insurance Management Solutions (AIMS) team has significant experience in the areas of operational risk management, systems design, pricing, reinsurance, capital management, financial modelling and financial reporting.
• Recognising the need to keep clients up-to-speed with IFRS developments, PwC established the International insurance accounting group (IIAG). It is a global group of our IFRS specialists who share experiences on new IFRS developments. As a centre of excellence, the group is responsible for IFRS thought leadership for the insurance industry and the dissemination of knowledge to all our client teams.
Insurers are about to go through a period of unprecedented accounting, regulatory and corporate governance changes, including:
• The Exposure Draft on Insurance Contracts.
• Solvency II is the largest ever change to the European solvency regulations, which may be replicated to a large extent in South Africa through the Solvency Assessment and Management (SAM) regime proposed by the Financial Services Board.
Over the next number of years, insurers will have to absorb, digest and implement all these changes and the challenges that accompany them. These include:
• Understanding the implications of the Exposure Draft.
• The alignment of reporting with the drivers of the business.
• Actuarial model and process development.
• Assessment of SAM/Solvency II compared to IFRS requirements.
• Potential product changes.
• Managing market and shareholder’s expectations during this period of change.
PwC can help insurers manage these challenges by:
• Assessing the impact of accounting and regulatory changes, including technical, financial and data/process implications.
• Training to management and staff.
• Support in the designing of new actuarial models.
• Providing project management support.
• Comparing SAM/Solvency II requirements to IFRS.
• Providing briefings and training for board members, non-executive directors, audit committees and senior management.
• Providing people and change management solutions that may arise as a result of a different measurement basis, including project structure and governance.
PwC thought leadership publications
Practical Guide to IFRS Insurance Contracts Fundamental accounting changes proposed
IASB/FASB Insurance Contracts Project – decisions to date and PwC observations
Getting closer to the finish line? Insurance contracts accounting under IFRS
Making sense of the numbers: South African analysts’ perspectives on current and future reporting in the insurance industry
Making sense of the numbers: Analysts’ perspectives on current and future reporting in the insurance industry
Insurance reporting at the crossroads: What do analysts think?
Countdown to Solvency II: Bridging risk and capital
Insurance Digest Strategic and emerging issues in South African Insurance
© 2010 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” and “PwC” refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL). Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way. (10-07880)
Contemplating the key changes and challenges on the future of insurance accounting
IFRS for insurance contracts
“The proposed standard better reflects the economics of insurance contracts, and would result in more relevant, understandable and comparable information being available to investors” IASB
