Ifrs Accounting For Insurance Ashley Patel Pricewaterhouse Coopers [Autosaved]
1. CAIR/CARTAC/World Bank Workshop and Conference Rose Hall Resort and Spa, 1-5 December 2008 Accounting for Insurance Contracts The Long Winding Road 5 December 2008 Ashley Patel
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5. INSURANCE ACCOUNTING – ANALYSTS’ COMMENTS Between May and October 2007, PricewaterhouseCoopers carried out in-depth interviews with 39 dedicated insurance analysts from the US, Europe, Asia and Australia. ‘ As it stands, financial reporting for life insurance companies is not useful to investors. The fundamentals of the business are not visible. Analysts cannot do any basic analysis and they have to resort to alternative bases.’ ‘ Non-life business is not transparent because companies manage the level of reserves as the cycle swings up and down.’
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8. SCOPE OF THE DISCUSSION PAPER Insurance Contract Definition Disclosures One model for all types Policyholder Accounting
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10. THE MODEL AT A GLANCE Life of the contract Claims Receive premiums to stand ready Stand ready to pay claims Probability weighted Probability weighted The contract can be an asset or liability
11. CURRENT EXIT VALUE MODEL The amount the insurer would expect to pay to another entity if it transferred all its remaining obligations and contractual rights to that entity The Three Building Blocks Time value of money Discount rate Current unbiased probability weighted estimates of future cash flows Current estimates Risk Margin Service Margin Margins
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14. DISCOUNT RATES “ Consistent with observable current market prices for cash flows whose characteristics match those of the insurance liability , in terms of, for example, timing, currency and liquidity” Own Credit Characteristics
15. HOW TO CALCULATE THE RISK MARGIN No prescribed technique Compensation for bearing risk Reference to what a market participant would require Not a ‘Shock-absorber” Unit of account is the portfolio
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17. THE SERVICE MARGIN Day One Loss No Day One Gain/Loss Day One Gain If margins are higher or lower than those required by market participants? =
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19. UNBUNDLING Interdependent resulting in arbitrary measurement Interdependent but not resulting in arbitrary measurement Not interdependent Phase II for whole contract Phase II for whole contract, but IAS 39 for deposit IAS 39 for deposit, Phase II for insurance
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24. PRACTICAL IMPLICATIONS – FINANCIAL REPORTING Earnings volatility Revaluing insurance liabilities will create potential earnings volatility Potential day one profit or loss Using current exit values could lead to reported profit or loss at contract inception Impact on revenue The question of whether certain premiums should be treated as income or deposits is left open and could affect “top line” revenue Impact on equity Discretionary policy dividends qualify as liabilities only if there is a ‘constructive obligation’ to pay them
25. PRACTICAL IMPLICATIONS – OPERATIONAL Systems impact Forecasting future cash flows based on probability-weighted scenarios will require significant upgrade of modelling capabilities Organisational impact Use of risk margins and cash flow analyses in accounting will require closer integration among finance, regulatory, actuarial and risk management functions. Resource impact Need for more qualified actuarial as well as finance and IT personnel
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