IFRS 17 will represent a significant change to insurance accounting, requiring insurers to revamp financial reporting practices and financial statements. RBC standard incorporates consistent valuation principles for assets and liabilities, a definition of qualifying capital resources and a risk-based capital requirement. Do they compare?

1. IFRS17WORKSHOP 2-3MAY2019FAIRVIEWHOTEL
INTERACTIONBETWEEN
IFRS17ANDRBC
Elias Omondi

2. WOODGROVE
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AGENDA
• Background
• RBC
• IFRS 17
• Objectives of IFRS 17 and RBC
• Interaction of IFRS 17 and RBC
• Using RBC to implement IFRS 17
• Way Forward
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3. WOODGROVE
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INTRODUCTION
The Good..?
• IFRS 17 will represent a significant change to insurance
accounting, requiring insurers to revamp financial reporting
practices and financial statements.
• RBC standard incorporates consistent valuation principles
for assets and liabilities, a definition of qualifying capital
resources and a risk-based capital requirement.
• RBC and IFRS 17 will promote effective and globally
consistent supervision of the insurance industry in order to
develop and maintain fair, safe and stable insurance markets
for the benefit and protection of policyholders and to
contribute to global financial stability.
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4. WOODGROVE
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RBC
Risk Based Capital Standard
• Risk Based Capital (RBC)
is the capital that should be
held by an insurer
considering its size and risk
profile
• RBC provides a holistic
approach to risk
management
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“Regulatory capital requirements at a sufficient level so that, in adversity, an insurer’s
obligations to policyholders will continue to be met as they fall due”

5. WOODGROVE
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Liabilities
Assets
Liabilities Unexpected Losses
Expected Losses
Total Assets
Regulatory regimes aim to have assets sufficient to satisfy projected obligations (expected
and unexpected) over a specified time horizon and within a specified confidence level
Required Capital
Free Assets
Total capital and surplus
RBC

6. WOODGROVE
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BASIC CONCEPT OF IFRS 17
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7. WOODGROVE
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BASIC CONCEPT OF IFRS 17
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• Current Practice
• New Method

8. WOODGROVE
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OBJECTIVES OF RBC & IFRS 17
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Improve
global
comparability
provide more consistent
information, allowing users to
compare results and trends
Relevance
Financial information
presented by an entity is
relevant and faithfully
represents the true underlying
financial position and
performance
Transparency
Presentation and disclosure
requirements will enhance
transparency and give users a
better understanding of the
sources and trends of earnings

9. WOODGROVE
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INTERACTION BETWEEN IFRS 17 & RBC
9
BothRBCandIFRS17
• Probability-
weighted
estimate of the
future cash flows,
• The time value of
money and
• An additional
allowance for risk
IFRS17
• An additional
contract liability
known as the
contractual
service margin
(‘CSM’) is
included to
eliminate any
gain on day one
RBC
• No equivalent
concept to the
CSM in RBC
Measurement Models

10. WOODGROVE
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INTERACTION BETWEEN IFRS 17 & RBC
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Measurement of Contracts
• Depends on their classification as either insurance or investment. The level of
insurance risk transferred to the insurer and the definition is broadly
unchanged from current IFRS 4
• Non-participating investment contracts(pure unit-linked savings) contracts,
are subject to the IFRS financial instruments and revenue standards
IFRS 17
• RBC capital charges for insurance risk depend on their classification
• The treatment of capital necessary for investment products is different from
insurance products
RBC

11. WOODGROVE
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INTERACTION BETWEEN IFRS 17 & RBC
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Discount Rate
‘Top-down’ or
‘bottom-up’
reflecting the
characteristics
of the liability.
IFRS 17
Prescribed
based on
matching and
volatility
adjustment
RBC
The volatility
adjustment is
not a feature
of the
liabilities so is
unlikely to
apply in IFRS
Difference

12. WOODGROVE
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HOW DO WE DETERMINE DISCOUNT RATE TO BE USED?
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IFRS 17 requires the discounting of cash flows to allow for financial risks, where they are not
reflected in the cash flows already.

13. WOODGROVE
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INTERACTION BETWEEN IFRS 17 & RBC
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Allowance for Risk – Risk Margins
No prescribed method. Company’s
own view of the compensation
required for uncertainty arising for
non-financial risks (only).
IFRS 17
Gross of reinsurance.
IFRS 17
Prescribed with defined risks, level
of diversification benefit and other
components.
RBC
Net of reinsurance.
RBC
Risk Adjustment: “The compensation the insurer requires for bearing the uncertainty about the amount and
timing of the cash flows that arise as the entity fulfils the insurance contract

14. WOODGROVE
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HOW TO MEASURE RISKADJUSTMENT – IFRS 17
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15. WOODGROVE
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HOW TO MEASURE RISKADJUSTMENT - RBC
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16. WOODGROVE
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WHICH WAYFORWARD?
Both regimes are based
on a probability-
weighted estimate of
the future cash flows
Plus an allowance for
the risk
Discounted at an
appropriate interest
rate
You make the best use of existing RBC
systems and processes to ensure smooth
and efficient a transition to IFRS 17
There is therefore significant
opportunity to use the same cash
flow models for both RBC and IFRS
17, potentially with some changes

17. THANK YOU
Elias Omondi +254 722 909 664
eomondi@ira.go.ke ; omondieliaso@gmail.com
www.ira.go.ke