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willistowerswatson.com
IFRS 17 Insurance Contracts
Starting the countdown to 2021
13 June 2017
EMEA Client Webinar
© 2017 ...
willistowerswatson.com
Q&A
Introduction
Getting the numbers right
Getting the numbers on time
Business implications
Agenda...
willistowerswatson.com
IFRS 17 in numbers
© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. ...
willistowerswatson.com
The IFRS insurance contracts standard – 20 years in the making
Mandatory for
annual periods
beginni...
willistowerswatson.com
Publication of IFRS 17 is a starting gun not a finishing line
© 2017 Willis Towers Watson. All righ...
willistowerswatson.com
Getting the
numbers right
Getting the numbers on time
Business implications
Key implementation chal...
willistowerswatson.com
Principal measure of fulfilment cash flows
Building Block Approach (BBA)
Expected
Cash
Flows
Risk
a...
willistowerswatson.com
Premium Allocation Approach (PAA)
Simplified Approach
© 2017 Willis Towers Watson. All rights reser...
willistowerswatson.com
Statement of Comprehensive Income
So what happened to written premiums?
© 2017 Willis Towers Watson...
willistowerswatson.com
IFRS 17 vs. Solvency II – Key Differences
Area IFRS 17 Solvency II
Purpose and target audience
Demo...
willistowerswatson.com
Grouping of contracts
Each portfolio is then divided into
three groups:
Contracts in each group nee...
willistowerswatson.com
Discount rates – alternative approaches
Expected
defaults
Residual
credit risk
Discount rate
Illiqu...
willistowerswatson.com
Risk adjustment principle very different to Solvency II
© 2017 Willis Towers Watson. All rights res...
willistowerswatson.com
The actuarial cash-flow modelling and associated reporting under IFRS 17
will drive the system and ...
willistowerswatson.com
CSM calculation and link to P&L/OCI is key
© 2017 Willis Towers Watson. All rights reserved. Propri...
willistowerswatson.com
Solvency numbers and a new complex P&L… but all in half of the time
How to make this happen?
© 2017...
willistowerswatson.com
Actuarial model processes need to be industrialized
16
© 2017 Willis Towers Watson. All rights rese...
willistowerswatson.com
Implement the new IFRS 17 content at the right place
Design and orchestrate seamless “End-to-End” p...
willistowerswatson.com
Reporting
systems
Feeder
systems
How might an IFRS 17 end-to-end solution look?
Using integration w...
willistowerswatson.com
More than just accounting: significant commercial impacts likely
© 2017 Willis Towers Watson. All r...
willistowerswatson.com
Impact of IFRS 17 on key insurer metrics
© 2017 Willis Towers Watson. All rights reserved. Propriet...
willistowerswatson.com
ALM: which metric to manage to?
© 2017 Willis Towers Watson. All rights reserved. Proprietary and C...
willistowerswatson.com
Engaging with investors
© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confident...
willistowerswatson.com
Getting the
numbers right
Getting the numbers on time
Business implications
Key implementation chal...
willistowerswatson.com
© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers W...
willistowerswatson.com
About Willis Towers Watson
Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory,
brokin...
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Webcast presentation: IFRS 17 – The count down to 2021 commences

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Slides from the Willis Towers Watson’s webcast “IFRS 17 – The count down to 2021 commences”, from 13 June 2017. The webcast provided an overview of the likely impacts on insurers’ businesses, processes and communication with stakeholders, as well as the key points to consider in actually getting to grips with the requirements of the standard.

Webcast recording: https://twmeetingcenter.webex.com/twmeetingcenter/lsr.php?RCID=3d424c49046e4a36a437f19f2b3a0b09

Published in: Economy & Finance

Webcast presentation: IFRS 17 – The count down to 2021 commences

  1. 1. willistowerswatson.com IFRS 17 Insurance Contracts Starting the countdown to 2021 13 June 2017 EMEA Client Webinar © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.
  2. 2. willistowerswatson.com Q&A Introduction Getting the numbers right Getting the numbers on time Business implications Agenda and speakers Richard Bulmer Roger Gascoigne Andreas Schröder Kamran Foroughi © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.
  3. 3. willistowerswatson.com IFRS 17 in numbers © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. How much insurers expect to spend on implementing IFRS 17 €25-100m From beginning of insurance contracts project to publication of IFRS 17 20 European insurers included in 2016 field testing of draft IFRS 17 European companies Participated in5 2,520 From publication of IFRS 17 to date of opening balance sheet 31 Expected implementation costs relative to Solvency II Introduction Getting the numbers on time Q&A Getting the numbers right Business implications 20%-250% 2 QIS5 years months 2021
  4. 4. willistowerswatson.com The IFRS insurance contracts standard – 20 years in the making Mandatory for annual periods beginning on or after 1 January 2021 Opening balance sheet required as of 1 January 2020 Early adoption possible The story so far – now the interesting part really starts © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 1997 Kick-off  IASC starts the Insurance Contracts project May 2017  Publication of IFRS 17 Insurance Contracts July 2013  Re-Exposure Draft Insurance Contracts May 2002  Insurance project split into Phase 1 and Phase 2 July 2010  Exposure Draft Insurance Contracts May 2007  Discussion Paper: Preliminary views March 2004  IFRS 4 Insurance contracts ‘Phase I’ issued 3 Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  5. 5. willistowerswatson.com Publication of IFRS 17 is a starting gun not a finishing line © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 2021 Final insurance contracts standard published as IFRS 17 2017 2018 Gap analysis, assessment of options, implementation, modification and testing 2020 Dry run 2018/19 IFRS 17 IFRS 9 Effective For insurance entities, two options apply: Overlay Approach or Deferral Approach IFRS 9 or/and IAS 39 and IFRS 4 IFRS 9 + IFRS 17 Opening balance sheet Full financial statements Dry Run Implementation 2019 Q1 reporting 4 2021 IFRS financial statements under IFRS 17 with comparatives for 2020* Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  6. 6. willistowerswatson.com Getting the numbers right Getting the numbers on time Business implications Key implementation challenges More than a compliance exercise © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. Applying judgement in a principles-based standard Complexity of implementation within a tight timeframe Setting-up and running complex actuarial cash-flow models Aligning processes, including increased automation Dealing with multiple metrics Managing stakeholder expectations 5 Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  7. 7. willistowerswatson.com Principal measure of fulfilment cash flows Building Block Approach (BBA) Expected Cash Flows Risk adjustment Contractual service margin (CSM) Total Insurance Contract Liability Discounting © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.  Quantifies unearned profit insurer expects to earn as it fulfils contract  Ensures no gain at initial recognition  Allocated over coverage period  Cannot be negative  Variable fee approach for direct participating business CSM 6 Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  8. 8. willistowerswatson.com Premium Allocation Approach (PAA) Simplified Approach © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.  Applied to remaining coverage  Permitted, but not required  Onerous contract test Unearned Premium Acquisition costs Allowance for onerous contracts (if required) 7 Total Insurance Contract Liability Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  9. 9. willistowerswatson.com Statement of Comprehensive Income So what happened to written premiums? © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.  Insurance contract revenue and service expenses exclude any deposit components  Revenue and expense are recognised as earned or incurred  Insurance contract revenue represents the transfer of promised services and comprises:  Expected claims  Risk adjustment  CSM  Acquisition cash flows  Insurance finance expense is excluded from insurance service (underwriting) result  Accounting policy choice to present insurance finance expense either  fully in P&L or  in P&L and OCI Statement of Comprehensive Income 2021 Insurance contract revenue X Insurance service expenses (X) Insurance service result X Investment income X Insurance finance expense X Net financial result X Profit/Loss X Discount rate changes on insurance liability (optional) X Total comprehensive income X 8 Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  10. 10. willistowerswatson.com IFRS 17 vs. Solvency II – Key Differences Area IFRS 17 Solvency II Purpose and target audience Demonstrate equity and performance over time to capital providers Demonstrate solvency to regulators Approach Principles-based In practice rules-based Discount rate Principle to be consistent with market, but no prescription Prescribed: generally swap less credit risk starting point with MA and VA optional Risk adjustment / margin Not prescribed: entity perspective Prescribed: 3rd party perspective Contractual service margin Yes: quantifies the unearned profit the insurer expects to earn as it fulfils the contract, ensuring no gain at day 1 No: day 1 profit recognised Contract boundary/recognition Recognise when coverage begins, but “onerous contract” test on a bound basis Recognise when insurer is bound Scope “Insurance contracts” only All business covered by insurance regulated entity Disclosure Principles-based with detailed minimum requirements Mandatory quarterly reporting in prescribed format Transition Retrospective application as default with simplifications available Option to align with Solvency I balance sheet on day 1, with 16 year transition © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 9 Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  11. 11. willistowerswatson.com Grouping of contracts Each portfolio is then divided into three groups: Contracts in each group need to be sub-divided into annual cohorts Contracts initially to be split into “portfolios”, meaning contracts that are subject to similar risks and managed together. © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. Contracts that are onerous at initial recognition Contracts that at initial recognition have no significant possibility of becoming onerous subsequently The remaining contracts in the portfolio 10 Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  12. 12. willistowerswatson.com Discount rates – alternative approaches Expected defaults Residual credit risk Discount rate Illiquidity premium Risk free rate Expected reference rate Bottom up Top down  No single method prescribed to assess discount rate  Should be consistent with observable current market prices for instruments with same characteristics as insurance liability  Exclude effect of own credit risk and other factors not relevant to liability © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. Illustrative 11 Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  13. 13. willistowerswatson.com Risk adjustment principle very different to Solvency II © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. To reflect the compensation that the entity requires for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risk  Whose perspective?  Required to disclose equivalent confidence levels 12 Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  14. 14. willistowerswatson.com The actuarial cash-flow modelling and associated reporting under IFRS 17 will drive the system and process implications © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. Your reporting system design needs to be flexible for usage under IFRS 17 but also ensure a robust and repeatable, timely delivery of required figures Risk adjustment Contractual service margin Reporting and disclosure requirements Segmentation and contract boundaries Use of Variable Fee and PAA Approaches Cash flows and discount rates Model Capabilities / IFRS Requirements 13 Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  15. 15. willistowerswatson.com CSM calculation and link to P&L/OCI is key © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 14 Present Value of Cash flows Risk adjustment Contractual service margin Contractual service margin  Calculation, storage and regular unlocking of service margin per measurement unit and model  Roll-forward  Loss recognition and reinstatement  For general approach only, lock-in of interest rate at issue  Drivers of resulting profit recognition and resulting P&L volatility Present Value of Cash flows Financial assumptions Risk adjustment Contractual service margin ? Future service assumptions Experience P&L /OCI T=0 T=1 Changes in the PV of cash flows from one period to another ... ….are smoothed through CSM or not Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  16. 16. willistowerswatson.com Solvency numbers and a new complex P&L… but all in half of the time How to make this happen? © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. Number of weeks after year end 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Solvency II Group - 2016 Solvency II Group – 2019 Major European insurers YE2016 reporting Financial reporting in 2021 15 Average, based on 5x of the largest European insurers for y/e 2016 financial reporting ? Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  17. 17. willistowerswatson.com Actuarial model processes need to be industrialized 16 © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. Asset data Deterministic Liability model Input Liability data Assumptions Other reports Output data Reporting templates Stochastic Model  Various sources  Different responsibilities  Different formats / interfaces  Separate models  (Unnecessarily) complex coding ?  Ongoing reconciliation  Various reports  Spreadsheet cascades  Manual adjustments Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  18. 18. willistowerswatson.com Implement the new IFRS 17 content at the right place Design and orchestrate seamless “End-to-End” process through workflow engine © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. Life Cash Flows & Results P&C Cash Flows & Results Third Party Calculation Tools Input Data P&C Life Reporting systems MCEV / NBV Financial Reporting IFRS Accounts GeneralLedger Consolidation S2 / QRT / Regulator … … ETL Pricing data Actual claims Actual costs Actual premium Cession data Pricing data Actual claims Actual costs Actual premium Cession data ETL ETL ETL Third Party Data Warehouse Store S2 / IFRS… Results Feeder systems Admin P&C Admin Life Assets ESG Re- Insur ance ETL ETL 17 Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  19. 19. willistowerswatson.com Reporting systems Feeder systems How might an IFRS 17 end-to-end solution look? Using integration workflow solution like Unify © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. Life Cash Flows & Results P&C Cash Flows & Results Third Party Calculation Tools Admin P&C Admin Life Assets ESG Re- Insur ance ETL ETL ETL Third Party Data Warehouse Store MCEV / NBV Financial Reporting IFRS Accounts GeneralLedger Consolidation S2 / QRT / Regulator … … Life P&C ETL ETL ETL Pricing data Actual claims Actual costs Actual premium Cession data Pricing data Actual claims Actual costs Actual premium Cession data S2 / IFRS… Results Input Data Unify DataValidator Star ESG RiskAgility FM ResQ 18 Radar Live Radar Live Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  20. 20. willistowerswatson.com More than just accounting: significant commercial impacts likely © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. The different equity and profit emergence and revised presentation requirements should lead insurance companies to review or revise: 1 2 4 3 Key metrics used Asset-liability management Product strategy and pricing Capital and risk management 5 Investor engagement 19 Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  21. 21. willistowerswatson.com Impact of IFRS 17 on key insurer metrics © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. Metric Impact Profit  IFRS profit top metric for insurers  Will become more complex under IFRS 17 Distributable cash flow  Top priority for investors  Impact of IFRS 17 on dividend paying capacity unclear; may vary by country Value  PC insurers currently use IFRS equity; life firms use mix of IFRS, EV & Solvency II Own Funds  Increased use of IFRS equity as Value starting point Capital  Current focus on Solvency II  No direct impact of IFRS 17 but maybe indirect 20 Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  22. 22. willistowerswatson.com ALM: which metric to manage to? © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. Solvency II ratio Solvency II balance sheet IFRS Profits 21 Ratio Time 100% SCR Profit Time ? IFRS Equity / Value A L A L Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  23. 23. willistowerswatson.com Engaging with investors © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. Plan the investor communication – the earlier the better! One of the biggest investor communication challenges we have ever seen Book Value Market based approach IFRS 17 Revenue excluding deposits 22 Introduction Getting the numbers on time Q&A Getting the numbers right Business implications Statement of Comprehensive Income 2021 Insurance contract revenue X Insurance service expenses (X) Insurance service result X Investment income X Insurance finance expense X Net financial result X Profit/Loss X Discount rate changes on insurance liability (optional) X Total comprehensive income X
  24. 24. willistowerswatson.com Getting the numbers right Getting the numbers on time Business implications Key implementation challenges More than a compliance exercise © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. Applying judgement in a principles-based standard Complexity of implementation within a tight timeframe Setting-up and running complex actuarial cash-flow models Aligning processes, including increased automation Dealing with multiple metrics Managing stakeholder expectations 23 Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  25. 25. willistowerswatson.com © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. Any questions Richard Bulmer Director +44 1737 274135 richard.bulmer@willistowerswatson.com Roger Gascoigne Director +420 226 294 449 roger.gascoigne@willistowerswatson.com Andreas Schröder Director +49 221 80003460 andreas.schroeder@willistowerswatson.com Kamran Foroughi Director +44 20 7170 2743 kamran.foroughi@willistowerswatson.com 24 If any questions are not addressed in this webcast, please direct your questions to ifrs17@willistowerswatson.com Introduction Getting the numbers on time Q&A Getting the numbers right Business implications
  26. 26. willistowerswatson.com About Willis Towers Watson Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 40,000 employees serving more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Willis Towers Watson 71 High Holborn London WC1V 6TP Towers Watson Limited (trading as Willis Towers Watson) is authorised and regulated by the Financial Conduct Authority in the UK. The information in this publication is of general interest and guidance. Action should not be taken on the basis of any article without seeking specific advice. To unsubscribe, email eu.unsubscribe@towerswatson.com with the publication name as the subject and include your name, title and company address. 25 Willis Towers Watson is uniquely placed to help both Life and P&C insurers interpret and implement the new standard developed by the IASB. We:  Advise more than three-quarters of the world's leading insurers  Are the industry's leading risk specialist and a leader in financial modelling  Are the largest provider of actuarial software in the world  Have more actuaries and chartered enterprise risk analysts (CERAs) serving the insurance industry than any other professional services company. Willis Towers Watson and IFRS 17 © 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. More from our website  IASB issues IFRS 17 Insurance Contracts, starting the countdown to 2021  International Financial Reporting Standards  How we can help you turn IFRS 17 into a success story  Software Solutions for Life Insurers  Software Solutions for Property & Casualty Insurers  Solvency II One Year On For more information about how we can help you turn IFRS 17 into a success story, please contact your Willis Towers Watson consultant or email us at: ifrs17@willistowerswatson.com

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