Agenda-D-2
Insurance Contracts
Jeong-Hyeok, Park
Research Fellow
September 29, 2010
Contents
1.Background
2.Working Group
3.Discussion Issues
1
Contents
Background
Working Group
Discussion Issues
2
Background
Project history
We are here
1
2004 ~
2007
1
2
IFRS ‘ Insurance
Contracts’
(Phase l)
2
DP Preliminary Views
on Insurance Contract
(Phase ll)
3
ED ‘ Insurance
Contracts’
(Phase ll)
4
Joint Project with FASB
2008
2009
2011
2010
4
3
• Issued in 2004
• Aimed at making only limited improvements
• Issued in 2007
• Issued in July 2010, comment due November 30, 2010
• Final standard : expected for Q2 2011
• Since 2008
3
Background
continued
Project Objective
Improve financial
reporting for
Insurance
contracts
Making it easier for
users to
understand
Enhance
comparability and
transparency
4
Contents
Background
Working Group
Discussion Issues
5
Working Group
Purpose
• To assist the AOSSG in preparing improved proposals to the
IASB regarding the ED ‘Insurance Contracts’
Lead country
• Korea
Co-lead country
• China
Members
• Australia, Hong Kong,
Indonesia, Japan, Malaysia,
Nepal, Thailand
6
Working Group
continued
Chronology of
Working Process
1
• September 03, 2010:
September
Sun
Mon
Tue
WG members’ preliminary views on ED
• September 14, 2010 :
2
Circulate draft of AOSSG WG’s preliminary
views on questions in IASB’s ED
5
6
7
3
4
All AOSSG members’ comments on
AOSSG WG’s preliminary views
• September 29, 2010:
1st AOSSG meeting
1
2
8
9
1
Fri
Sat
3
4
10 11
3
2
• September 16, 2010:
Tur
Wed
12 13 14 15 16 17 18
19 20 21 22 23 24 25
4
26 27 28 29 30
7
Contents
Summary
Working Group
Discussion Issues
8
Key Issues to be discussed
Issue 1.
Two Margin approach vs Single Margin Approach
Issue 2.
Discount Rate
Issue 3.
Acquisition Costs
Issue 4.
Presentation
Issue 5.
Transition
9
Issue 1. Two Margin approach vs Single Margin Approach
1
Two Margin Approach
2
Single Margin Approach
= Best Estimate of Liability + RA + RM
= Best Estimate of Liability + CM
1
p
r
e
m
i
u
m
residual
margin
risk
adjustment
cash
outflows
2
composite
margin
cash
outflows
10
Issue 1. Two Margin approach vs Single Margin Approach
Two Margin Approach
• Convey useful
information about the
amount of insurance
risks
• Reduce the amount of
RM for arbitrary release
patterns
Single Margin Approach
• Easier Application to
practice
• Reduce possibility of a
loss at the point of the
first measurement
• Reduce fluctuation of
gains or losses in
subsequent
measurement
11
Issue 1. Two Margin approach vs Single Margin Approach
WG Preliminary Views
• Which model do you prefer? Two Margin vs Single Margin.
(Opinion) Diverse views existing
• Do you agree with the definition of Risk Adjustment?
(Opinion) Diverse views existing, Some concern that definition of
cash outflows
RA is not appropriate for a description of insurance liability
• Do you agree with the measuring RA at a portfolio level?
(Opinion) Most agree./ Options should be given / Entity wide basis
12
Issue 1. Two Margin approach vs Single Margin Approach
WG Preliminary Views
• Do you agree with no recognition of gain at inception?.
(Opinion) Most agree. / Gradual recognition of such gain
• Do you agree with estimating margin at the level of portfolio?
(Opinion) Diverse views existing.
cash outflows
• Do you agree with the method of releasing the margin ?
(Opinion) Diverse views / Remeasurement. / More guides
• Do you agree with the accretion of interest on the margin?
(Opinion) Pros and Cons exiting
13
Issue 2. Discount Rate
How to determine discount rate?
• Reflecting characteristics of the insurance contract
• According to the dependence on the performance of specific assets
 No ⇒ risk-free plus adjustment for illiquidity
 Yes ⇒ consider performance of assets
Yes
NO
Assets
Liabilities
Assets
Liabilities
Risk-free rate
Liabilities
+
performance
Liabilities
of assets
illiquidity
14
Issue 2. Discount Rate
WG Preliminary Views
• Do you agree with the proposed discount rate?
(Opinion) Pros and Cons existing / Asset earned rate / Credit
Spread should be reflected.
• Do you agree with considering the effects of liquidity?
cash outflows
(Opinion) Some concerns about how this might be done.
• Do you agree with concerns that discount rate misrepresent
the economic substance?
(Opinion) Views are divergent.
15
Issue 3. Acquisition Costs
Measurement Level
• incremental acquisition costs (on a contract level) are included in
the cash flows
• non-incremental acquisition costs are expensed
Measurement
Building
Blocks
=
Cash flows
incremental
acquisition
costs
+
Risk
adjustment
+
Residual
margin
non-incremental
acquisition costs
→ expensed
16
Issue 3. Acquisition Costs
WG Preliminary Views
• Do you agree that the incremental acquisition costs should
be included in the initial measurement?
(Opinion) Most agree. / The scope of acquisition costs
• Do you agree that non-incremental acquisition costs should
be recognized as expenses when incurred?
(Opinion) All agree.
17
Issue 4. Presentation (Summarized Margin Approach)
Examples
Inception
six months
six months
1 Jan
to 30 Jun
to 31 Dec
21
26
2
2
23
28
Experience adjustment
(10)
(10)
Changes in estimates
(20)
0
0
0
40
38
(25)
(23)
Risk margin
Residual margin
Insurance margin
Net gain at inception
0
0
Investment income
Interest on insurance liability
Net interest and investment
0
15
15
Profit
0
8
33
18
Issue 4. Presentation (Summarized Margin Approach)
WG Preliminary Views
• Do you agree with the summarized margin presentation?
(Opinion) Most prefer premium approach(Traditional method)
Extended margin approach can be a choice.
• Do you agree with presenting all income and expense in P&L?
(Opinion) Diverse views existing.
OCI presentation needs to be considered.
19
Issue 5. Transition`
Previous GAAP
Transition
deferred
acquisition costs
IFRS 4
Phase II
existing
insurance liabilities
intangible assets
Risk adjustment
cash flows
Difference to
retained earnings
20
Issue 5. Transition
WG Preliminary Views
• Do you agree with the proposed transition requirements?
(Opinion) Diverse views existing.
(Modified) Retrospective / Prospective Application
No recognition of residual margin at the transition date
may have some problems
* Alternative - Residual Margin = Max [(A) – (B), 0]
(A) Existing provision on the date of transition
(Assuming that LAT was passed)
(B) PV of fulfillment cash flows
21
Thank you !!
22