IFRS 17 – Understanding the

Requirements for Life Insurers

Abdul Moid Ahmed Khan, ASA

Senior Manager
Actuarial & Insurance Advisory Services

Muhammad Usama Dangra, ASA, CERA

Manager
Actuarial & Insurance Advisory Services February 28, 2018
 Contents
• Measurement and Financial Performance
▫ Key Components and Changes
▫ Example 1: Term Life
▫ Example 2: Unit Linked

• Level of Aggregation
• Transition
▫ Transition approaches
▫ Example 2 (Extension): Full Retrospective
▫ Example 2 (Extension): Modified Retrospective

• Challenges for Life Insurers in Adopting IFRS 17

Life Insurance Premium Components

Application
A life insurance premium typically consists of four key
when applying
elements
IFRS 17
1. Mortality and morbidity
Charges for the benefits  Included
charge

 Included
2. Expenses recovery Cost incurred to issue and administer

Repays to the policyholder regardless

3. Deposit x Excluded
of insured event occurs

Amount expects to earn from

4. Profit for service and  Included
providing services including a risk
bearing risk
premium

 Included in insurance revenue when applying IFRS 17

x Excluded in insurance revenue when applying IFRS 17

Measurement of Insurance Contracts
Unearned profit the
Contractual entity will recognize as
Service Margin it provides services
under the insurance
contracts

Compensation an
Risk entity requires for
Adjustment bearing uncertainty
Insurance about the amount and
Contract timing of cash flows
Liability
or Asset
Impact of discounting.
Time Value Fulfillment
Discount rate based on
of Money Cash Flows
liability characteristics

Best An explicit, unbiased

Estimate and probability
Cash Flows weighted estimate of
future cash flows

4
Measurement Models under IFRS 17
General Model (GM) /
Building Block Approach
(BBA)
Applicable to products
without direct participation
features, such as:
- whole of life term
- limited year term
- without profit endowment
Variable Fee Approach
(VFA)
Applicable to products such
as:
Necessary modification
- with profit endowment
for products with direct
- unit-linked
participation features
Premium Allocation
Optional simplification Approach (PAA)
for short term products Applicable to products such
as:
- one-year term
- personal accident
- certain riders
5
Differences Between General Model
and Variable Fee Approach

PV of Future Risk Unearned Profit

Cash Flows Adjustment (CSM)
Initial  No  No
 No Difference
Recognition Difference Difference

x Difference in how
 No  No CSM is adjusted for
Subsequently
Difference Difference changes in financial
variables

6
Reporting Financial Performance
Disaggregation

Premium
Income
Insurance Service Result
Investment Gains (or losses) from the providing
Income insurance services and changes to
non-financial variables

Claims

Expenses

Movement in Insurance Finance

Policyholder Income and Expenses
Liabilities
Gains (or losses) from
investments and changes to
Profit / (Loss) financial variables
Reporting Financial Performance
Insurance Service Revenue

Premium
Income

Investment
Income
Insurance Service Revenue
Claims

General Model and Variable Premium

Expenses Allocation
Fee Approach Approach
Movement in
Policyholder
Liabilities Unearned
Profits Expected
Claims & Earned
Recognized & Premiums
Release of RA Expenses
Profit / (Loss)
Reporting Financial Performance
Incurred Claims and Policyholder Liabilities

Premium
Income
Incurred claims will
Investment include explicit risk
Income adjustments and release
thereof
Claims

Expenses
Movement in liabilities for
future years will not be required
Movement in to compute profit (or loss)
Policyholder
Liabilities

Profit / (Loss)
Example 1: Term Life
Particulars Value
Sum Assured 1,000,000
Single Premium 8,000
Benefit Term 3 years
Discount Rate 10%

• For simplicity:
▫ Risk adjustment and expenses have not been
assumed
Term Life – Contractual Service Margin
IFRS 17
CSM times
Year 0 1 2 3 discount rate
PV Expected Future Cash Inflows (8,000) - - -
It is the time
PV Expected Future Cash Outflows 6,138 4,752 2,727 -
value of money
PV Expected Future Net Cash Flows (1,862) 4,752 2,727 - on CSM
Risk Adjustment - - - -
Fulfillment Cash Flows (1,862) 4,752 2,727 -

Expected profits at
Contractual Service Margin: initial recognition
Opening Balance - 1,862 1,365 751
New Contracts 1,862 - - -
Interest Accretion - 186 137 75 Unearned
profits
Recognized in P&L - (683) (751) (826) recognized
Closing Balance 1,862 1,365 751 - in P&L as
revenue
Term Life – Profit & Loss
IFRS 4
Year 1 2 3 Total
Premium Income 8,000 - - 8,000
Investment Income 850 650 400 1,900

Total Income 8,850 650 400 9,900

Claims Incurred (1,500) (2,000) (2,500) (6,000)
Change in Future Year Liabilities (4,752) 2,025 2,727 -
Profit / (Loss) 2,598 675 627 3,900 Claims
expected based
IFRS 17
on the
Year 1 2 3 Total assumptions as
Release in CSM 683 751 826 2,260 at beginning of
Expected Claims 2,000 2,500 3,000 7,500 the period
Insurance Service Revenue 2,683 3,251 3,826 9,760
Insurance Service Expense (1,500) (2,000) (2,500) (6,000) Time value
Insurance Service Result 1,183 1,251 1,326 3,760 of money
Insurance Finance Income 850 650 400 1,900
Analogous
Insurance Finance Expenses (800) (612) (348) (1,760)
to expected
Net Financial Result 50 38 52 140 investment
Profit / (Loss) 1,233 1,289 1,378 3,900 income
Why Are Expected Claims Included in Revenue?

Source of Profit (or loss) IFRS 17 Financial

from Insurance Contracts Performance Measurement

20xx
Profit margin
built in the Release in CSM xxx
product design Expected Claims xxx
Insurance Service Revenue xxx
Less: Insurance Service Expense (xxx)
Profit / (Loss) xxx
Gain (or loss)
from deviation of
actual from
expected
Term Life – Insurance Contract Liability
IFRS 4
Year 0 (BOY) 1 (EOY) 2 (EOY) 3 (EOY)

PV Future Cash Flows - 4,752 2,727 -

Liability for Future Years - 4,752 2,727 -
Claim Reserves - - 500 500
Insurance Contract Liability - 4,752 3,227 500

IFRS 17
Year 0 (BOY) 1 (EOY) 2 (EOY) 3 (EOY)

PV Expected Future Cash Flows (1,862) 4,752 2,727 -

Risk Adjustment - - - -
Fulfillment Cash Flows (1,862) 4,752 2,727 -
Contractual Service Margin 1,862 1,365 751 -
Liability for Future Years - 6,117 3,478 -
Claim Reserves - - 500 500
Insurance Contract Liability - 6,117 3,978 500
Term Life (Onerous/Loss Making) – Profit & Loss
IFRS 4
Year 1 2 3 Total
Premium Income 4,000 - - 4,000
Investment Income 850 650 400 1,900 Expected PV of
Total Income 4,850 650 400 5,900 loss at initial
recognition.
Claims Incurred (1,500) (2,000) (2,500) (6,000)
Change in Future Year Liabilities (4,752) 2,025 2,727 - Mathematically,
Profit / (Loss) (1,402) 675 627 (100) excess of PV
outflows over
IFRS 17 PV inflows at
Year 1 2 3 Total time 0
Release in CSM - - - -
Expected Claims 2,000 2,500 3,000 7,500
Insurance Service Revenue 2,000 2,500 3,000 7,500
Claims Incurred (1,500) (2,000) (2,500) (6,000) Loss
Onerous Contracts (2,138) - - (2,138) recognized
Insurance Service Expense (3,638) (2,000) (2,500) (8,138) upfront
Insurance Service Result (1,638) 500 500 (638) (when
expected)
Net Financial Result 236 175 127 538
Profit / (Loss) (1,402) 675 627 (100)
Example 2: Unit Linked
Particulars Value
Single Premium 15,000
Benefit Term 3 years
Death Benefit Higher of 17,000 or account value
Maturity Benefit Account value
5% of single premium
Charges
2% of account value each year
Investment Return 10%
Discount Rate 10%

• For simplicity:
▫ Risk adjustment and expenses have not been
considered
▫ Discount rate is equal to expected investment income
Unit Linked – Contractual Service Margin
IFRS 17
Year 0 1 2 3
PV Expected Future Cash Inflows (15,000) - - -
PV Expected Future Cash Outflows 13,439 14,613 15,904 -
Present
PV Expected Future Net Cash Flows (1,561) 14,613 15,904 -
value of
Risk Adjustment - - - - future
Fulfillment Cash Flows (1,561) 14,613 15,904 - charges
less
claims
Contractual Service Margin:
Opening Balance - 1,561 1,089 572
New Contracts 1,561 - - -
Investment Income - 1,425 1,521 1,623
Finance Expense - (1,344) (1,461) (1,590)
Recognized in P&L - (553) (577) (604)
Closing Balance 1,561 1,089 572 -

Investment income: The investment income on underlying assets

Finance Expense: Policyholder share of the investment income
Unit Linked – Profit & Loss
IFRS 4
Year 1 2 3 Total
Premium Income 15,000 - - 15,000
Investment Income 1,425 1,521 1,623 4,569 Includes
Total Income 16,425 1,521 1,623 19,569 account
Claims Incurred (170) (170) (17,494) (17,834)
value
Change in Future Year Liabilities (15,208) (1,021) 16,229 -
Profit / (Loss) 1,047 330 357 1,734
Amount in
IFRS 17 excess of
Year 1 2 3 Total account
value only
Release in CSM 553 577 604 1,734
Expected Claims 16 4 - 21
Insurance Service Revenue 569 582 604 1,755
Insurance Service Expense (16) (4) - (21)
Insurance Service Result 553 577 604 1,734

Insurance Finance Income 1,425 1,521 1,623 4,569

Insurance Finance Expenses (1,425) (1,521) (1,623) (4,569)
Net Financial Result - - - -
Profit / (Loss) 553 577 604 1,734
Unit Linked – Insurance Contract Liability
IFRS 4
Year 0 (BOY) 1 (EOY) 2 (EOY) 3 (EOY)

Fair Value of Underlying Assets - 15,208 16,229 -

Liability for Future Years - 15,208 16,229 -
Claim Reserves - 50 100 2,000
Insurance Contract Liability - 15,258 16,329 2,000

IFRS 17
Year 0 (BOY) 1 (EOY) 2 (EOY) 3 (EOY)

PV Expected Future Cash Flows (1,561) 14,613 15,904 -

Risk Adjustment - - - -
Fulfillment Cash Flows (1,561) 14,613 15,904 -
Contractual Service Margin 1,561 1,089 572 -
Liability for Future Years - 15,702 16,475 -
Claim Reserves - 50 100 2,000
Insurance Contract Liability - 15,752 16,575 2,000
Unit Linked – Deviation of Actual and Expected
Investment Return
• Actual investment return turns out to be 12% instead of 10%:
▫ a large portion would be passed on to policyholders except;
▫ for the increase in the amount of charges that are linked to account value

Expected Actual Includes the

Year 2 10% 12% impact of change
in the value of
Contractual Service Margin:
future income
Opening Balance 1,089 1,089 from charges
New Contracts - -
Investment Income 1,521 1,825
Finance Expense (1,461) (1,750)
Recognized in P&L (577) (585)
Closing Balance 572 579

The impact of higher future charge income due to higher return is

recognized over the remaining term of the policy
Improvements Under IFRS 17
Consistency Comparability Information Profits

IFRS 4 IFRS 4 IFRS 4 IFRS 4

- Mix of local - Limited - Limited - Day 1 profit can
statutory comparability information on be recognized
reporting between insurers source of profits
& other
industries - Locked in
assumptions

- Includes deposit
component

IFRS 17 IFRS 17 IFRS 17 IFRS 17

- Consistent - Increased - Identifies source - Profit
across transparency of profit recognized based
geographies about on exposure
profitability - Updated approach as
assumptions services are
- Comparable provided (no day
with other - Excludes deposit 1 profit)
industries component

21
Insurance Versus Other Industries

Other
Treatment/Information IFRS 4 IFRS 17
Industries

Varies by Local As Service is As Service is

Recognition of Revenue
Practices Provided Provided

Recognition of Losses Varies by Local When When

on Onerous Contracts Practices Expected Expected

Varies by Local Contract by Grouping is

Unit of Account
Practices Contract Basis Permitted

Trend Information
Limited Full Full
about Profitability

2
2
Level of Aggregation – Minimum Groups
All insurance contracts

Portfolio 1 Portfolio 2 Portfolio 3

Onerous at Not onerous & no

initial significant risk of Other
recognition becoming onerous

Yr 1 Yr 2 Yr .. Yr 1 Yr 2 Yr .. Yr 1 Yr 2 Yr ..

2
3
Level of aggregation – Illustration
Insurance Company

Unit Endowment
With Profits Term Life
Linked

Onerous at Not onerous & no

initial significant risk of Other
recognition becoming onerous
After 10 years and
assuming all else is
equal, the portfolio
could potentially be
made up of 30 Yr 1 Yr 2 Yr 10 Yr 1 Yr 2 Yr 10 Yr 1 Yr 2 Yr 10
groups of contracts

2
4
 Transition - Approaches
Full Retrospective
Approach
Identify, recognize and
measure each group of
insurance as if IFRS 17
had always applied

If it is impractical to apply Full Retrospective Approach, the following two can

be adopted:

Modified Retrospective Fair Value Approach

Approach
Achieve the closest Determine the CSM or loss
outcome to retrospective component for remaining
application possible using coverage as the difference
reasonable and supportable between fair value of a
information available group of insurance contacts
without undue cost or and the fulfillment cash
effort flows
Unit Linked Transition– Full Retrospective
Year 2 (EOY) Year 2 (EOY)

IFRS 4 Insurance Contract Liability – IFRS 4 16,329

Fair Value of Underlying Assets 16,229 Insurance Contract Liability – IFRS 17 16,575
Liability for Future Years 16,229 Increase in Liability 247
Claim Reserves 100 Impact on Shareholders’ Equity (247)
Insurance Contract Liability 16,329
Year 1 2 Total
IFRS 17 Profit / (Loss) – IFRS 4 1,047 330 1,377
PV Expected Future Cash Flows 15,904 Profit / (Loss) – IFRS 17 553 577 1,130
Risk Adjustment - Difference (247)
Fulfillment Cash Flows 15,904
Contractual Service Margin 572
Liability for Future Years 16,475 Actual CSM; determined by
Claim Reserves 100 tracking the CSM since
inception till the transition date
Insurance Contract Liability 16,575
as if IFRS 17 was always
applicable
Unit Linked Transition– Modified Retrospective
Reflects the
income
Computation of Estimated CSM 2 (EOY)
already
Fair Value of Underlying Assets 16,229 recognized in
Fulfillment Cash Flows at Transition Date (15,904) P&L
Adjustments:
Charges Deducted from Underlying Assets before
1,398
Transition Date
Reflects the
Amounts Paid before Transition Date that would not have costs/
(21)
varied based on the Returns on Underlying Assets
expenses
Estimated CSM before Recognition in P&L 1,702 already borne
Estimated Amount of CSM that relates to Service Provided
(1,232)
before Transition Date It is the
Estimated CSM at the Transition Date 470 claims paid in
excess of
account
Estimated value of CSM at initial recognition values
Unit Linked Transition– Modified Retrospective

Year 2 (EOY)

Insurance Contract Liability – IFRS 4 16,329

Fulfillment Cash Flows 15,904

Contractual Service Margin (Estimated) 470
Claim Reserves 100
Insurance Contract Liability – IFRS 17 16,474
Increase in Liability 145
Impact on Shareholders’ Equity (145)
Effects on Reported Equity When Applying IFRS 17
Impact on
Factors that are expected to impact on the reported equity
Equity
Acquisition costs are currently expensed as incurred
Insurance Contracts are currently measured using rates that are
lower than market rates (market rate=8%, current rate = 4%)
Risk margins currently used are higher than the risk adjustment
used to apply IFRS 17 (very conservative)
Profits are currently recognized at contract inception
Aggregation of onerous contracts and profitable contracts is
currently permitted
Discount rates are currently based on assets backing insurance
contract liabilities
Insurance Contracts are currently measured using rates that are
higher than market rates (market rate=4%, current rate = 8%)
Risk margins currently used are lower than the risk adjustment used
to apply IFRS 17 (less than prudent estimate)
Challenges Posed to Life Insurers

• Challenges posed to life business including possible re-

use of current processes and systems

Type of Impact Level

Data granularity and data quality of cash flows have to be
Moderate
high enough to enable CSM calculation
Cash Flow view is common practice for life business Low
Implementation of system to process multiple yield
Moderate
curves simultaneously required
Implementation of system to compute and store CSM
calculations required, history of previous reporting High
period results required
Implementation of solution for complex posting logic
High
required
Major changes to Chart of Accounts High
IFRS 17 - Summary
Potential
It will change the financial statements as follows
Impact
Value of insurance liabilities: new calculations High

No “Day 1” profit: released to P&L over the life of the contract High

Revenue recognized reduces liability for remaining coverage

Moderate
attributable for services provided in the period
Presentation of P&L and balance sheet: look very different High
Payments to policyholders unrelated to insured event (return of
Moderate
‘deposits’) are not revenue

Grouping of results (aggregation): big impact on systems and

High
processes
New disclosures: lots of additional information High
Lots of judgments to be made High
 Thank You!
Questions?

Abdul Moid Usama Dangra

Moid.ahmed@sirconsultants.com Usama.dangra@sirconsultants.com