Introduction to IFRS 17 3Blocks ®

Background

Introduction

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What is wrong with IFRS 4?

Insurance Contracts IFRS

IFRS 4 allows for a wide range of insurance liabilities modelling methods
Phase I (2005) Phase II (2022)
that can be applied as long as they satisfy the Liability Adequacy Test.
IFRS 4 IFRS 17

Different levels of safety embedded in

Lack of comparability between countries Lack of comparability between companies
insurance liabilities calculations

Valuation of insurance liabilities does

Discounting is not always required, typically Insurance liabilities may be calculated
not have to be cash flow-based
non-life TPs valued on an undiscounted basis based on historical assumptions

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Timeline

First Exposure IFRS 17 IFRS 17 Transition First IFRS 17

Draft Publication Amendments Date Fin. Statements

2010 2013 2017 2018 2019 2020 2021 2022 2023 2024
... ...

Second Third Exposure Effective Date

Exposure Draft Draft Initial Application

Drafting the new standard Implementation IFRS 17 reporting

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Measurement models overview [1]

General Variable Fee Premium Allocation

Model (GM) Approach (VFA) Approach (PAA)

Contracts linked to Short term contracts PVCF - Present

Application Default approach
underlying assets (less than 1 year) Value of Cash Flows
RA – Risk
Adjustment
Endowments, Terms, Unit Links, 1-year non-life,
Examples Annuities, Whole Life With Profits health or life insurance CSM - Contractual
Service Margin
LFRC - Liability for
(FV Assets) - (Var. Fee) Similar to unearned Remaining
LFRC PVCF + RA + CSM
+ RA + CSM premium reserve Coverage
LIC - Liability for
Incurred Claims
LIC PVCF + RA PVCF + RA PVCF + RA

Insurance issued Insurance issued (*) measured using

Ins/Reins Reinsurance held
Insurance issued
Reinsurance held the fulfilment CF
measurement
Non-onerous Non-onerous Non-onerous,
Onerousness Onerous Onerous Onerous(*)

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Measurement models overview [2]

IFRS 17 scope: Insurance Risk No insurance Risk

Insurance Direct No Direct Direct No Direct

contracts Participation Participation Participation Participation
Features Features Features Features

No Discretionary
Reinsurance Participation Out of IFRS 17 scope
held Features
VFA GM/PAA
Discretionary
Investments Participation VFA GM/PAA
with DPF Features

Investment contracts with Discretionary

Participation Features (DPF)

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Components of insurance liability

Non-
Onerous Claims
onerous
contracts incurred
contracts

Liability for
LFRC Loss
Fulfilment Liability for Incurred
excluding Component
Cash Flows Remaining Claims
the LC (LC)
Coverage (LIC)
Treatment of insurance
(LFRC) liabilities’ movements
* recognised in the
CSM
insurance result

Revenue Expenses * Recognition of the loss component

and reversals of the loss
component recognition

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Selected IFRS 17 accounting challenges 3Blocks ®

Group level vs Portfolio level accounting

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Group level vs Portfolio level 3Blocks ®

IFRS 17 groups – level of aggregation

Insurance Portfolio
• Subject to similar risks
• Managed together Profitability
• Within the same product line
• Onerous at initial recognition
IFRS 17 • At initial recognition no significant
possibility of becoming onerous
group • Remaining contracts

Groups established at initial recognition and their

Cohorts
Contracts issued more than
one year apart should not be
included in the same group.
composition should not be changed
Groups may be smaller than that prescribed above e.g.
quarterly instead of yearly cohorts
Onerous contract group may be identified by measuring
the set of contracts instead of on the individual basis
Regulatory pricing restrictions (e.g. Gender Directive)
driving profitability differentiation may be ignored

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Group level vs Portfolio level 3Blocks ®

Level of aggregation concept

Frequency of Daily calculations, monthly, quarterly,

Article 24
calculations once in the reporting period
To measure a group of contracts, an entity
may estimate the fulfilment cash flows at a
Level of Group, portfolio, segment, entity level, higher level of aggregation than the group
calculations provided that article 24 is satisfied or portfolio, provided the entity is able to
include the appropriate fulfilment cash
Level of flows in the measurement of the group,
accounting
Group, portfolio, segment, entity level applying paragraphs 32(a), 40(a)(i) and
40(b), by allocating such estimates to
groups of contracts.
Locked-in
Group, accident year (PAA OCI)
discount rate

Aggregating
Level of
losses with gains
Group Aggregation
Rules

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Introduction

Article 24
To measure a group of contracts, an entity may estimate the fulfilment cash flows at a higher level of aggregation than the
group or portfolio, provided the entity is able to include the appropriate fulfilment cash flows in the measurement of the
group, applying paragraphs 32(a), 40(a)(i) and 40(b), by allocating such estimates to groups of contracts.

Option A
Allocate to group all fulfilment cash flows, regardless of whether it is needed for measurement or not.

Option B
Allocate to group fulfilment cash flows only when it is needed for the measurement.

M(Gr1) + M(Gr2) + ⋯ + M(Grn) = M(Gr1 ∪ Gr2 ∪…. ∪ Grn)

M(. ) – IFRS 17 measurement In what cases does the equation hold?

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Introduction

M(Gr1) + M(Gr2) + ⋯ + M(Grn) = M(Gr1 ∪ Gr2 ∪…. ∪ Grn)

LIC LFRC

GM (no OCI) Equitation holds

GM (OCI) (*) Equitation doesn’t hold

Onerous
VFA and non-
onerous
PAA (no OCI)
(*) In most cases, the OCI effect on claims
PAA (OCI) (**) is immaterial, e.g. may be material for
annuity-type claims
PAA (no OCI)
Non-
onerous (**) grouping by accident date required
PAA (OCI) (**)

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Introduction to IFRS 17 3Blocks ®

Measurement - GM

Measurement
General Model (GM)

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Overview

Insurance The General Model is a default

Liabilities IFRS 17 insurance liabilities
Sign convention:
measurement approach
Future cash “+” for inflows
flows “-” for outflows The same approach

Fulfilment Cash Flows

for the initial and
subsequent
Time value “+” or “-” dep. on measurement
of money the CF sign &
structure

Risk “+”, Risk Adj.

Adjustment increases the TP

Contractual Initial and subsequent

“+”, CSM
CSM

Service measurement methods

Margin increases the TP are different

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Cash flows

Best estimate cash flows Best estimate of cash flows

Insurance
Reassessed at each reporting date
Liabilities
Assumptions based on experience
Reflect conditions existing at the
measurement date
Future cash 0 1 2 3 4 5
Within boundary of the contract
flows
Expenses Claims Unbundle distinct components:
Acquisition Premium investments, derivatives or service
Can be done at portfolio level and
Time value allocated to insurance groups
of money

Recognition Cashflow boundary

Risk The earliest of the following: • Substantive rights exist
Adjustment
• beginning of the coverage period • Ability to reassess the risk and change
• date when the first premium becomes due the premiums or benefits
Contractual • when the group becomes onerous
Service
Margin

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Discounting [1]

Insurance Insurance cash Top-Down Insurance Yield on the

flows are not cashflows underlying assets
Liabilities directly linked directly linked
to assets to assets Adj. yield on the
Bottom-up
underlying assets
Future cash
flows
Assets reference portfolio rate 5.5%

Time value Duration mismatch adjustment 0.5%

Top-Down
of money Credit Risk premium for expected losses (Probability of Default) -1.5%

Credit risk premium for unexpected losses (Cost of Downgrade) -0.5%

Risk Top-down IFRS 17 discount rate 4.0%

Adjustment
Bottom-up IFRS 17 discount rate 3.5%
Contractual Liquidity premium 1.5% Bottom-up
Service
Margin Swap rate (risk free rate) 2.0%

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Risk Adjustment

Insurance Risk Adjustment calculation method is not specified in the

Liabilities standard, but it should follow the following principles:
- longer duration
- higher severity Higher risk
Future cash Greater Risk Adjustment
flows - wider distribution
- less is known

Time value
of money Confidence level based methods

18%
Mean
16%
Risk 14%
Adjustment 12%
10%
Value at Risk
8%
Contractual 6%
Conditional Tail Expectation
Service 4%
2%
Margin
0%

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CSM initial measurement [1]

Insurance
Liabilities Discount
Recognise Day 1 gain as the CSM

Risk Adj.
Future cash Initial
flows
Initial measurement
Future cash flows
cash flows
Pre-recogn.
acq. CF
Time value
of money CSM

Risk
Adjustment
Insurance Insurance
FCF FCF FCF FCF/Bank
Contractual asset liability
Service
Margin

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CSM initial measurement [2]

Insurance
Liabilities
Recognise Day 1 loss in the P&L
Discount
Future
cash flows Risk Adj.
Future cash
flows
Initial measurement

Initial
cash flows
Initial
loss
Time value Pre-coverage
acq. CF
of money

Risk
Adjustment
Insurance Insurance
FCF FCF FCF FCF/Bank
asset cost
Contractual
Service
Margin

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CSM initial measurement: examples

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CSM subsequent measurement

Insurance Contractual Service Margin

Liabilities Interest Estimate
variance
New
contracts
Future cash Subsequent measurement Release to
flows revenue

CSM
[opening] CSM
Time value [closing]
of money

Opening Additions to Accreted Fulfilment Release to Closing

balance the group interest CF variances revenue balance
Risk
Adjustment
The effect of any new Interest accrete Future fulfilment Release to revenue in
Contractual contracts added to the at the locked-in cashflows estimate proportion to coverage
group in case the group discount rate variance measured at units e.g. number of
Service is not closed yet. locked-in discount rate policies in-force
Margin

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IFRS 17 Reporting

IFRS 17 Accounting Examples

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PAA loss component

Revenue under the GM – without loss component

Reduction in liability
CSM
RA Expected claims &
Acq. expenses
Costs
Acquisition costs
Expenses Premium
Revenue =
Release of Risk
Adjustment
Claims
Release of CSM

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PAA loss component

Revenue under the GM – with loss component

RA Loss Reduction in liability

Comp.
Acq.
Costs
Expected claims & _
expenses Amounts allocated

Expenses
Release of Risk _ to Loss Component
Adjustment
Premium
Revenue =
Acquisition costs

Claims
Release of CSM

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IFRS 17 Reporting – Example 1

Example 1 - profitable; no variances

Expected cash flows 0 1 2 Total Income statement 1 2 Total

Premiums 1000 - - 1000 Expected claims & expenses 300 300 600
Claims & expenses - (300) (300) (600) Release of the CSM 200 200 400
Acquisition costs - - - - Acquisition costs experience adj. - - -
Total 1000 (300) (300) 400 Premiums experience adj. - - -
Acquisition costs recognition - - -

Actual cash flows 0 1 2 Total Insurance revenue 500 500 1000

Premiums 1000 - - 1000 Actual claims and expenses (300) (300) (600)

Claims & expenses - (300) (300) (600) Acquisition cost recognition - - -

Acquisition costs - - - - Loss component recognition - - -

Total 1000 (300) (300) 400 Loss component run-off - - -

Insurance service costs (300) (300) (600)
Profit or loss 200 200 400

CSM 400 200 - n/a

Loss component - - - n/a

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IFRS 17 Reporting – Example 2

Example 2 - profitable, no variances, acquisition costs recognition

Expected cash flows 0 1 2 Total Income statement 1 2 Total

Premiums 1000 - - 1000 Expected claims & expenses 300 300 600
Claims & expenses - (300) (300) (600) Release of the CSM 100 100 200
Acquisition costs (200) - - (200) Acquisition costs experience adj. - - -
Total 800 (300) (300) 200 Premiums experience adj. - - -
Acquisition costs recognition 100 100 200

Actual cash flows 0 1 2 Total Insurance revenue 500 500 1000

Actual claims and expenses (300) (300) (600)
Premiums 1000 - - 1000
Acquisition cost recognition (100) (100) (200)
Claims & expenses - (300) (300) (600)
Loss component recognition - - -
Acquisition costs (200) - - (200)
Loss component run-off - - -
Total 800 (300) (300) 200
Insurance service costs (400) (400) (800)
Profit or loss 100 100 200

CSM 200 100 - n/a

Loss component - - - n/a

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IFRS 17 Reporting – Example 3

Example 3 - onerous at recognition and onerous subsequently, no variances

Expected cash flows 0 1 2 Total Income statement 1 2 Total

Premiums 1000 - - 1000 Expected claims & expenses (*) 500 500 1000
Claims & expenses - (600) (600) (1200) Release of the CSM - - -
Acquisition costs - - - - Acquisition costs experience adj. - - -
Total 1000 (600) (600) (200) Premiums experience adj. - - -
Acquisition costs recognition - - -
Insurance revenue 500 500 1000
Actual cash flows 0 1 2 Total
Actual claims and expenses (600) (600) (1200)
Premiums 1000 - - 1000
Acquisition cost recognition - - -
Claims & expenses - (600) (600) (1200)
Loss component recognition (200) - (200)
Acquisition costs - - - -
Loss component run-off 100 100 200
Total 1000 (600) (600) (200)
Insurance service costs (700) (500) (1200)
Profit or loss (200) - (200)

CSM - - - n/a
Loss component (200) (100) - n/a

(*) less the loss component run-off

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IFRS 17 Reporting – Example 4

Example 4 – profitable; claims experience adjustment in year 1

Expected cash flows 0 1 2 Total Income statement 1 2 Total

Premiums 1000 - - 1000 Expected claims & expenses 300 300 600
Claims & expenses - (300) (300) (600) Release of the CSM 200 200 400
Acquisition costs - - - - Acquisition costs experience adj. - - -
Total 1000 (300) (300) 400 Premiums experience adj. - - -
Acquisition costs recognition - - -
Insurance revenue 500 500 1000
Actual cash flows 0 1 2 Total
Actual claims and expenses (500) (300) (800)
Premiums 1000 - - 1000
Acquisition cost recognition - - -
Claims & expenses - (500) (300) (800)
Loss component recognition - - -
Acquisition costs - - - -
Loss component run-off - - -
Total 1000 (500) (300) 200
Insurance service costs (500) (300) (800)
Profit or loss - 200 200

CSM 400 200 - n/a

Loss component - - - n/a

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IFRS 17 Reporting – Example 5

Example 5 - profitable; change in claims estimates in year 1

Expected cash flows 0 1 2 Total Income statement 1 2 Total

Premiums 1000 - - 1000 Expected claims & expenses 300 400 700
Claims & expenses - (300) (300) (600) Release of the CSM 150 150 300
Acquisition costs - - - - Acquisition costs experience adj. - - -
Total 1000 (300) (300) 400 Premiums experience adj. - - -
Acquisition costs recognition - - -
Expected cash flows 2 Total Insurance revenue 450 550 1000
Premiums - - Actual claims and expenses (300) (400) (700)
Claims & expenses (400) (400) Acquisition cost recognition - - -
Acquisition costs - - Loss component recognition - - -
Total (400) (400) Loss component run-off - - -
Insurance service costs (300) (400) (700)
Actual cash flows 0 1 2 Total Profit or loss 150 150 300
Premiums 1000 - - 1000
CSM 400 150 - n/a
Claims & expenses - (300) (400) (700)
Loss component - - - n/a
Acquisition costs - - - -
Total 1000 (300) (400) 300

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IFRS 17 Reporting – Example 6

Example 6 - profitable at recognition, onerous subsequently; change in claims estimates in year 1

Expected cash flows 0 1 2 Total Income statement 1 2 Total

Premiums 1000 - - 1000 Expected claims & expenses (*) 400 600 1000
Claims & expenses - (400) (400) (800) Release of the CSM - - -
Acquisition costs - - - - Acquisition costs experience adj. - - -
Total 1000 (400) (400) 200 Premiums experience adj. - - -
Acquisition costs recognition - - -
Expected cash flows 2 Total Insurance revenue 400 600 1000
Premiums - - Actual claims and expenses (400) (700) (1100)
Claims & expenses (700) (700) Acquisition cost recognition - - -
Acquisition costs - - Loss component recognition (100) - (100)
Total (700) (700) Loss component run-off - 100 100
Insurance service costs (500) (600) (1100)
Actual cash flows 0 1 2 Total Profit or loss (100) - (100)
Premiums 1000 - - 1000
CSM 200 - - n/a
Claims & expenses - (400) (700) (1100)
Loss component - 100 - n/a
Acquisition costs - - - -
(*) less the loss component run-off
Total 1000 (400) (700) (100)

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IFRS 17 Reporting – Example 7

Example 7 - profitable; premium experience adjustment in year 1

Expected cash flows 0 1 2 Total Income statement 1 2 Total

Premiums 1000 - - 1000 Expected claims & expenses 300 300 600
Claims & expenses - (300) (300) (600) Release of the CSM 200 200 400
Acquisition costs - - - - Acquisition costs experience adj. - - -
Total 1000 (300) (300) 400 Premiums experience adj. 200 - 200
Acquisition costs recognition - - -

Actual cash flows 0 1 2 Total Insurance revenue 700 500 1200

Actual claims and expenses (300) (300) (600)
Premiums 1000 200 - 1200
Acquisition cost recognition - - -
Claims & expenses - (300) (300) (600)
Loss component recognition - - -
Acquisition costs - - - -
Loss component run-off - - -
Total 1000 (100) (300) 600
Insurance service costs (300) (300) (600)
Profit or loss 400 200 600

CSM 400 200 - n/a

Loss component - - - n/a

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IFRS 17 Reporting – Example 8

Example 8 - profitable, acquisition costs experience adjustment in year 1

Expected cash flows 0 1 2 Total Income statement 1 2 Total

Premiums 1000 - - 1000 Expected claims & expenses 300 300 600
Claims & expenses - (300) (300) (600) Release of the CSM 100 100 200
Acquisition costs (200) - - (200) Acquisition costs experience adj. (100) - (100)
Total 800 (300) (300) 200 Premiums experience adj. - - -
Acquisition costs recognition 200 100 300

Actual cash flows 0 1 2 Total Insurance revenue 500 500 1000

Actual claims and expenses (300) (300) (600)
Premiums 1000 - - 1000
Acquisition cost recognition (200) (100) (300)
Claims & expenses - (300) (300) (600)
Loss component recognition - - -
Acquisition costs (200) (100) - (300)
Loss component run-off - - -
Total 800 (400) (300) 100
Insurance service costs (500) (400) (900)
Profit or loss - 100 100

CSM 200 100 - n/a

Loss component - - - n/a

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Introduction to IFRS 17 3Blocks ®

IFRS 17 vs Solvency II

IFRS 17 vs Solvency II

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Solvency II and IFRS 17 – Differences [1]

Solvency II IFRS 17

Goal Capital adequacy and risk management Show financial position and result for the
reporting period

Scope Assets and liabilities, own funds, capital Recognition, measurement, presentation and
requirements disclosure of insurance liabilities

Contracts covered All contracts giving rise to assets or liabilities (Re)insurance contracts issued, reinsurance
contracts held, investments with DPF

Geographical coverage EEA i.e. the European Union plus Iceland, All insurance and reinsurance companies in
Liechtenstein and Norway the world reporting under IFRS

Acquisition cost Recognised immediately Recognised in systematic way over the

insurance period

Discounting Risk free rate with adjustments: matching adj., Risk-free rate plus illiquidity adjustment
volatility adj., discount rate transitional

Initial gain Recognised immediately in P&L Initial gain recognised gradually over the
insurance coverage period

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Solvency II and IFRS 17 – Differences [2]

Solvency II IFRS 17

Contract beginning Earlier of the coverage period and policy date Earlier of the coverage period, first premium
due, the group becomes onerous

Contract end Unilateral right to terminate contract, amend Similar to Solvency II, however, only insurance
premiums or benefits and financial risk considered

Short-term contracts No special treatment of short-term contracts Simplification allowed for short-term
contracts

Grouping Homogeneous Risk Groups Groups based on portfolio, profitability and

underwriting period

Risk Adjustment Cost of Capital method, applied only to the No method prescribed; RA applied to both
insurance liabilities insurance liabilities and reinsurance held

Unbundling Not required Distinct derivative, investment or service

components should be unbundled

Expenses Cashflow models include overhead expenses Cashflow models include only expenses that
relate directly to the ins. contract fulfilment

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Solvency II and IFRS 17 – Differences [3]

Solvency II IFRS 17

Reinsurance modeling Reinsurance modelling mirrors the related Reinsurance held and the related insurance
insurance contract calculations contract are modelled independently

Transition Possibility to apply transitional measures on Possible simplifications related to the

the TPs or TPs discount rates transitional CSM

Disclosures Disclosures focused on the solvency position Disclosures focused on explaining the financial
and risk management (QRT, SFCR, ORSA) position and result for the period

Contracts with DPF “Surplus Funds” defined in the UK regulations Does not regulate the country specific
excluded from the TPs elements, IFRS is principle based

Effective date 1 January 2016 1 January 2023, with an earlier

implementation option

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Solvency II vs IFRS 17 – Balance Sheet

Solvency II IFRS 17 Spot the difference

Free Surplus
Shareholder equity
Own
Funds
SCR
MCR
Other Liabilities

Other Liabilities
Contractual
Service
Margin
Assets Risk Assets
Margin Risk
Adjustment

Technical
Technical Provisions
Provisions
Best Best
Estimate Estimate
Liability Liability

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