Introduction to IFRS 17 - 3Blocks

1 3 Blocks . Introduction to ifrs 17. Pawel Wozniak, Agnieszka Hupert March 2019. Introduction to ifrs 17 3 Blocks . Table of content Introduction 3 Onerous contracts .. 79. General Model . 10 Acquisition costs .. 85. Risk Adjustment .. 19 Full Retrospective Approach .. 90. Contractual Service Margin .. 24 Mod. Retrospective Approach .. 94. Reinsurance .. 33 Fair Value Approach .. 103. ifrs 17 Reporting .. 41 Implementation considerations .. 107. Variable Fee Approach .. 52 ifrs 17 vs Solvency II .. 123. Premium Allocation Approach .. 62 Appendix .. 129. Introduction to ifrs 17 Mar 2019 2. Introduction to ifrs 17 3 Blocks . Background Introduction Introduction to ifrs 17 Mar 2019 3. Introduction to ifrs 17 3 Blocks . 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.

2 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 Introduction to ifrs 17 Mar 2019 4. Introduction to ifrs 17 3 Blocks . Timeline First Exposure ifrs 17 Transition First ifrs 17. Draft publication date fin. statements 2010 2013 2017 2018 2019 2020 2021 2022 2023.. Second Effective date Exposure Draft Initial application Drafting the new standard Implementation ifrs 17 reporting Retrospective implementation Introduction to ifrs 17 Mar 2019 5. Introduction to ifrs 17 3 Blocks . Measurement models overview [1]. General Variable Fee Premium Allocation Model (GM) Approach (VFA) Approach (PAA).

3 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(*). Introduction to ifrs 17 Mar 2019 6. Introduction to ifrs 17 3 Blocks . 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.

4 Discretionary Investments Participation VFA GM/PAA. with DPF Features Investment contracts with Discretionary Participation Features (DPF). Introduction to ifrs 17 Mar 2019 7. Introduction to ifrs 17 3 Blocks . 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 Introduction to ifrs 17 Mar 2019 8. Introduction to ifrs 17 3 Blocks . Unit of account 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 composition should not be changed Cohorts Groups may be smaller that that prescribed above Contracts issued more than quarterly instead of yearly cohorts one year apart should not be Onerous contract group may be identified by measuring included in the same group.

5 The set of contracts instead of on the individual basis Regulatory pricing restrictions ( Gender Directive). driven profitability differentiation may be ignored Introduction to ifrs 17 Mar 2019 9. Introduction to ifrs 17 3 Blocks . Measurement - GM. Measurement General Model (GM). Introduction to ifrs 17 Mar 2019 10. Introduction to ifrs 17 3 Blocks . 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 & struc Risk + , Risk Adj. Adjustment increases the TP. Contractual Initial and subsequent + , CSM. CSM. Service measurement methods Margin increases the TP are different Introduction to ifrs 17 Mar 2019 11. Introduction to ifrs 17 3 Blocks.

6 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 Ability to reassess the risk and change Adjustment beginning of the coverage period the premiums or benefits date when the first premium becomes due Possibility to do the reassessment at the Contractual when the group becomes onerous portfolio level Service Margin Introduction to ifrs 17 Mar 2019 12. Introduction to ifrs 17 3 Blocks . 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.

7 Yield on the Bottom-up underlying assets Future cash flows Assets reference portfolio rate Time value Duration mismatch adjustment of money Top-Down Credit Risk premium for expected losses (Probability of Default) Credit risk premium for unexpected losses (Cost of Downgrade) Risk Top-down ifrs 17 discount rate Adjustment Bottom-up ifrs 17 discount rate Contractual Liquidity premium Bottom-up Service Margin Swap rate (risk free rate) Introduction to ifrs 17 Mar 2019 13. Introduction to ifrs 17 3 Blocks . Discounting [2]. Insurance Liquid liabilities Not-liquid liabilities Semi-liquid liabilities Liabilities Examples Annuities, Single P. Terms Endowments, Terms Unit Links Future cash Surrender risk No surrender risk Some surrender risk Substantial surrender risk flows Only u/w risks are longevity Mortality, longevity, No longevity risk Other liquidity risk and expense risk morbidity, expense risk indicators Premiums have been paid Not all premiums paid Time value The swap yield curve plus the The swap yield curve plus The swap yield curve of money liquidity premium.

8 Some portion of the liquidity appropriate to the currency of Bottom-up premium. the related cash flows. approach Risk [Swap Rate] + [Liq Prem] [Swap Rate] + F x [Liq Prem] [Swap Rate]. Adjustment Reference portfolio rate adjusted for mismatches and credit risk Top-down Contractual [Ref Portfolio rate] - [Mismatch adj.] - [Probability of Default] - [Cos of Downgrade]. approach Service Top-Down = Bottom-Up Top-Down Bottom-Up Margin Introduction to ifrs 17 Mar 2019 14. Introduction to ifrs 17 3 Blocks . Risk Adjustment Insurance Risk Adjustment calculation method not specified in the Liabilities standard but it should follow the fallowing 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%.

9 Conditional Tail Expectation Service 4%. 2%. Margin 0%. Introduction to ifrs 17 Mar 2019 15. Introduction to ifrs 17 3 Blocks . 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-recong. Acquisit. CF. Time value of money CSM. Risk Adjustment Insurance Insurance FCF FCF FCF FCF/Bank Contractual asset liability Service Margin Introduction to ifrs 17 Mar 2019 16. Introduction to ifrs 17 3 Blocks . 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 Acquisit. CF. of money Risk Adjustment Insurance Insurance FCF FCF FCF FCF/Bank asset cost Contractual Service Margin Introduction to ifrs 17 Mar 2019 17. Introduction to ifrs 17 3 Blocks.

10 CSM subsequent measurement Insurance Contractual Service Margin Liabilities Interest Estimate variance New contracts Future cash Release to Subsequent measurement 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 number of Service is not closed yet. locked-in discount rate policies in-force Margin Introduction to ifrs 17 Mar 2019 18. Introduction to ifrs 17 3 Blocks . Risk Adjustment Risk Adjustment Introduction to ifrs 17 Mar 2019 19. Introduction to ifrs 17 3 Blocks . Confidence level techniques 20%. Confidence level techniques Mean Easy to communicate to users 15%.