Insurance ContractsJeong-Hyeok, Park
Research Fellow
September 29, 2010
Agenda-D-2
Contents
2
1.Background
2.Working Group
3.Discussion Issues
Contents
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Working Group
Background
Discussion Issues
Background
2004 ~ 2007 2011
Project history
2010
We are here
11• Issued in 2004
• Aimed at making only limited improvements
DP Preliminary Views on Insurance Contract
(Phase ll)• Issued in 2007
ED ‘ Insurance Contracts’
(Phase ll)
IFRS ‘ Insurance Contracts’
(Phase l)
• Issued in July 2010, comment due November 30, 2010
• Final standard : expected for Q2 2011
Joint Project with FASB • Since 2008
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11 22 3344
2008 2009
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Background continued
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Project Objective
Improve financial reporting for Insur-
ance contracts
Making it easier for users to under-
stand
Enhance compara-bility and trans-
parency
Contents
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Discussion Issues
Working Group
Background
Working Group
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Purpose• To assist the AOSSG in preparing improved proposals to the
IASB regarding the ED ‘Insurance Contracts’
Lead countryLead country • Korea
Co-lead countryCo-lead country • China
MembersMembers
• Australia, Hong Kong, In-donesia, Japan, Malaysia, Nepal, Thailand
Working Group continued
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Chronology of Working Process
• September 03, 2010:
WG members’ preliminary views on ED
• September 14, 2010 :
Circulate draft of AOSSG WG’s preliminary views on questions in IASB’s ED
• September 16, 2010:
All AOSSG members’ comments on AOSSG WG’s preliminary views
• September 29, 2010:
1st AOSSG meeting
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September
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Contents
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Working Group
Discussion Issues
Summary
Key Issues to be discussed
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Issue 1. Two Margin approach vs Single Margin Approach
Issue 2. Discount Rate
Issue 3. Acquisition Costs
Issue 4.
Issue 5. Transition
Presentation
Issue 1. Two Margin approach vs Single Margin Approach
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premium
cash outflows
cash outflows
riskadjustment
residualmargin composite
margin
Two Margin Approach = Best Estimate of Liability + RA + RM
Single Margin Approach = Best Estimate of Liability + CM
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2
1 2
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Issue 1. Two Margin approach vs Single Margin Approach
Two Margin Approach Single Margin Approach
• Convey useful informa-tion about the amount of insurance risks
• Reduce the amount of RM for arbitrary release patterns
• Easier Application to practice
• Reduce possibility of a loss at the point of the first measurement
• Reduce fluctuation of gains or losses in sub-sequent measurement
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cash outflows
• 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
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
WG Preliminary Views
Issue 1. Two Margin approach vs Single Margin Approach
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cash outflows
• 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.
• 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
WG Preliminary Views
Issue 1. Two Margin approach vs Single Margin Approach
Liabilities
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Issue 2. 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
How to determine discount rate?
NO Yes
Assets Liabilities
Risk-free rate
+
illiquidity
Liabilities
Assets Liabilities
performance of assets
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cash outflows
• 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?
(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.
WG Preliminary Views
Issue 2. Discount Rate
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Issue 3. Acquisition Costs
• incremental acquisition costs (on a contract level) are included in
the cash flows
• non-incremental acquisition costs are expensed
Measurement Level
Measurement Building Blocks
= Cash flows + Risk ad-justment
+ Residual margin
incremental ac-
quisition costs
non-incremental ac-
quisition costs
→ expensed
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WG Preliminary Views
Issue 3. Acquisition Costs
• 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.
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Issue 4. Presentation (Summarized Margin Ap-proach)
Inception six months six months
1 Jan to 30 Jun to 31 Dec
Risk margin 21 26
Residual margin 2 2
Insurance margin 0 23 28
Experience adjustment (10) (10)
Changes in estimates (20) 0
Net gain at inception 0 0 0
Investment income 40 38
Interest on insurance liability (25) (23)
Net interest and investment 0 15 15
Profit 0 8 33
Examples
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WG Preliminary Views
Issue 4. Presentation (Summarized Margin Approach)
• 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.
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Issue 5. Transition`
existinginsurance liabilities
cash flows
intangible assets
deferredacquisition costs
Risk adjustment
Previous GAAP Transition IFRS 4Phase II
Difference toretained earnings
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WG Preliminary Views
Issue 5. Transition
• 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
Thank you !!
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