FASB/IASB Insurance Contracts Project Update September 15, 2011 - - PowerPoint PPT Presentation

FASB/IASB Insurance Contracts Project Update

September 15, 2011

FASB/IASB Insurance Contracts Project Update 2

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FASB/IASB Insurance Contracts Project Update 3

Agenda

► IASB/FASB recent progress ► Project timeline ► Modeling results

FASB/IASB Insurance Contracts Project Update 4

Boards re-deliberations

Key topics to be discussed

• Risk adjustment/Composite margin*
• Modified approach
• Presentation
• Disclosures

Key topics discussed

• Scope
• Fulfillment cash flows
• Discount rate
• Risk adjustment/Composite margin*
• Recognition
• Contract boundary
• Acquisition costs
• Reinsurance
• Residual margin

FASB/IASB Insurance Contracts Project Update 5

Key changes to measurement inputs

Measurement input IASB ED/FASB DP Result of re-deliberations

Current estimate of future cash flows Current, explicit and unbiased expected value estimate

• f future cash flows.

The measurement objective of expected value refers to the mean that considers all relevant information. The Boards noted that not all possible scenarios need to be identified and quantified, provided that the estimate is consistent with the measurement

• bjective of determining the mean.

Discount rate Discount rate should reflect the characteristics of the

• liabilities. Derived as the risk free rate plus a premium

for illiquidity. The Boards recognize that an illiquidity premium may be difficult to calculate. Therefore they will allow a top down approach from taking the expected return of a portfolio of assets that have similar characteristics to the insurance contracts minus the spread for credit risk. Risk adjustment (IASB ONLY) The risk adjustment should be the amount the insurer would rationally pay to be relieved of the risk and should be updated (remeasured) each reporting period Objective has been change to, “‘The risk adjustment shall be the compensation the insurer requires to bear the risk that the ultimate cash flows could exceed those expected”. The IASB tentatively decided that the measurement of an insurance contract should contain an explicit adjustment for risk. The adjustment would be determined independently from the premium and would be re-measured in each reporting period.

FASB/IASB Insurance Contracts Project Update 6

Key changes to measurement inputs

Measurement input IASB ED/FASB DP Result of re-deliberations

Composite Margin (FASB ONLY) Difference between premium and current estimate of cash flows discounted for the time value of money The FASB has tentatively decided that the measurement model should use a single margin approach that recognizes profit as the insurer satisfies its performance obligation . An insurer satisfies its performance obligation as it is released from exposure to risk as evidenced by a reduction in the variability of cash outflows. An insurer should not remeasure or recalibrate the single margin to recapture previously recognized margin. Residual margin Eliminate profit at issue then amortize over the coverage period (on the basis of passage of time) but if the insurer expects to incur benefits and claims in a pattern that differs significantly from the passage of time, the residual margin should be released on the basis of the expected benefits and claims The IASB indicated that they would permit unlocking the residual margin based on changes in estimates of future cash flows. The IASB also indicated that the residual margin should be allocated “over the coverage period on a systematic basis that is consistent with the pattern of transfer of services provided under the contract.” The FASB indicated that they would not permit remeasurement of the residual margin if they adopted a two margin measurement approach.

FASB/IASB Insurance Contracts Project Update 7

Key changes to measurement inputs

Measurement input IASB ED/FASB DP Result of re-deliberations

Reinsurance Reinsurance contracts accounted for using a mirrored based approach to gross with no losses permitted at issue. The FASB and IASB recently made several decisions around ceded reinsurance. The three most critical of these decisions were: 1. Losses on a reinsurance contract will be recognized

• ver the coverage period through recorded the loss

as an additional reinsurance recoverable. Gains will be recognized through establishing a residual/composite margin in line with direct and assumed contract liabilities. 2. A cedant should not recognize a reinsurance asset until the underlying contract is recognized, unless the reinsurance contract is an aggregate coverage. 3. The ceded portion of the risk adjustment should represent the risk being removed through the use of

• reinsurance. i.e. the difference between a gross and

net risk adjustment is recorded as the ceded risk adjustment. Acquisition costs Expenses that were incremental to writing a contract could be reflected in the measurement of the cash flows of the contract. The IASB has decided to allow all the costs that the insurer will incur in acquiring the portfolio, including costs that relate directly to the acquisition of the portfolio to be included in the measurement of the cash flows. The FASB tentatively decided that the acquisition costs included in the cash flows of insurance contracts would be limited to those costs related to successful acquisition efforts and direct costs that are related to the acquisition of a portfolio of contracts.

FASB/IASB Insurance Contracts Project Update 8

Key changes to measurement inputs

Measurement input IASB ED/FASB DP Result of re-deliberations

Contract Boundary The boundary of an insurance contract is the point at which an insurer either: (a) is no longer required to provide coverage, or (b) has the right or the practical ability to reassess the risk of the particular policyholder and, as a result, can set a price that fully reflects that risk. In assessing whether it can set a price that fully reflects the risk, an insurer shall ignore restrictions that have no commercial substance The Boards decided that contract renewals should be treated as a new contract:

• when the insurer is no longer required to provide

coverage; or

• when the existing contract does not confer any

substantive rights on the policyholder. The Boards noted that a contract does not confer on the policyholder any substantive rights when the insurer has the right or the practical ability to reassess the risk of the portfolio the contract belongs to and, as a result, can set a price that fully reflects the risk of that portfolio. The Boards also noted that all renewal rights should be considered in determining the contract boundary whether arising from a contract, from law or from regulation.

FASB/IASB Insurance Contracts Project Update 9

Project timeline

IASB – discussion paper issued FASB – invitation to comment

2007 2008 2009 2010 May Nov Aug

End of comment periods (IASB and FASB) FASB Discussion Paper FASB ED and IASB re-exposed ED Possible implementation date (expected) FASB – Joined the project

Oct Jan

IASB and FASB meetings to develop insurance contracts standards

Jan 2009 to July 2010

Comment period ends

Sept Nov 2014 2015

?

Jan

Final FASB and IASB Standard

H2 2012/ H1/2013 Q4 2011 /H1 2012

FASB/IASB Insurance Contracts Project Update 10

Model background

► The model is designed to show a retrospective view over the last ten

years of financial statements under four accounting standards: statutory, current US GAAP, IFRS as proposed by the IASB insurance contract exposure draft, and proposed US GAAP as presented in the FASB insurance contract discussion paper

► Data is obtained from 10-K and statutory annual statement filings over

the period 1999 through 2009

► Throughout the presentation current US GAAP is labeled “GAAP, the

IASB proposal is labeled “IFRS” and the FASB proposal is labeled “FASB”.

FASB/IASB Insurance Contracts Project Update 11

Key events from 2000-2009

(1.0) (0.8) (0.6) (0.4) (0.2) 0.0 0.2 0.4 0.6 0.8 1.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Billions

Underwriting Net Income vs. Net Income Prior to Tax

GAAP U/W Income GAAP Net Income Before Tax

FASB/IASB Insurance Contracts Project Update 12

10-Year History of Key Income Drivers

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

5-Year Treasury Yield

60.0% 65.0% 70.0% 75.0% 80.0% 85.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Current Accident Year Loss Ratio

(0.4) (0.2) 0.0 0.2 0.4 0.6 0.8 1.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Billions

1-Year Loss Development

2.0 2.5 3.0 3.5 4.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Billions

Written Premium

FASB/IASB Insurance Contracts Project Update 13

GAAP v IFRS v FASB underwriting income

(1.5) (1.0) (0.5) 0.0 0.5 1.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Net U/W Income Billions Calendar Year

Comparison of Underwriting Income

GAAP IFRS FASB

FASB/IASB Insurance Contracts Project Update 14

Impact on underwriting net income per share

• $2.00
• $1.50
• $1.00
• $0.50

$0.00 $0.50 $1.00 $1.50 $2.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Calendar Year

Difference in Underwriting Net Income Per Share

IFRS - GAAP FASB - GAAP

FASB/IASB Insurance Contracts Project Update 15

Income effects of loss reserve discount – IFRS Basis

0.00 1.00 2.00 3.00 4.00 5.00 6.00 (0.7) (0.5) (0.3) (0.1) 0.1 0.3 0.5 0.7 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 5-Year Yiedl Rate (%) Discount Billions

IFRS - Current Year Discount vs. Change in Discount of Prior Years

Change in Discount of Prior Accident Years Current Accident Year Discount 5 Yr Yields

Positive numbers - credit to income Negative numbers - debit to income

FASB/IASB Insurance Contracts Project Update 16

Loss development effects of loss reserve discount – IFRS Basis

(1.0) (0.8) (0.6) (0.4) (0.2) 0.0 0.2 0.4 0.6 0.8 1.0 (0.7) (0.5) (0.3) (0.1) 0.1 0.3 0.5 0.7 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1 Year Loss Development Billions Discount Billions

IFRS - Current Year Discount vs. Change in Discount of Prior Years

Change in Discount of Prior Accident Years Current Accident Year Discount 1-year loss development

Positive numbers - credit to income Negative numbers - debit to income

FASB/IASB Insurance Contracts Project Update 17

Income effects of loss reserve discount – FASB Basis

0.00 1.00 2.00 3.00 4.00 5.00 6.00 (0.7) (0.5) (0.3) (0.1) 0.1 0.3 0.5 0.7 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 5-Year Yield Rate (%) Discount Billions

FASB - Current Year Discount vs. Change in Discount of Prior Years

Change in Discount of Prior Underwriting Years Current Underwriting Year Discount 5 Yr Yields

Positive numbers - credit to income Negative numbers - debit to income

FASB/IASB Insurance Contracts Project Update 18

Risk adjustment – effects of changing loss ratios

50% 55% 60% 65% 70% 75% 80% 85% (0.7) (0.5) (0.3) (0.1) 0.1 0.3 0.5 0.7 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Current AY Loss Ratio (%) Risk Adjustment Billions

IFRS - Current Year Risk Adjustment vs. Change in Risk Adjustment of Prior Years

Change in Risk Margin of Prior Accident Years Current Accident Year Risk Margin Current Accident Year Loss Ratio

Positive numbers - debit to income Negative numbers - credit to income

FASB/IASB Insurance Contracts Project Update 19

Composite margin – effects of changing loss ratios

60% 62% 64% 66% 68% 70% 72% 74% 76% 78% 80% (0.7) (0.5) (0.3) (0.1) 0.1 0.3 0.5 0.7 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Current UY Loss Raio (%) Composite Margin Billions

FASB - Current Year Composite Margin vs. Change in Composite Margin of Prior Years

Change in Composite Margin of Prior Underwriting Years Current Underwriting Year Composite Margin Current UY Loss Ratio

Positive numbers - debit to income Negative numbers - credit to income

FASB/IASB Insurance Contracts Project Update 20

Risk adjustment – effects of changing discount rate

0.00 1.00 2.00 3.00 4.00 5.00 6.00 (0.7) (0.5) (0.3) (0.1) 0.1 0.3 0.5 0.7 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 5-Yr Yield Rate (%) Risk Adjustment Billions

IFRS - Current Year Risk Adjustment vs. Change in Risk Adjustment of Prior Years

Change in Risk Adjustment of Prior Accident Years Current Accident Year Risk Adjustment 5 Yr Yields

Positive numbers - debit to income Negative numbers - credit to income

FASB/IASB Insurance Contracts Project Update 21

Composite margin – effects of changing discount rate

0.00 1.00 2.00 3.00 4.00 5.00 6.00 (0.7) (0.5) (0.3) (0.1) 0.1 0.3 0.5 0.7 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 5-Year Yield Rate (%) Composite Margin Billions

FASB - Current Year Composite Margin vs. Change in Composite Margin of Prior Years

Current Underwriting Year Composite Margin Change in Composite Margin of Prior Underwriting Years 5 Yr Yields

Positive numbers - debit to income Negative numbers - credit to income