IFRS 4 Insurance contracts Summary of key issues www.pwc.com/ca/insurance

www.pwc.com/ca/insurance
IFRS 4
Insurance contracts
Summary of key issues
Summary of key issues
In June 2013, the International Accounting Standards
Board (IASB) released for comment a revised exposure
draft on the accounting for insurance contracts. This
brought some significant changes from the previous
exposure draft and has received some vocal responses
from those in the Canadian insurance industry.
Now that the comment period has ended, we have
summarized the key issues we have heard from
Canadian insurers, regulators, associations and others
impacted by the proposed new standard. Change
appears to be inevitable as the IASB continues its push
to issue a final standard. How the IASB responds to this
latest feedback remains to be seen as it works towards
issuing a final standard in 2014 or early 2015.
Key issues for long term contracts
Area
Discount rate and use of OCI
Implication
•Discount rate reflects characteristics of the insurance liability - not the underlying
assets
•Concerns over volatility and capital impacts for long term products (however based
on IASB feedback, long term discount rates are not expected to be as volatile as
Canadian insurers first anticipated)
•Definition of unobservable rates and approach for how to calculate discount rates for
periods beyond observable market interest rates
Contractual service margin
•Level of granularity – determined at the portfolio level (and calculated at a more
granular time cohort level)
•Definition of a portfolio – could lead to inconsistent application in the absence of
additional guidance
•Unlocking of contractual service margin adds complexity; smoothing impact of
assumption changes
•No prescribed pattern of amortization could lead to diverse earnings patterns
Presentation
•New insurance revenue metric based on insurance service provided during the period
- derived from insurance liability building blocks
•Does not contain premiums written volume information - a key performance
indicator today
•IASB feedback argues that presenting changes in the insurance liability building
blocks provides more visibility than the change in reserves line used today
•Lower insurance revenue number when excluding investment/deposit components
•Complexity vs. benefit of excluding investment/deposit components
Contracts that require an entity to hold
underlying items and specify a link to
these items
•Added complexity
Risk adjustment
•No prescribed method could result in inconsistent application
•How practicable is the requirement to split the liabilities’ cash flows based on their
level of dependence on the underlying items/asset returns?
•Treatment of changes in estimates inconsistent with the contractual service margin
(no unlocking)
2
Key issues for both short term and long term contracts
Area
Discount rate and use of OCI
Implication
•Mandatory OCI presentation adds complexity and requires tracking of multiple discount
rates
•Potential for an accounting mismatch with underlying assets supporting insurance
liabilities
Confidence level (risk
adjustment) disclosure
•Need to calculate and disclose - even if not using this method to determine the risk
adjustment
•Additional burden on actuarial resources to prepare
•May not be relevant to the entities’ view on risk adjustment
Liability adequacy test for
remaining coverage
•Performed at the portfolio level – no netting between portfolios
•Definition of a portfolio – could lead to diverse practice in the absence of additional
guidance
•Likely recognize onerous liabilities sooner than today
Enhanced disclosures
•Disclosures required at a more granular level than today
•Impacts on data and systems to capture and prepare the required information
Transition
•Practical expedients available but still resource intensive (feedback suggests more than 3
years transition period is required)
•Availability of historical data, a significant concern for preparers
•Interaction with IFRS 9 – does not give ability to fully re-designate all financial assets
Key issues for short term contracts
Area
Use of simplified approach
Implication
•Need to demonstrate ‘proxy’ for building blocks approach for policies with coverage
periods greater than 1 year
•Demonstration not needed for policies 1 year or less
Reinsurance
•Measurement of reinsurance contracts may be inconsistent with the underlying direct
contracts – coverage period of risks attaching reinsurance contracts may be greater than 1
year
•For risks attaching contracts, will have to estimate reinsurance cash flows before direct
policies are written
Risk margin
•No prescribed method could result in inconsistent application
•Revenue related to the risk margin is earned over the settlement period – could lead to
later revenue recognition on long tail business
3
Who to call
Leigh Chalmers
Partner, Audit and Assurance Group
416 869 2359
[email protected]
Dan Doyle
Partner, Actuarial – Life
416 941 8377
[email protected]
Larissa Dyomina
Partner, National Accounting Consulting
416 869 2320
[email protected]
Marco Fillion
Partner, Actuarial – Life
416 814 5789
[email protected]
Philip Thieren
Partner, Audit and Assurance Group
514 205 5377
[email protected]
www.pwc.com/ca/insurance
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