Understanding and Implementing the New Accounting Standard for Insurance Contracts

IFRS 17

Understanding

Insurance Contracts Gap - Analysis

Asosiasi Asuransi Umum Indonesia (AAUI)

8 November 2021

Dr.Ludovicus Sensi W, CPA, CA

CTPRIMA

Agenda

1 Persiapan Implementasi IFRS17

 Surat OJK – Persiapan Implementasi IFRS 17

2 Insurance Value Chain

 Timeline

 Implication to Management and Stakeholders

 Operational Implications

 Improve financial reporting

 Key focus area of the standard

 Critical IFRS 17 Components

 Measurement Model

 Building Block Approach 3 Complexity of IFRS 17

 Overview General Model

 Insurance Risk VS Non-Insurance Risk

 Understanding Gap analysis

Agenda

 Technical Requirement

 IFRS Requirement

 Changes In Fs Presentation And Disclosure 3 Complexity of IFRS 17

4 Actuarial Aspect

 Measurement Models

 Separated Component

 Level Of Aggregation

 Expected Cash Flows

 Discount Rate

 Risk Adjustment

 Exercise

 Actuarial Gap analysis

Agenda

 IT Systems Requirements

 IFRS 17 IT Gap Analysis 5 Impact of IFRS 17 for IT

6 Financial Accounting and Reporting Aspects

 Business Process and Control

 Accounting Policy Framework

 Chart Of Account

 How Does IFRS Impact?

 Recognition

 Measurement

 Presentation

 Disclosure

 IFRS 17 Financial Accounting Gap Analysis

REFERENCE

 Insurance Contracts Accounting Standard AASB 17- Issued by Actuary Institute September 2017

 IFRS 17 Challenges, Seminar ISEA September 2021, Presented by Palti FTH Siahaan

 IFRS 17 for life Insurers June 2018– issued by Ernst & Young Global Limited, a UK Company limited.

 IFRS 17 Audit Committee Training Great Eastern Holdings Limited and Subsidiaries July 2019 - issued by Ernst & Young Global Limited, a UK Company limited

 IFRS 17: The First Truly International IFRS July 2017– issued Sue Lloyd – IASB

 IFRS 17: The First Truly International IFRS – issued Mehul Dave – Director of Actuarial & Insurance Solution, Deloitte Singapore.

 KPMG Insurance Contract July 2020 – Illustrative Disclosure for Insurer Guide to annual financial statement IFRS 17 and IFRS 9, September 2020 Edition

 KPMG Insurance Contract First Impression: 2020 Edition IFRS 17

 Angie Ng - Head of Technology & Software Insurance Consulting And Technology Willis Towers Watson, Singapore

 IFRS 17 Implementation by General Insurers in Singapore – Issued by Mehul Dave, Chair of IFRS 17 GI Working Party, 17 January 2020.

 PwC Insurance Contract June 2021, An illustration Financial statements presentation and

disclosure.

CTPRIMA Section 1

Persiapan Implementasi IFRS 17

• Surat OJK – Persiapan Implementasi IFRS 17

• Understanding Gap analysis

■ Dalam rangka memastikan persiapan penerapan PSAK 74 berjalan dengan baik maka pada tahun 2021 diharapkan seluruh Perusahaan Asuransi dan Perusahaan Reasuransi telah melakukan kajian terhadap kebutuhan infrastruktur dan hal pendukung lainnya dibandingkan dengan ketersediaan/kesiapannya (Gap Analysis). Kajian tersebut juga dilengkapi dengan analisis dampak penerapan PSAK 74 berdasarkan karakteristik produk dan portofolio polis perusahaan serta rencana pemenuhan gap dimaksud.

PERSIAPAN IMPLEMENTASI IFRS 17 - SE OJK NO. S-893/NB.211/2021 - 9 SEP 2021 1

People Process Technology

■ Berkaitan dengan hal tersebut, kami minta Saudara untuk menuangkan hasil analisis tersebut dalam Position Paper dan menyampaikannya kepada OJK. Penyampaikan position paper tersebut kami harapkan dapat diterima OJK sebelum tanggal 31 Desember 2021.

Perlu Strategi jangka Panjang:

1 PERSIAPAN IMPLEMENTASI IFRS 17 - SE OJK NO. S-893/NB.211/2021 - 9 SEP 2021

1 UNDERSTANDING GAP ANALYSIS

Define Future State

Review Current

State Identify Gap

Outline Resolutions &

Timeline

Pada umumnya pendekatan dan metodologi yang digunakan dalam Gap analysis adalah dengan (i) melakukan diskusi dan tanya jawab (define future state), (ii) review dokumentasi atas sistem yang berjalan (review current state), (iii) membandingkan dengan persyaratan (requirement) IFRS 17 dan IFRS 9 (pratical best practices), (iv) menganalisis kesenjangan (Gap Analysis) dan (v) memberikan saran dan rekomendasi .

Recomendation

1 2 3 4

5

CTPRIMA Section 2

Insurance Value Chain

INSURANCE VALUE CHAIN – PRODUCT SPECIFICATION

Reserve & Claims, 60%

Investment Profit 4%

Cost of Admin, 31%

Company's Margin, 5%

Global Insurance Industry Insight - McKinsey

2

INSURANCE VALUE CHAIN – COST OF INSURANCE

Global Insurance Industry Insight - McKinsey

2

CTPRIMA Section 3

Complexity of IFRS 17

2023 - 2025

TIMELINE

2021 - 2022 2020

2019 2018

2017

Implementation period Reporting

IFRS 17IFRS 9

IFRS 17 start of comparative period

IFRS 17 effective date 1 Jan 2023 and 1 Jan 2025 for Indonesia IFRS 9 Effective date

IFRS 17 standard issued

Predominant

insurance activities? Yes

Overlay approach^?

No

Deferral Approach

First IFRS 9 annual financial statements

3

Actuarial

Accounting

IT Systems

&

Processes

KPIs Human

Resources

IMPLICATION TO MANAGEMENT AND STAKEHOLDERS

IFRS 17

/ IFRS 9

3

IMPROVE FINANCIAL REPORTING

Assumptions used in the valuation of insurance contact liabilities reflect the characteristics of the insurance contract

rather than the risk related to asset / investment activity

Single accounting

approach

Provides up-to-date market consistent

information of obligation including

value of options and guarantees

Underwriting revenue and expenses are

recognised over time in comparable way

to other non insurance business

Provides separate information about the

investment and underwriting performance

Reflects time value of money

3

7. Technology

► Core systems, investment system, actuarial systems, pricing systems, etc.

► Posting logic/engines

► General Ledger, consolidation and reporting systems

► System interfaces

► Current system capacities &

capabilities (agile technology)

► New functionalities/features 3. People

► Training

► Cross functional collaboration (especially for Finance & Risk)

► Project resourcing & budget

► Managing change fatigue 1. Policy

► New accounting policies/procedures and control documentation

► IFRS 17 methodology guidance and reporting instructions

► GL Chart of Accounts changes and account mappings

► Assumptions setting (modelling)

► Investment policy changes (TFRS 9)

4. Organization

► Roles and responsibilities between Actuarial and Finance

departments

► Technical Provisions Assumptions/

Expert Judgement Committee

► Impact on outsourcing contracts 5. Data

► Refinement, upgrading, conversion and migration of (complex) actuarial

valuation models

► New financial reporting data requirements (input/output)

► Data reconciliations at different levels

► Data quality, storage and archiving

► Data security & controls

► Data governance and master data management

2. Performance Management

► Changes in MI reports and KPI‟s

► Planning, budgeting and forecasting processes need to be adjusted

► VBM, scorecards and incentive schemes

Policy Performance Management

Data Process Technology Organization

People

OPERATIONAL IMPLICATIONS The big picture

6. Processes

► Materiality concepts/guidelines

► Updating closing and reporting processes, planning processes, actuarial processes, risk management etc.

► Internal and external reporting templates including group reporting packages

► Internal controls and audit trail

3

KEY FOCUS AREAS OF THE STANDARD

(1-9)

(10-13)

(14-24)

(38-39)

(37) (36) (33-35)

(53-59)

(60-62)

(40-46) (47-52) (71) (80-92) (83-86)(87-92)

(29-32) (72)

(74-77)

(97-116)

(117-120)

3

OVERVIEW OF GENERAL MODEL 3

Change in estimates

Contractual service margin

Risk adjustment

Probability weighted discounted expected present value of cash

flows

Fulfilment cash flows

Time value of money and other assumptions related to financial risk

Experience adjustments

Release of contractual service margin

Release of risk adjustment Interest accretion at

inception rate Profit or loss (insurance

service result)

Profit or loss and/or other comprehensive income (insurance finance income

or expenses)

+ +

Insurance Contract Liability

3 INSURANCE RISK VERSUS NON-INSURANCE RISK

Insurance risk, as defined – „Risk, other than financial risk, transferred from the holder of a contract to the issuer. Insurance risk is deferent with financial risk.

Insurance Risk Financial Risk



Death or survival

•

Interest rates



Injury

•

Financial instrument prices



Illness

•

Currency exchange rates



Disability

•

Indices of prices or rates



Loss of property due to damage/theft

•

Credit ratings/credit indices



Failure of a debtor to make a payment when it is due

•

Commodity prices

1 2 3 4 5 6 7 8 9

Definition of Insurance contracts

Combination / unbundling of insurance contracts Separating non-insurance components

Recognition of insurance contracts Insurance acquisition cash flows

Contract modifications and accounting for derecognition Level of Aggregation (LoA)

Onerous contracts Contract Boundaries

THE CRITICAL IFRS 17 COMPONENTS

THE CRITICAL IFRS 17 COMPONENTS

3

THE CRITICAL IFRS 17 COMPONENTS

11 12 13 14 15 16 17 18 19

Discount Rate

Risk adjustments for non-financial risk Contractual Service Margin (CSM) Subsequent Measurement

Premium Allocation Approach (PAA)

Accounting for reinsurance contract held – recognition Accounting for reinsurance contract held - measurement Presentation and disclosures

Transition

THE CRITICAL IFRS 17 COMPONENTS

10 General Measurement Model (GMM)

3

MEASUREMENT MODELS

3

BUILDING BLOCK APPROACH

18 18

 Deferred profit absorbs assumption changes for future coverage (“Unlocking”)

 Profit measured and reported based on the delivery of the “insurance coverage service”

 The measurement of insurance contracts will consist of a number of explicitly reported balance which include BEL, RA, and CSM

 Discount rates based on market interest rates (currency, duration, liquidity and asset – dependency)

 Need to group contracts by portfolio, year of sale and one of the three possible profitability levels

Page 24

3

TECHNICAL REQUIREMENTS OF IFRS 17 3

Underwriting result and finance result will

have a new „feel‟ and presentation. New KPIs,

strategy, incentives and education are required

as well as system changes.

Current profit profiles will be impacted giving rise to

potential strategic or business decisions.

Longer tail and riskier business will be more affected by the IFRS

17 valuation model.

Presentation and disclosure

Level of aggregation/

onerous contract Best estimate

cash flow Greater rigour in

measuring and reporting onerous losses at inception.

The OCI solution provides a device to reclassify volatility out of

profit or loss (P&L) due to change in yield curve.

This comes at a potentially higher

operational cost.

Simplified approach (PAA) Discounting

PAA is expected to be the measurement basis for GI Companies, except in a small number

of possible cases, including reinsurance.

Reinsurance measurement Risk adjustment

The disclosure of the confidence interval for

risk adjustment will introduce a new level

of transparency and constrain how insurers

use margins in their reserves.

Contractual

service margin Transition

Ledger strategy, implementation

approach and Internal MI

transition will drive business

change –

with new balance sheet position needed from

31/12/19.

Acquired portfolios Unbundling

These IFRS 17 technical requirements will significantly increase the complexity and data volume

IFRS REQUIREMENTS - KEY CALCULATION COMPONENTS

Page 26

 Effectively a balancing item that eliminates day one gain

 Cannot be negative except for reinsurance

 Released as services are provided

 Adjusted to reflect impact of changes in best estimate assumptions in respect of future service thereby reducing profit variability

 CSM discount rate “locked” at inception except for directly participating business

 Modified “variable fee” approach for direct participation business Contractual Service Margin

 Explicit

 Unbiased

 Entity perspective

 Within contract boundary

Cash Flows

 Reflect liquidity

characteristics of cash flows

 Consistent with observable market prices

 Exclude factors not relevant to the cash flows

Time Value of Money

 Compensation the insurer requires for bearing uncertainty

 May reflect diversification within and between

portfolios

 Disclosure of confidence level

Risk Adjustment

Market- consistent value of cash

flows

Risk adjustment

CSM

Fulfilment cash flows

3

IFRS REQUIREMENTS - Contractual Service Margin Calculation Example

Page 27

3

IFRS REQUIREMENTS - GROUPING, DISCOUNT RATES, RISK ADJUSTMENT

Page 28

Grouping of contracts

Risk adjustment principle

Discount Rates

3

NEW STATEMENT OF COMPREHENSIVE INCOME

Page 29

3

CHANGES IN FS PRESENTATION AND DISCLOSURE

Net earned premiums

Interest, dividend and other investment income Incurred claims and benefits

Change in provisions Profit or loss

Key Changes :

 Two drivers of profit presented separately

 Insurance revenue excludes deposits [written premiums disclosed in the notes]

 Revenue and expense are recognized as earned or incurred

 Insurance finance expenses are excluded from insurance service result and are presented (i) fully in P&L or (ii) in P&L and OCI, depending on accounting policy

IFRS 17

Total comprehensive income

Discount rate changes on insurance liability (optional)

Insurance revenue

Insurance services expense Incurred claims and expense Acquisition costs

Gain/loss from reinsurance Insurance service result

Investment income

Insurance finance expense Net financial result

Profit or loss

Statement of Comprehensive Income

IFRS 17

IFRS 4

3

Statement of Financial Position

Assets

Reinsurance contract assets Insurance contract assets

Liabilities

Insurance contracts liabilities Reinsurance contracts liabilities Assets

Reinsurance contract assets Deferred acquisition costs Premiums receivable

Policy loans

Liabilities

Insurance contracts liabilities Unearned premiums

Claims payable

IFRS 17 IFRS 4

CHANGES IN FS PRESENTATION AND DISCLOSURE

3

Section 4 - Actuarial Aspect

 Separated components

 Level of aggregation

 Expected Cash Flows

 Discount Rate

 Risk Adjustment

 Exercise

 Gap analysis

Accounting under IFRS 17

Accounting under IFRS 17, disaggregation for presentation in income statement notes

Accounting under IFRS 9

Accounting under IFRS 15

Insurance components

Non-distinct

investment components Distinct investment components

Embedded

derivatives, which are not closely related

Distinct performance obligation to provide

goods and services

Separation

Disaggregation¹

1 Disaggregation is the exclusion of an unseparated investment component from insurance contracts revenue

SEPARATED COMPONENTS

4

LEVEL OF AGGREGATION

Portfolio

Contracts not onerous at inception

Onerous contracts at

inception

No significant possibility of

becoming onerous Other profitable

contracts

Portfolio = A group of contracts (a) subject to similar risks (b) managed together

Assessment based on:

(a) Likelihood of changes in estimates which, if they occurred, would result in the contracts becoming onerous

(b) Using internal information about changes in estimates

At Contract Inception

CSM is recognized and released as insurance service is provided A loss is

recognized in the P&L at inception

Cohorts

1

2

3

Permitted to group only contracts issued no more than one year apart

Assessment is done at contract inception – no subsequent re-assessment

Page 34

4

LEVEL OF AGGREGATION GROUPING OBJECTIVES

Profitable

 have no significant possibility of

recognised as part is released as

are provided

Group B

 information about the contracts’ resilience

Portfolio 1 Entity divides each portfolio into groups

Credit insurance  contracts issued within the same year

  consistent with internal reporting

 exemption for regulatory pricing

 group not reassessed after initial recognition

Group A Contracts that at initial recognition

Unearned profit is

contracts

becoming onerous subsequently, if any

of the liability and insurance services

 Other profitable contracts, if any

Onerous

Group C Contracts that are onerous at initial

A loss is

contracts

 recognition, if any

recognised in P&L

4

 The estimates of CFs used to determine the fulfilment CFs shall include all cash inflows and outflows that relate directly to the fulfilment of the portfolio of contracts:

 Current and explicit (separate from discount rate and risk adjustment)

 Market variables as consistent as possible with observable market prices

 Incorporate all available information in an unbiased manner (including trends)

 Include all CFs within contract boundary

Coverage period

Premium

Acquisition costs

Other expenses/ taxes

Claims payments Cash outflowsCash inflows

Cash flows within contract boundary

Claims payments including claim

handling cost Premium

Time

BUILDING BLOCK APPROACH - FULFILMENT CASH FLOWS

Contractual service

margin Risk adjustment

Time value of money

Future cash flows

Page 36

4

EXPECTED CASH FLOW - Expected Cash Flows of a Group of Insurance Contracts

Premiums and any other costs specifically chargeable to the Policyholder

• Premium adjustments

• Instalment premiums

• Any additional cash flows that result from those premiums

Payments to, or on behalf of policyholder

• Incurred claims that have not yet

been paid (IBNP)

• Incurred claims that have not yet been reported (IBNR)

• Future claims

• Payments that vary

depending on returns on underlying items

Costs of providing benefits in kind • Replacement of stolen articles

Payments in a fiduciary capacity to meet the

policyholder’s tax obligations

• Payment of death duties or inheritance tax

Potential cash inflows from recoveries on claims, as long as they have not been recognised as a separate asset

• Salvage and subrogation

Insurance acquisition cash flows attributable to the portfolio

• Acquisition Cost

Claim handling costs – investigating, processing and resolving claims

• Legal and loss adjusters’ fees

• Internal costs of investigating

• claims and processing claims payments Policy administration and

maintenance costs

• Costs of billing premiums

• Costs of handling policy changes (e.g. conversions)

• Recurring commissions expected to be paid to intermediaries if the

policyholder continues paying premiums within the

boundary.

Allocation of fixed and variable overheads directly

attributable to fulfilling insurance contracts

These are allocated to contracts or groups using methods that are systematic, rational and consistently applied to all costs with similar characteristics.

These include accounting, human resources, IT and support, building depreciation, rent, maintenance and utilities.

Cost of investment activity Costs of managing certain investments

Cash Flow Examples Cash Flow Examples

4

BUILDING BLOCK APPROACH - TIME VALUE OF MONEY

Top-down approach

Current market rates of returns: either of own asset portfolio or a reference portfolio

Adjust for risks that are not relevant to the insurance contract, e.g., default risk, market risk

Adjust for duration differences if necessary (No need to adjust for the difference due to liquidity)

Adjust for other characteristics of the insurance contracts if necessary

Illiquidity premium: Adjust for liquidity characteristics of the insurance contracts

Bottom-up approach

Risk-free yield curve with similar characteristics (e.g., duration, currency)

4

DISCOUNT RATE - Discounting to Reflect the Time Value of Money

IFRS 17 does not prescribe a single estimation technique to derive discount rates. However, the standard does specify that a „top- down‟ or „bottom-up‟ approach may be used. In theory, for insurance contracts with cash flows that do not vary based on the performance of the underlying items, both approaches should result in the same discount rate, although differences may arise in practice. The rate shall reflect the time value of money and the financial risks related to those cash flows (ALMA).

Fulfilment cash flows Current discount rates

CSM interest accretion for contracts without direct participation features

Rates determined on initial recognition of the group

Adjustments to the CSM for changes in the fulfilment cash flows for contracts without direct participation features

Rates determined on initial recognition of the group

Adjustments to the CSM for changes in the fulfilment cash flows for direct participating contracts that do not vary based on the returns on underlying items, excluding the change in the effect of the time value of money and financial risks

Current discount rates

For groups applying the PAA, liability for remaining coverage adjustment for the time value of money

Rates determined on initial recognition of the group

Insurance finance income or expenses Discount rate used for disaggregation

Aspect of Measurement Discount Rate

4

 Compensation that an entity requires for bearing the uncertainty about the amount and timing of the cash flows that arise as the entity fulfils the insurance contract

 RA shall be included in the measurement in an explicit way (i.e. uncertainty should not be included in the future cash flows)

 No prescribed technique so different companies may use different techniques

 Disclosure on the confidence-level is required if the entity uses a technique other than the confidence level technique

BUILDING BLOCK APPROACH - RISK ADJUSTMENT

Contractual service margin

Risk adjustment

Time value of money

Future cash flows

Risk Adjustment

Low frequency but high severity

Knowledge About current

estimate and trend

Duration of Contract

Width of Probability distribution Uncertainty

due to lack Of experience

4

RISK ADJUSTMENT - Risk Adjustment for Non-Financial Risk

Risk Adjustment corresponds to the compensation that an entity requires for bearing the uncertainty about the amounts of and timing cash flows related to non- financial risks inherent in insurance contracts The scope of risks associated with the calculation of the RA covers both insurance risks (e.g. mortality risk, P&C reserve risk, longevity, morbidity) and non-financial risks related to insurance contracts (e.g. lapse risk, surrender risk, and expense risk); operational risk is not included in the RA assessment because by nature it is considered more global.

the IASB proposed 3 approaches to measuring RA:

•the Cost of Capital method,

•the Value at Risk (VaR) - (confidence level)

•the Tail Value at Risk approach (TVaR).

Evaluation of non financial/insurance risks Integrated in the Risk

Adjustment

Evaluation of financial risks Integrated

in the Best Estimate

Risko Asuransi: Risiko, selain risiko keuangan, yang dialihkan dari pemegang kontrak kepada penerbit kontrak. Contoh: – death or survival, injury, illness, disability, loss of property due to damage or theft, and failure of a debtor to make a payment when it is due.

Risiko Keuangan: Risiko akibat kemungkinan perubahan masa depan atas factor”

berikut: interest rates, financial instrument prices, commodity prices, currency exchange rates, indices of prices or rates, and credit ratings or credit indices.

4



At initial recognition, the CSM is defined as the negative of fulfilment cash flow, floored by zero.



Purpose of recognizing a positive initial CSM:



To eliminate any day 1 gains (if initial CSM is positive)



To represents the unearned profit that the entity recognizes as it provides services under the insurance contract



If CSM is floored by zero at inception, the insurance contract is onerous. All loss should be recognized in P&L at inception



Objective of the standard is to:



Provide principles for the measurement of an individual insurance contract, but that in applying the standard an entity could aggregate insurance contracts provided that it meets that objective; and



Onerous contracts should not be aggregated with profit-making contracts

BUILDING BLOCK APPROACH - CONTRACTUAL SERVICE MARGIN

Contractual service margin

Risk adjustment

Time value of money

Future cash flows

4

 Subsequently, the roll-forward calculation of CSM is summarized as follows:

 Locked-in rate at the inception of contract is used for accreting interest.

 An entity should recognise the remaining contractual service margin in profit or loss over the coverage period in a systematic way that best reflects the remaining transfer of the services. For contracts with no

participating features, the service represented by the contractual service margin is insurance coverage that:

 is provided on the basis of the passage of time; and

 reflects the expected number of contracts in force.

CSM at the beginning of the reporting period + Accreted interest

– Amount recognised for services provided in the period +/– Changes in the estimates of future cash flows

+/– Changes in RA relating to future coverage

= CSM at the end of the reporting period Contractual

service margin

Risk adjustment

Time value of money

Future cash flows

BUILDING BLOCK APPROACH - CONTRACTUAL SERVICE MARGIN

4

BASIC METHODS IN MEASUREMENT INSURANCE CONTRACT

4

CTPRIMA

Building block approach

BUILDING BLOCK APPROACH - INITIAL MEASUREMENT

• Measured at inception as the expected contract profit to be earned as services are fulfilled. It is adjusted for changes in non-financial variables affecting future coverage cash flows. It accretes interest based on day 1 discount rate (locked-in rate)

– Block 4

• An entity-specific assessment of the uncertainty about the

amount and timing of future cash flows – Block 3

• An adjustment that converts future cash flows into current amounts. Discount rates based on market interest rates (currency, duration, liquidity). – Block 2

• Expected (probability-weighted) cash flows from premiums, claims, benefits, expenses and acquisition costs – Block 1

• Contracts are grouped by portfolio, year of sale and one of

the three possible profitability levels

• Profit measured and reported based on the delivery of the “insurance coverage service”

• CSM (“deferred profit”) absorbs assumption changes for future coverage (“unlocking”)

• Discount rates based on market interest rates (currency, duration, liquidity)

• CSM (expected profit) from participating contracts revalued

based on assets.

❶

❷

❸

❹

4

BUILDING BLOCK APPROACH - SUBSEQUENT MEASUREMENT

The fulfilment cash flows are remeasured at each reporting date to reflect estimates based on current assumptions, applying the same requirements that apply to initial measurement. Changes in estimates of the fulfilment cash flows are reflected in either profit or loss or OCI – or, in some cases, they adjust the CSM – depending on their nature.

Interest is accreted on the carrying amount of the CSM during the reporting period using the discount rate applied on initial recognition to reflect the time value of money. The balance is allocated to profit or loss each reporting period to reflect the provision of insurance contract services in the period

4

CTPRIMA

Exercise

 Benefits



2-year term



Single premium of USD 1,000



Sum assured = USD 3,000

 Assumption



100 policies sold, with deferrable expenses incurred of USD 10,000



Best estimate assumption: 10 claims each year



Risk adjustment (RA) = USD 2,000



No other cash flows

 For simplicity, discount rate = 0%



By applying the building block approach



At issue: Total cash flows = 100 * 1,000 – 10,000 – (10+10) * 3,000 – RA 2,000 = 28,000



Therefore, CSM = 28,000



Under these settings, the total IFRS 17 insurance liability at issue is:



Fulfillment cash outflows = (10+10) * 3,000 + RA 2,000 = 62,000



CSM = 28,000



Total IFRS 17 insurance liability = 62,000 + 28,000 = 90,000

EXERCISE - BUILDING BLOCK APPROACH Case study

4

EXERCISE - BUILDING BLOCK APPROACH Case study

Start of Year 1

Accounting entries:

Dr Cr

1.0 Dr Est. future cashflow (Premium) 100,000

Cr Est Future Cash – Claim 60.000

Cr Est Future Cash - DAC 10.000

Cr CSM 28,000

Cr RA 2,000

(Recognition of est. future cashflow [P - Cl - Co], RA and CSM)

2.0 Dr Cash 100,000

Cr Est. future cashflow 100,000

(Premium received)

3.0 Dr Est. future cashflow - DAC 10,000

Cr Cash 10,000

(Payment of deferrable expenses)

Income statement:

Insurance contracts revenue -

Incurred claims and expenses -

Acquisition costs -

Operating result -

Investment income -

Profit -

Balance sheet:

Assets:

90,000 Cash

Liabilities:

Insurance contract liabilities:

Fulfillment cashflow:

Est. future cashflow 60,000

RA 2,000

CSM 28,000

90,000 Equity:

Profits -

90,000

4

EXERCISE - BUILDING BLOCK APPROACH

Case study

 At the end of year 1,

 There are 15 claims (as opposed to the 10 claims expected)

 The Company re-estimates year 2 claims as 8 cases, down from 10 previously

 The updated RA = 1,000

 No other assumption changes

 Profit driver assumed to be based on no. of policies in- force:

 The amortization factor = 28,000 / (90 + 80) = 164.7

 Based on the remaining policies at end of year 1 (100– 15), the CSM amortization = 85 * 164.7 = 14,000

 However, there is also a favorable assumption

change, where claims are reduced by (10-8) * 3,000

= 6,000

 Therefore ending year 1 CSM = 28,000 – 14,000 + 6,000 = 20,000

 For end of year 1,

 The updated future cash flows = 8 * 3,000 = 24,000

 Therefore total IFRS 17 insurance liability

 Fulfillment cash flows = 24,000 + RA 1,000 = 25,000

 CSM = 20,000

 Total IFRS 17 insurance liability = 45,000

4

Case study

End of Year 1

Accounting entries:

Dr Cr

1.0 Dr CSM 14,000

Dr RA 1,000

Dr Est. future cashflow (expected incurred claim)

30,000

Dr Acquisition costs 5,000

Cr Insurance contract revenue 50,000

(Revenue recognition)

2.0 Dr Claims incurred 45,000

Cr Cash 45,000

(Claims recognition)

3.0 Dr Est. future cashflow 6,000

Cr CSM 6,000

(Recognition of impact of favorable change in future claims)

Income statement:

Insurance contracts revenue 50,000

Incurred claims and expenses (45,000)

Acquisition costs (5,000)

Operating result 0

Investment income -

Profit 0

Balance sheet:

Assets:

45,000 Cash

Liabilities:

Insurance contract liabilities:

Fufillment cashflow:

Est. future cashflow 24,000

RA 1,000

CSM 20,000

45,000 Equity:

0 Profits

45,000

EXERCISE - BUILDING BLOCK APPROACH

4

EXERCISE - BUILDING BLOCK APPROACH Case study

End of Year 2

Accounting entries:

Dr Cr

1.0 Dr CSM 20,000

Dr RA 1,000

Dr Est. future cashflow (expected incurred claim)

24,000

Dr Acquisition costs 5,000

Cr Insurance contract revenue 50,000

(Revenue recognition)

2.0 Dr Claims incurred 24,000

Cr Cash 24,000

(Claims recognition)

Income statement:

Insurance contracts revenue 50,000

Incurred claims and expenses (24,000)

Acquisition costs (5,000)

Operating result 21,000

Investment income -

Profit 21,000

Balance sheet:

Assets:

21,000 Cash

Liabilities:

Insurance contract liabilities:

Fufillment cashflow:

Est. future cashflow -

RA -

CSM -

- Equity:

21,000 Profits

21,000

4

Premium allocation approach

CTPRIMA

Subsequent Measurement

• measures the liability for remaining coverage as the amount of premiums received net of acquisition cash flows paid, less the net amount of premiums and acquisition cash flows that have been recognised in profit or loss over the expired portion of the coverage period based on the passage of time.

• assumes that recognising the contract‟s premium over the coverage period provides similar information and profit patterns to those provided by recognising insurance contract revenue measured using the general measurement model.

PREMIUM ALLOCATION APPROACH

4

Reasonable approximation

of the group measurement using the core requirements?

Coverage period of each contract

in the group

<= 1 year?

NO NO

YES YES

Must apply core

requirements May apply premium

allocation approach

PREMIUM ALLOCATION APPROACH - ELIGIBILITY CRITERIA

4

A B

IFRS 17 Liability

A. Simplified measurement

B. Measurement under the general model, but discounting of claims to be settled within 1 year not required

PV of future

cash flows Risk adjustment PV of future

cash flows

Risk adjustment

Contractual service margin

Split in three blocks not required

Liability for incurred claims Liability for

remaining coverage

PREMIUM ALLOCATION APPROACH - Simplifications for short-term contracts

4

UNDERSTANDING LEVEL OF AGGREGATION

4

UNDERSTANDING LEVEL OF AGGREGATION

4

UNDERSTANDING LEVEL OF AGGREGATION

4

UNDERSTANDING LEVEL OF AGGREGATION

4

EXERCISE PAA - 1Y PROTECTION GROUP CONTRACT

Contoh Kasus 1 Y Group Protection Contract

3/12 x 1000 6% CI

4

Mid year reporting ending Dec x1 Jun x2 Dec x2

Reporting Periode 1 2 3

Premium Received 1,200 - - Direct Acq Expense (50) - - Claims settled - - (900) Cash In 1,150 - (900) Cash Balance End 1,150 1,150 250 Claims Incurred 250 500 150 Risk Adjustment 15 20 30 40 (45) (60) Group of contracts Info

Issue 1 Oct x1

coverage 12 months

end 30 Sep x2

Report YE Dec

Interim 30 of June

Assumptions at initial

Receive premium 1200 (*)

pay direct Acq cost 50 (*)

Claim & risk even

Expected claim 1000

Risk on claim 8%

lapse none

Claims settled 900 in Nov x2

(*) immediate after initial recognition

6%

EXERCISE PAA - 1Y PROTECTION GROUP CONTRACT

Contoh Kasus 1 Y Group Protection Contract

Financial Statement

Dec x1 Jun x2 Dec x2

Insurance contract liability as of 1,165 1,095 -

LIC 265 795 -

LRC 900 300 -

BS

Cash 1,150 1,150 250

Insurance contract liability (1,165) (1,095) -

Equity (15) 55 250

P&L

Insurance revenue (par. B126) 300 600 300 Insurance expense (par. 59a) (315) (530) (105) Profit (loss) (15) 70 195

Reconciliation

Dec x1 Jun x2 Dec x2

Liability for remaining coverage

Opening balance - 900 300

Cash inflows 1,200 - -

Insurance revenue (300) (600) (300) Closing balance 900 300 - Liability for incurred claims

Opening balance - 265 795 Estimates of the present value of

future cash flows 250 500 150 Risk adjustment for

non-financial risk 15 30 (45)

Settlement - - (900)

Closing balance 265 795 - Insurance service expenses 315 530 105 Estimates of the present value

of future cash flows 265 530 105 Expense paid 50 - -

UPR + PDR PDR=0 Claim Reserve + risk adjustment

4

Gap analysis report

CTPRIMA

I. Latar belakang dan Tujuan

a. Latar Belakang – Mengapa Aspek Akuaria penting

b. Tujuan – Melihat kondisi saat ini dengan persyaratan IFRS 17 (By product, Portfolio ??) II. Pendekatan dan Metodologi – (i) Analisis product spect (ii) review asumsi dan

metodologi (iii) SAP-OJK

III. Analisis kesenjangan PSAK 74 VS PSAK 62 dan 28 – Aspek Aktuaria

a. Persyaratan Utama PSAK 74 : Definisi kontrak asuransi, Penggabungan/ pemisahan kontrak asuransi, Pemisahan komponen non-asuransi, Pengakuan kontrak asuransi, Arus kas akuisisi asuransi, Modifikasi kontrak dan akuntansi untuk penghentian pengakuan, Tingkat agregasi (LoA), Kontrak yang merugi (Onerous), Batasan kontrak, Model Pengukuran Umum (GMM), Tingkat diskonto, Penyesuaian risiko untuk risiko nonkeuangan, Marjin Jasa Kontraktual (CSM), Pengukuran selanjutnya, Pendekatan Alokasi Premi (PAA), Akuntansi untuk kontrak reasuransi milikan – pengukuran, Penyajian dan pengungkapan.

GAP ANALYSIS REPORT – ACTUARIAL ASPECT

4

GAP ANALYSIS REPORT – ACTUARIAL ASPECT

III. Analisis kesenjangan PSAK 74 – Aspek Aktuaria (lanjutan)

b. Penjelasan rinci Analisis Kesenjangan – (Persyaratan PSAK 74) C. Implikasi

IV. Saran dan Rekomendasi V. Lampiran

VI. Referensi

4

IFRS STANDARD CURRENT PRACTICES Paragraph 25: a group of insurance contracts:

i. The beginning of the coverage period of the group of contracts;

ii. The date on which the first payment from a policyholder in the group becomes due; and

iii. For a group of onerous contracts, when the group becomes onerous.

Paragraph 26: If there is no contractual due date, the first payment from the policyholder is deemed to be due when it is received.

 Receive premiums before the start of the insurance coverage provided by a written contract

 Some GI contracts, such as open marine contracts, have no coverage commencement date

IMPLICATION

IFRS 17 is a departure from current practice where only premiums from commenced contracts are accounted as revenue o Revenue recognition will have to be changed and premiums received for pre-commenced contracts will be excluded:

 Some insurance contracts, such as open marine contracts, can lead to recognition difficulties as date of coverage commencement may not be immediately apparent

 Contracts should not be recognized for advanced premiums and post-dated premiums in the profit and loss statement until the beginning of the coverage period

GAP ANALYSIS REPORT – ACTUARIAL ASPECT Contract Recognition

4

IFRS STANDARD CURRENT PRACTICES

• Paragraph 36: An entity shall adjust the estimates of future cash flows to reflect the time value of money and the financial risks related to those cash flows, to the extent that the financial risks are not included in the estimates of cash flows.

• Paragraph 56: The entity is not required to adjust the carrying amount of the liability for remaining coverage to reflect the time value of money and the effect of financial risk if, at initial recognition, the entity expects that the time between providing each part of the coverage and the related premium due date is no more than a year.

• Currently, many general insurers estimate the insurance liabilities on an undiscounted basis

IMPLICATION

• PAA Cohorts : If future cash flows are expected to be paid or received one year after the date the claims are incurred, discounting is required for the liability for incurred claims

• Materiality : (i) Develop methodology and processes to demonstrate the materiality of discounting, (ii) Develop threshold for materiality.

(iii) Communication with the external auditor

• Others :Decision on the accounting policy to present the effects of changes in discount rates either in (1) profit or loss, or (2) disaggregated between profit or loss and other comprehensive income.

GAP ANALYSIS REPORT – ACTUARIAL ASPECT Discount Rate

4

• IT Systems Requirements

• IFRS 17 IT Gap Analysis

Section 5 – Impact of IFRS for IT

IT Systems Requirements

CTPRIMA

NEW SYSTEMS REQUIREMENTS

1. Master data management

Data preparation, data validation, posting and reporting capability. Facilitating significant volumes of data feeds and storage, integrate with general ledgers and actuarial models to load and post data.

Audit trail availability.

2. Process Organization

Ability to orchestrate end-to-end workflows with clear reporting processes, ability to perform

adjustments and audit data inputs, outputs and any manual interventions.

3. Calculation engine

Powerful enough to process a significant volume of information, with the ability to trace and document calculation inputs and outputs in detail. includes best estimate cashflows, the risk adjustment and the CSM at inception and subsequent measurements

4. Rules engine

Needs predefined rules that can integrate with data management to generate posting. The engine must be easy to deploy and able to accommodate your custom posting rules

5. Reporting

Ready for both predefined and ad hoc reports.

Page 71

5

DATA MANAGEMENT

Data Availability

Sufficient Granularity?

Cleansing?

Reference Data Ready for Enrichment?

Data Management Process in Place?

Page 72

5

DATA PROCESS ARCHITECTURE

Claim Exp Marketing

Underwriting

Premium

Reinsurance

Investment

Commission

Claim Core Processes

Expenses Investment

Cession Cash Flow

Policy

Legacy System?

Collection

Data Process

Cleansing

Validation Enrichment

Internal Data Semi-Private

Data Public Data

Claim Exp Expenses Investment

Cession Cash Flow

Policy Cleansed

Transformation Engine

Reference Data Management

Actuarial

Risk Valuation

Expected Cashflow Actual Cashflow

Expenses Insurance Acquisition Cashflow

Reserve DLL

CSM

Journal Entries

Report Feed back Prospective

Simulation

Page 73

5

PROCESS INTEGRATION

Marketing Underwriting Premium Collection

Reinsurance Investment

Claim

Financial / Accounting IFRS17

Actuarial

INSURANCE BUSINESS CYCLES What to Focus?

Actuarial Financial

Operational

Page 74

5

IFRS 17 PROGRAM

Page 75

5

CALCULATION SYSTEM QUALITY REQUIREMENTS

Calculation System Quality

Requirements

Page 76

5

MORE THAN A COMPLIANCE EXERCISE

Key challenges faced by industry and actuaries

Implementation Challenges

Commercial Challenges

Page 77

5

INTEGRATION OF A MULTI – DISCIPLINARY TEAM

Page 78

5

IFRS 17 IT Gap Analysis

CTPRIMA

PROSES GAP ANALYSIS

Define Future State

Review Current

State Identify Gap

Outline Resolutions &

Timeline

Page 80

5

Target

Operating Model

Business Target Operating Model

Calculation procedures Level of Integration

Process outline

Planning

Data

Data Component Availability Reference Data Data Management

Granularity Data quality

System &

Procedure

Capability

Data & System Architecture

Operating Procedure Adjustment

Project Management

Infrastructure

Capability Infrastructure

Component Architecture Performance

Continuity management

GAP ANALYSIS POINTS

Page 81

5

1 2 3 4

TARGET OPERATING MODEL

Policy Grouping

Profitability Calculation: Full Retro? Modified?

Fair value?