Canadian Institute of Actuaries L’Institut canadien des actuaires by jib24063

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									Canadian             L’Institut
 Institute           canadien
        of           des
Actuaries            actuaires
2009 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2009
 2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009
                                                    IFRS Conversion
                                          •   Overview
                                          •   Contract classification
                                          •   Embedded derivatives
                                          •   Reinsurance presentation
                                          •   Segregated fund presentation
                                          •   Insurance disclosures
                                          •   Non-insurance related changes
                                          •   Existing guidance/resources
 2009 Seminar for the Appointed Actuary                      Overview
                                              Phase I vs Phase II
Colloque pour l’actuaire désigné 2009
                                          •

                                          •   Jan 1, 2011 (with 2010 comparatives)
                                              –   Insurance contracts continue current CGAAP
                                                  treatment (except for changes below)
                                              –   Investment contracts: IAS 39
                                              –   Service contracts: IAS 18
                                          •   Embedded derivatives: separately fair
                                              valued, unless exempt
                                          •   Reinsurance: treated as asset on BS /
                                              impairment test
                                              –   No income statement impact expected
 2009 Seminar for the Appointed Actuary                  Overview (cont’d)
                                              Seg fund presentation:
Colloque pour l’actuaire désigné 2009
                                          •

                                              –   No concept of “off balance sheet” under IFRS
                                              –   Seg Funds will come on-balance sheet
                                          •   Disclosures:
                                              –   Extensive additional requirements
                                              –   Need to be able to provide most of this for 2010
                                                  comparative
  IFRS: Double conversion for Insurers
                          Insurance and Investment Contracts:
Current CGAAP:                    Actuarial Liabilities



                   Insurance            Investment          Service
Phase I
January 1, 2011:   Contracts:           Contracts:         Contracts:
                     CALM                 IAS 39            IAS 18


                                        Embedded
                                        Derivatives:
                                     IAS 39 Fair Value
                                          option
Phase II                Insurance
January 1, 2013      Contracts: new
(or later):          IFRS standards
                   (Discussion Paper)
        Contract Classification
Generally, the following types of contract would
  be classified as Insurance:
   Life insurance plans (term, T100, Par Life, Whole
    life, Universal Life YRT and Level COI)
   Endowment products
   Critical Illness/Health/Disability contracts
   Long Term Care
   Group Life and Health insurance (excluding ASO
    contracts)
     BUT must consider contractual hold harmless provisions
      and/or other terminal accounting provisions
   Reinsurance contracts: Life, A&H, P&C
   Payout immediate/deferred annuities (life
    contingent)
   Contract Classification (cont’d)
Insurance Contracts (cont’d):
   Most seg fund/VA products with guarantees
     Must ensure that benefits on death can be “significantly
      different” (higher or lower) than non-DB benefits
   Most accumulation products/deferred annuities with
    Book Value Death Benefit in deferral period
   Accumulation products/deferred annuities with
    contractual guaranteed annuitization rates
     Provided guaranteed rates represent a “scenario of
      commercial substance”
   Contract Classification (cont’d)
Generally, the following types of contracts
  would be classified as Investment:
   Annuity certains (no life contingency)
   Accumulation products with no “non-financial”
    guarantees/options
   Savings / wealth products without guarantees
     Example: Mutual Funds


   These could also have a “Service” component
     Unbundling, IAS 18 would apply
   Contract Classification (cont’d)
Service Contracts:
   Group ASO
   Some FinRe reinsurance arrangements with limited
    or no risk transfer
   Some mutual funds or other investment products
    where we are simply a conduit to third party funds,
    and/or where we do not retain the right to choose
    Investment Managers?
   Service component embedded in Investment
    Contracts
     To the extent “investment management” services are
      being performed under the contract, acquisition costs
      associated with providing investment management
      services can be capitalized under IAS 18 where those
      costs are “direct and incremental” to the contract.
Classification: Outstanding issues

• Accumulation products with annuitization
  guarantee rates: is guarantee “significant”
  in all cases?
• Group contracts with hold harmless
  provisions
• Business agreements which stipulate
  profit sharing arrangement on underlying
  insurance business
 2009 Seminar for the Appointed Actuary   Embedded Derivatives (EDs)
                                          Definition (for reference)
Colloque pour l’actuaire désigné 2009


                                           IAS 39.9: “A derivative is a financial
                                            instrument with all three of the following
                                            characteristics:
                                             – its value changes in response to the change in a
                                               specified underlying variable.
                                             – it requires no initial net investment or an initial
                                               net investment that is smaller than would be
                                               required for other types of contracts; and
                                             – it is settled at a future date.”
 2009 Seminar for the Appointed Actuary                    EDs (cont’d)
                                          Definition (for reference)
Colloque pour l’actuaire désigné 2009


                                           An embedded derivative is defined in IAS
                                            39.10 as follows:
                                             – is a part of a combined (hybrid) contract, which
                                               also contains non-derivative components
                                             – combined contract includes an identifiable
                                               condition to modify the cash flows otherwise
                                               payable; and
                                             – modification of cash flows is in response to a
                                               market factor or non-financial variable that is not
                                               specific to a party to the contract
 2009 Seminar for the Appointed Actuary            Embedded Derivatives
                                              “Embedded derivatives” in Insurance
Colloque pour l’actuaire désigné 2009
                                          •

                                              Contracts must be separately measured at
                                              Fair Value under IAS 39, unless:
                                              –   The Embedded Derivative feature itself meets
                                                  definition of Insurance, or
                                              –   The Embedded Derivative is “closely related” to
                                                  the host contract
                                                   •   Economic risks in ED is similar in nature to the
                                                       risks in host contract
                                                   •   ED cannot be measured independently (without
                                                       reference) to the host contract
                                                   •   IAS 39 AG30 and AG33 provide specific
                                                       examples of EDs that are / are not considered
                                                       closely-related
 2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009
                                          Examples of exempt EDs
                                          •   Insurance EDs:
                                                 Seg Fund Guaranteed…
                                                   •   … Minimum death benefit (GMDB)
                                                   •   … Minimum income benefit (for life) (GMIB)
                                                   •   … Minimum accumulation benefit (GMAB)
                                                 LTC with CPI-indexing


                                          •   Closely-related EDs:
                                                 Unit-linked VUL (off balance sheet) [IAS39 AG33(g)]
                                                 Minimum guaranteed interest floors [IAS39 AG33(b)]
 2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009
                                          EDs: Outstanding issues
                                          •   Index-linked UL:
                                              –   closely-related or not?
                                              –   If not, what would be measurement implications?

                                          •   Seg Fund guarantees:
                                              –   Most are exempt because they are life contingent
                                              –   Term certain “GMWB” feature: closely related or
                                                  not?

                                          •   Reinsured GMIB contracts

                                          •   Credit derivatives/Modco arrangements
 2009 Seminar for the Appointed Actuary           Reinsurance ceded
Colloque pour l’actuaire désigné 2009


                                          • Contract classification: Reinsurance
                                            contracts are assessed separately

                                          • Direct business is assessed independently
                                            from any ceded risk
 2009 Seminar for the Appointed Actuary        Reinsurance ceded (cont’d)
                                          • Reinsurance ceded shown as asset on
Colloque pour l’actuaire désigné 2009

                                            Balance Sheet
                                             – No measurement implications, i.e. no
                                               expected impact on earnings
                                             – Balance sheet presentation will change
                                                Gross liability vs. reinsurance ceded on the
                                                 asset side
                                                Need a reasonable way to allocate net liability
                                                 into gross (direct liability) and ceded (asset)
                                                   – Must be based on underlying cash flows
                                                   – Reasonable assumption about related assets


                                          • Increased disclosure requirements
 2009 Seminar for the Appointed Actuary        Reinsurance ceded (cont’d)
                                          • Impairment of reinsurance asset
Colloque pour l’actuaire désigné 2009

                                              Reduce the carrying amount and recognize the
                                               impairment loss in earnings if:
                                                1.May not receive all amounts due under terms of
                                                  contract, as a result of an event occurring after initial
                                                  recognition of the reinsurance asset
                                                2.The event has a reliably measurable impact on the
                                                  amounts due from the reinsurer


                                          • Impairment of reinsurance assets is considered
                                            under CALM per SOP 2130.30
 2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009
                                                  Seg Fund Presentation
                                          •   No concept of “on / off” balance sheet under
                                              IFRS
                                          •   Seg Funds will come on balance sheet
                                              –   Generally agreed that one line summary presentation
                                                  is appropriate
                                          •   Income statement presentation: expected to
                                              remain as per current CGAAP
                                              –   Deposits do not constitute “income”
                                              –   Only net fee income and expenses will flow through
 2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009
                                                  Insurance Disclosures
                                          •   Insurance disclosures:
                                              –   Risks before and after reinsurance
                                              –   Sensitivity analysis, focus on impact on future
                                                  cashflows vs policy liability
                                              –   Concentration of risks
                                              –   Claims development table: comparison of actual to
                                                  previously estimated
                                                   •   5 yrs historical on adoption, growing to 10 yrs
                                                       historical
                                                   •   Some examples from Europe

                                          •   Investment contracts disclosures
 2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009
                                                  Insurance Disclosures
                                          •   Disclosures on reinsurance:
                                              –   Gain/loss on buying reinsurance
                                              –   Reconciliation in reinsurance asset

                                          •   Extensive disclosure (although not prescribed
                                              format) on embedded derivatives, including
                                              those that are exempt
                                              –   For exempt EDs, overview of measurement
                                                  approach and objectives, and limitations vs Fair
                                                  Value measurement

                                          •   Reconciliation of DAC balance
                                          Other “Phase I” Non-Insurance Related
                                          Changes for 2011
 2009 Seminar for the Appointed Actuary

                                          •   Consolidation of “off balance sheet”
Colloque pour l’actuaire désigné 2009

                                              investment
                                          •   Real estate accounting
                                          •   Hedge accounting
                                          •   Accounting for private equity investments
                                          •   Income taxes
                                          •   IFRS 1 – Transitional elections
                                              –   Re-set cumulative translation adjustment
                                                  (CTA)
                                              –   Pensions (reflect cumulative unrecognized
                                                  actuarial gain/loss)
                                              –   Business Combinations
 2009 Seminar for the Appointed Actuary   Source materials and references
Colloque pour l’actuaire désigné 2009


                                          •   IFRS 4, core text, but specifically
                                              Appendices

                                          •   IAS 39: Examples of Embedded
                                              Derivatives
 2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009
                                                 Guidance/resources
                                          •   CIA website: new Ed Notes and
                                              Research papers
                                          •   CIA website: Industry group paper on
                                              contract classification
                                          •   IASP papers (IAA)
                                          •   CIA past webcast presentations and
                                              meeting materials

								
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