Separating components from insurance contracts Insurance IFRS Seminar December 1, 2016 Michael Lockerman Session 7 Session 7

Agenda Separating elements (aka unbundling): Presentation only An example Embedded derivatives Investment components Service contracts Presentation only

Separating Elements

Date An example Single premium saving contract with death benefit $1,000 + the stated accumulated value (not the surrender value)

Embedded derivatives Separate EDs if and only if: Date Embedded derivatives Separate EDs if and only if: The ED is not closely related to the host (Most common demonstration is debt versus equity characteristics) If separated, the ED meets the definition in IFRS 9 If qualifies, should value ED first, remaining contract is valued in accordance with the ED

Investment components Date Investment components Unbundle is to separate and separately measure the investment component. Done if the IC is deemed distinct from the insurance component Unbundle if: IC is separately sold in the same market and jurisdiction (but this may lead to differences in different markets) Do not unbundles if: policyholder cannot lapse one without the other, or they are not sold separately, or can only value one with the other Asset management fees part of investment component Policy loans are part of deposit element and unbundled with them

Goods and services Unbundling is required if: Date Goods and services Unbundling is required if: the goods or service could be sold separately, or The policyholder can benefit from it without benefiting from the insurance contract Unbundling is not allowed if: The goods or service cannot be separated from the insurance contract, or The goods or service has been significantly modified Health insurance example with claims processing service No health benefit, only claims processing Stop loss benefit with claims processing High deductible coverage with claims processing

Application and calculation Date Application and calculation Unbundling is only allowed if it is required Goods and services follow the revenue recognition standard Investment components and embedded derivatives follow the financial instrument standard (IFRS 9) Allocation of cash flows: Start with investment components and EDs and measure as if stand alone Separate discounts/supplements and cashflows (including expenses and acquisition costs) between insurance and goods & service on a “rational and consistent” basis

Presentation Only

Separating investment components Date Separating investment components If not already unbundled, investment components must be removed from revenue and benefits in the presentation model This includes any “returnable amounts” that would be returned to the policyholder if the insured event did not occur Examples are the surrender value even if the underlying product is primarily a protection product. Should be removed from premium and claims However, these still follow the overall IC model

Separating investment components Date Separating investment components With the exception of term life or life contingent pay-out annuities, the majority of contracts will have some aspect of a returnable amount There are also additional disclosure requirements for these amounts. Brings another layer of complexity to the overall calculation and presentation

Example 1 “105” single premium product where the death benefit is 105% of the account value If the paid premium is $1000 with no front end loads, what is recognized as revenue in the Profit and Loss statement? Policyholder dies when the AV = $1100. What is the benefit shown in the Profit and Loss statement?

Example 2 Whole life product with DB of $40,000 If the paid premium is $1000, how much is recognized as revenue in the Profit and Loss statement if: PV of total expected premiums = $20,000 PV of total expected DB = $5,000 PV of total expected surrender values = $10,000 Policyholder dies when the cash value = $5,000. What is the claim listed in the Profit and Loss statement?

Thank You