Insurance IFRS Seminar December 1, 2016 Darryl Wagner Session 17 Cash Flows Workshop Darryl Wagner, FSA, MAAA Insurance IFRS Seminar December 1, 2016 Darryl Wagner Session 17

Objectives To calculate the beginning liability values for the Statement of Financial Position There are 2 cases: Base Case & Mortality Sensitivity with extra 25% loading Spreadsheet provided has 4 tabs: Assumptions Base Case Mortality Sensitivity 2001 CSO

Case Study Product: 10 year Level Term Life Insurance Insured Characteristics Male, age 45 Face Amount of $50K Fixed level annual premium - $4.50 per $1,000 face Commission on premium is 75% in year 1 and 5% thereafter Non-commission acquisition expenses of $75 per policy (Assume 75% of $75 is directly attributable & successful) Annual maintenance expenses of $10 per policy Investment yield is 6% annually Inflation is 3% per annum Experience Mortality – 75% of 2001 CSO Table Experience Lapse – 8% for years 1-9, and 100% for year 10

Illustrative modeling approach Block 1: Fulfillment Cash Flows We assume a pricing-type model for single policy New business model for liability Cash flows include: Projected premium incomes Directly attributable acquisition expenses Projected future maintenance expenses Projected death benefit payments Single scenario only – no probability weighting of multiple scenarios

Illustrative modeling approach (cont.) Block 2: Interest Discount Rates For simplification, we assume fixed level interest discount rates are used to discount all cash flows Flat yield curve with risk-free rate of 2.28% annually Estimated liquidity premium is 0.37% annually

Illustrative modeling approach (cont.) Block 3 (IASB): Margins - Risk Adjustment We assume a Cost of Capital approach Future annual economic capital values estimated using proxy factors 0.18% of Face amount, plus 6.16% of Premium Risk adjustment at valuation date is 6% of PV of future annual economic capital values

Illustrative modeling approach (cont.) Block 3 (IASB): Margins – Contractual Service Margin At initial measurement, contractual service margin is a plug item measured as [PV of cash inflows] – [PV of cash outflows with Risk Adjustment]

Exercise Objective: Calculate the beginning liabilities for the Statement of Financial Position Assumptions Tab: calculate the discount rate For Base Case and Mortality Sensitivity Tabs: calculate the beginning liabilities using the IASB approach

Questions to consider You just completed day 1 calculations for the statement of financial position. Your supervisor asks you what will happen a year from now if assumptions change in a material manner. How would you answer him/her? Assume you are a stock analyst and need to explain the following to potential investors: - The differences between the concepts of risk adjustment, and contractual service - How to compare these values by insurance product and portfolio for one company or between peer companies

Questions to consider (cont’d) What are some alternative approaches you might use to develop risk adjustment? How would you develop the disclosure requirement which relates risk adjustment to a confidence level? What changes to your existing processes and valuation systems would be needed to implement this methodology?

Thank You