1. Insurance IFRS Seminar December 1, 2016 Francesco Nagari Session 2
Financial Reporting for Insurance Companies (including management reporting)
Insurance IFRS Seminar
December 1, 2016
Francesco Nagari
Session 2
Session 2

2. An example 20 year Term insurance policy
Policyholder pays $100 at the beginning of the contract. The insurance company gives that $100 to the agent who sold the contract
If the policyholder is still alive, he pays the insurer another $100 on every anniversary (which is not given to the same agent).
If he doesn’t pay, then the contract ends.
As long as he pays, this goes on until he dies or 20 years pass
If he dies at anytime while the contract is in-force, the insurer will pay his beneficiaries $100,000

3. An example What can happen
Policyholder pays all premiums and doesn’t die: Insurer collects $2,000 less the $100 to the sales agent: $1,900
Policyholder stops paying premium at some point and lapses the policy: insurer collects something less than the $1,900
Policyholder dies at some point and his beneficiary receives the death benefit: Insurer pays between $100,000 and $98,100
At the beginning of the contract, right after the company received the first $100 and give it to the agent, what should they report?
Nothing?
A liability sufficient to cover the death benefit?
An assets equal to the expected cash inflows and associated investment income?
A liability sufficient to cover mildly adverse experience with mortality?
It depends on the framework / purpose of the reporting.

4. Financial reporting frameworks
Insider reporting
Have all the information available
Can be customized to fit your needs
Outsider
Limited information
Uniformity and comparability are key
Solvency
Does the company have enough capital to cover the risks it is taking?
Value
Is the company creating value for shareholders and other stakeholders?

5. Financial reporting frameworks
Outsider
Insider
Value
Should I invest in or make a deal with this company? E.g. buy shares, business deal
Compare to other insurers
Compare to other industries
Solvency
Is this company stable or safe? E.g. buy a policy, loan money
Assess credit worthiness
Assess security, ability to keep promises

6. Financial reporting frameworks
Outsider
Insider
Value
Should I invest in or make a deal with this company? E.g. buy shares, business deal
Compare to other insurers
Compare to other industries
Solvency
Is this company stable or safe? E.g. buy a policy, loan money
Assess credit worthiness
Assess security, ability to keep promises

7. Financial reporting frameworks
Outsider
Insider
Value
Should I invest in or make a deal with this company? E.g. buy shares, business deal
Compare to other insurers
Compare to other industries
Are we effectively running our company and satisfying our stakeholders
Functional KPIs
Value based decision making e.g. product pricing
Capital based decision making e.g. product pricing
Anticipate outsider concerns
Solvency
Is this company stable or safe? E.g. buy a policy, loan money
Assess credit worthiness
Assess security, ability to keep promises

8. Outsider value reporting
Balance sheet or income statement focus?
Estimate the expected value created over the life of the relationship or product?
Estimate the value as of the reporting date regardless of the past?
Very different answers
Example: Samsung microprocessors
Maybe the right answer is a combination of both?

9. Things to keep in mind
Cash flows are both uncertain and far into the future so can vary drastically from expectations
Insurance contracts often have several options and guarantees
These are not often the reason the contract was purchased so may not be efficiently exercised.
Unlike other financial transactions, insurance is not an efficient market with information parity.
We are measuring the liability independently but ultimate cash flows may depend partly or wholly on asset performance

10. Things to keep in mind (cont’d)
Financial reporting changes only affect timing. They do not affect the overall profitability of a company
Given the very long duration and cash flow uncertainty of many insurance contract relationships, that timing can make a drastic difference
Compounding these issues, the insurance industry has developed differently in most jurisdictions and as a result it is hard to find a solution that works in all cases
Designing simple and comparable measures across all these complex insurance products has been something that experts have been chasing for years…

11. Thank you!