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

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

3. Separating Elements

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

5. 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

6. 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

7. 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

8. 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

9. Presentation Only

10. 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

11. 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

12. 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?

13. 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?

14. Thank You