1. Presentation Workshop
Insurance IFRS Seminar
December 2, 2016
Darryl Wagner
Session 25

2. Objectives
To build the Statement of Comprehensive Income using the Exposure Draft approach
For simplification purposes, we only calculate the following:
Underwriting margin
Gains and losses at initial recognition
Acquisition costs that are not incremental
There are 2 cases: Base Case & Mortality Sensitivity with extra 25% loading
Spreadsheet provided has 4 tabs:
Assumptions
Base Case
Mortality Sensitivity
2001 CSO

3. Case Study Product: 10 year Level Term Life Insurance
Insured Characteristics
Male, age 45
Face Amount of $50K
Fixed level annual premium - $4.5 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

4. 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

5. Illustrative modeling approach (cont.)
Block 2: Interest Discount Rates
For simplification, we assume fixed 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

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

7. 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]
Then amortized in proportion to change in PV of expected future benefit cash flows

8. Statement of comprehensive income
IASB Exposure Draft
Insurance contract revenue X
Claims and benefits incurred
(X)
Amortization of acquisition costs
Changes in estimates for future claims
Unwind of previous changes in estimates
Total Underwriting Margin
Investment income
Interest accreted on insurance contracts
Profit
Components of other comprehensive income
Total comprehensive income
Block 1
Current, unbiased and probability weighted estimates of the contractual cash flows
The future cash flows are re-estimated every period with changes reflected in the SCI
The difference between the expected vs. actual cash flows during the period are reflected in the SCI

9. Statement of comprehensive income
IASB Exposure Draft
Insurance contract revenue X
Claims and benefits incurred
(X)
Amortization of acquisition costs
Changes in estimates for future claims
Unwind of previous changes in estimates
Total Underwriting Margin
Investment income
Interest accreted on insurance contracts
Profit
Components of other comprehensive income
Total comprehensive income
Block 2
Discounting of cash flows
The interest expense from the discount unwinding is recognized in the SCI
The discount rates are re-estimated every period with changes recognized in the SCI

10. Statement of comprehensive income
IASB Exposure Draft
Insurance contract revenue X
Claims and benefits incurred
(X)
Amortization of acquisition costs
Changes in estimates for future claims
Unwind of previous changes in estimates
Total Underwriting Margin
Investment income
Interest accreted on insurance contracts
Profit
Components of other comprehensive income
Total comprehensive income
The risk adjustment is re-measured at each reporting period and the movement is recognised in the SCI
Block 3
Risk adjustment

11. Statement of comprehensive income
IASB Exposure Draft
Insurance contract revenue X
Claims and benefits incurred
(X)
Amortization of acquisition costs
Changes in estimates for future claims
Unwind of previous changes in estimates
Total Underwriting Margin
Investment income
Interest accreted on insurance contracts
Profit
Components of other comprehensive income
Total comprehensive income
The contractual service margin is released ON a systematic basis that reflects the remaining transfer of services that are provided under the contract
Block 3
Contractual service margin

12. Exercise
Objective: Build the Statement of Comprehensive Income using the Exposure Draft approach
For both Base Case and Mortality Sensitivity:
Calculate the IASB contractual service margins
Calculate the underwriting margin, gains and losses at initial recognition, and acquisition costs that are not directly attributable

13. Assumptions/Calculation Methods
Answer Key
Underwriting margin
Assumptions/Calculation Methods
Change in risk adjustment
Risk adjustment (t) – Risk adjustment (t+1)
Release of contractual service margin
Contractual service margin (t) – Contractual service margin (t+1)
Gains/losses at initial recognition
Losses at initial recognition of an insurance contract
Max (Risk adjustment + NPV of fulfillment CFs, 0)
Acquisition costs that are directly attributable
75% of total acquisition costs, plus the incremental 1st year commission

14. Answer Key Base Case IASB Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Total
(a) Underwriting margin
Insurance contract revenue
Release of contractual service margin 15 17 18 19 21 22 24 26
197
Change in risk adjustment 5 4 43
Period expected cash outflows
104
108
110
109
112
116
121
127
134
1,150
Acquisition cost period allocation 6 7 56
Claims and benefits incurred
(104)
(108)
(110)
(109)
(112)
(116)
(121)
(127)
(134)
(1,150)
Amortization of acquisition costs
(181)
(5)
(6)
(7)
(233)

15. Answer Key Mortality Sensitivity
IASB
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Total
(a) Underwriting margin
Insurance contract revenue
Release of contractual service margin -
Change in risk adjustment 5 4 43
Period expected cash outflows
130
135
137
136
140
144
150
158
167
1,433
Acquisition cost period allocation 6 7 56
Claims and benefits incurred
(130)
(135)
(137)
(136)
(140)
(144)
(150)
(158)
(167)
(1,433)
Amortization of acquisition costs
(181)
(5)
(6)
(7)
(233)

16. Questions to consider
In the Mortality Sensitivity case, what if the mortality shock comes after year 1 (in a valuation-type model)? What considerations need to be made when unlocking the CSM?
Can there be negative reserves? What is the significance of a negative reserve result? How would the asset side of the balance sheet be represented if this scenario was to arise?

17. Thank You