1. 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

2. 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

3. 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

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 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

6. 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

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]

8. 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

9. 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

10. 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?

11. Thank You