1. © 2012 Deloitte LLP. Private and confidential Aggregating contracts and disaggregating deposit components IFRS 4 Phase II Update IASB and FASB joint meetings – March 2012 Francesco Nagari 30 March 2012

2. © 2012 Deloitte LLP. Private and confidential Agenda  Highlights of decisions from this month joint and separate meetings  Detailed analysis of the Staff recommendations and Board discussions  Update on timetable and next steps IFRS 4 Phase II - Webcast (March 2012)1

3. © 2012 Deloitte LLP. Private and confidential Highlights from joint IASB/FASB meeting 21 March Unit of Account ‒ Similar portfolio definitions approved for risk adjustment, residual and single margin. The Staff will work on the wording to ensure that the same objective is achieved Investment Components – Identification for disaggregation ‒ Both Boards agreed to define investment components as amounts payable regardless of insured event occurring ‒ This concept will be used for presentation only. Investment Components – Measurement and presentation in the SOCI ‒ IASB voted to exclude investment components from aggregate premium in comprehensive income. FASB asked for a follow-up session prior to their vote. Investment Components – Presentation in the statement of financial position ‒ Both Boards agreed to not disaggregate investment components on the balance sheet provided adequate disclosures were made in the notes 2IFRS 4 Phase II - Webcast (March 2012)

4. © 2012 Deloitte LLP. Private and confidential Highlights – IASB and FASB separate meetings FASB only meeting on 7 March Scope of contracts with discretionary participation features ‒ FASB unanimously supported Staff recommendation to scope out financial instrument with discretionary participation features confirming divergence in this area IASB only meeting on 20 March Possible use of OCI (education session) ‒ Little support was shown by IASB for an OCI solution in general ‒ A loss recognition test for the OCI solution to accelerate loss recycling to income under certain scenarios was also substantially unsupported 3IFRS 4 Phase II - Webcast (March 2012)

5. © 2012 Deloitte LLP. Private and confidential Details of joint meeting – 21 March P aper 2A/81A - Unit of Account (UoA) Background 4 Items affected by a UoA decisionUoA decisions Contract boundaryPortfolio level (previously agreed) Risk adjustment (IASB only) Across portfolios based on the risk appetite neutrality underpinning the risk adjustment concept Onerous test Initial measurement of residual/ single margin Subsequent release of residual/ single margin Focus of this paper IFRS 4 Phase II - Webcast (March 2012)

6. © 2012 Deloitte LLP. Private and confidential Details of joint meeting – 21 March P aper 2A/81A – UoA (cont.) Staff recommendations summary : Alternative 1 (IASB Staff) The UoA used to determine the residual/single margin at initial recognition and perform the onerous test should be the portfolio defined as contracts that are: 1)subject to similar risks; [same as the ED] 2)managed together as a single pool; and [same as the ED] 3)priced similarly relative to the risk taken on. [new criterion] The UoA used to release the residual/single margin should not be prescribed, provided it is performed in a manner consistent with the objective of releasing the residual margin over the coverage period to the period(s) in which the service is provided [for the IASB]; or of releasing the single margin in the period(s) in which the insurer is released from risk [for the FASB]. 5IFRS 4 Phase II - Webcast (March 2012)

7. © 2012 Deloitte LLP. Private and confidential Details of joint meeting – 21 March Paper 2A/81A – UoA (cont.) Staff recommendations summary : Alternative 2 (FASB Staff) The unit of account used to determine the residual/single margin at initial recognition, release the residual/single margin, and perform the onerous contract test should be the portfolio. Portfolio of insurance contracts should be defined as contracts that are: 1)subject to similar risks; [same as IASB staff and the DP] 2)managed together as a single pool; [same as IASB staff and the DP] 3)priced similarly relative to the risk taken on; [same as IASB staff] and 4)with a similar duration and similar expected patterns of release of the residual/single margin. [new criterion] The 4 th criterion limits the maximum level of aggregation and eliminates the need for a cohort or sub-portfolio definition for the subsequent release of the residual/single margin 6IFRS 4 Phase II - Webcast (March 2012)

8. © 2012 Deloitte LLP. Private and confidential Discussion and decisions  Boards questioned whether ‒ criteria 1-3 are indicators of a broader principle ‒ ‘managed together’ is a necessary criterion  Debate around ‘priced relative to risk taken on’ criterion led to combining it with the risk homogeneity test  Boards agreed that the definition should cap the level of aggregation  Debate around the criterion to guide the release of residual/single margin led to a different final position – see next page Next steps IASB and FASB Staff to work on the wording to ensure the same objective is achieved, even if differences in wording remain 7 Details of joint meeting – 21 March Paper 2A/81A – UoA (cont.) IFRS 4 Phase II - Webcast (March 2012)

9. © 2012 Deloitte LLP. Private and confidential 8 Details of joint meeting – 21 March Paper 2A/81A – UoA (cont.) IFRS 4 Phase II - Webcast (March 2012) IASB decision (9 vs. 5)FASB decision (unanim.) A portfolio of insurance contracts should be defined as contracts that are: i. subject to similar risks and priced similarly relative to the risk taken on; and ii. managed together as a single pool.ii. have similar duration and similar expected patterns of release of the single margin. The unit of account used to determine the residual margin and perform the onerous test should be the portfolio. The unit of account used to determine and release the single margin, and perform the onerous contract test should be the portfolio. The unit of account used to release the residual margin should not be prescribed. However, the release of the residual margin should be performed in a manner consistent with the objective of releasing the residual margin over the coverage period to the period(s) in which the service is provided.

10. © 2012 Deloitte LLP. Private and confidential Details of joint meeting – 21 March Papers 2F/81F, 2G/81G, 2H/81H Separation of investment components Background and objectives  ED and DP proposed to unbundle certain investment components: explicit account balances  Feedback on unbundling was critical of the ED and DP proposals  Boards remain concerned over deposit components presented as part of aggregate premiums  At their November joint meeting: ‒ FASB tentatively agreed to unbundle explicit account balances ‒ IASB preferred to disaggregate instead of unbundling (no vote)  The Staff proposed to achieve certain objectives with the separation of investment components a)Provide a basis to determine total aggregate premium in comprehensive income b)Improve comparability with other financial institutions c)Provide liquidity risk measure (e.g. amounts payable on demand) 9IFRS 4 Phase II - Webcast (March 2012)

11. © 2012 Deloitte LLP. Private and confidential Details of joint meeting – 21 March Paper 2G/81G Determining aggregate premium for insurance component Summary of Staff recommendations 1.Definition of investment component An amount that the insurer is obligated to pay the policyholder or beneficiary regardless of whether an insured event occurs 2.Presentation and measurement in the statement of comprehensive income Exclude from the aggregate premium the present value of investment components (defined as above), measured consistently with the measurement of the overall insurance contract liability 10IFRS 4 Phase II - Webcast (March 2012)

12. © 2012 Deloitte LLP. Private and confidential Details of joint meeting – 21 March Paper 2G/81G Determining aggregate premium for insurance component (cont.) Discussion on the definition of an investment component The Staff presented four alternatives A.No separation B.Separate explicit account balances only (as defined at November 2011 joint meeting) C.Separate amounts payable to policyholder regardless of insured event occurring D.Separate amounts insurer estimates will be returned to the policyholder and/or their beneficiaries FASB FASB proposed to introduce first the unbundling of investment components if distinct from the insurance component and then disaggregating from the insurance liability those amounts payable to policyholder regardless of insured event occurring. This was referred to as ‘alternative C+’ The Staff will bring back a new analysis to assess the viability of ‘alternative C+’ 11IFRS 4 Phase II - Webcast (March 2012) Vote on definitionIASBFASB Alternative C9 vs. 5Unanimous

13. © 2012 Deloitte LLP. Private and confidential Details of joint meeting – 21 March Paper 2G/81G Determining aggregate premium for insurance component (cont.) Discussion on presentation and measurement in the SOCI  The debate appeared to highlight FASB’s greater appetite for unbundling (i.e. Separate measurement of the investment component as if it is a separate contract) over disaggregation (i.e. Separate presentation of investment components after the whole insurance contracts has been measured)  The vote on the second proposal had the following outcome  We expect that this new FASB paper would also propose the solution on whether ‘alternative C+’ will be part of the new accounting standard 12 Vote on measurementIASBFASB Approve Staff recommendation UnanimousNo vote, Need separate meeting IFRS 4 Phase II - Webcast (March 2012)

14. © 2012 Deloitte LLP. Private and confidential Details of joint meeting – 21 March Paper 2H/81H Statement of Financial Position Presentation Summary of Staff recommendations Insurers should not be required to present disaggregated investment components separately from the insurance contract in the statement of financial position Disclose in the notes  Portion of insurance contract representing aggregated portions of premiums received (and claims / benefits paid) that were excluded from the statement of comprehensive income (i.e. investment components as defined in previous paper)  The amounts payable on demand Discussion  After having considered and rejected the use of measurement bases from IFRS and US GAAP financial instruments accounting for the balance sheet disclosure of disaggregated investment components the Boards agreed to avoid that altogether  Several IASB and FASB members summarised the discussion by noting that the issue did not present itself with an obvious answer, therefore disclosure is more appropriate to address different user objectives 13IFRS 4 Phase II - Webcast (March 2012)

15. © 2012 Deloitte LLP. Private and confidential Details of joint meeting – 21 March Paper 2H/81H Statement of Financial Position Presentation (cont.) Conclusion Next steps The issue on whether this decision should be a requirement or a disclosure policy choice will be discussed at a future meeting 14 IASBFASB Approve Staff recommendation11 vs. 34 vs. 3 IFRS 4 Phase II - Webcast (March 2012)

16. © 2012 Deloitte LLP. Private and confidential Details of FASB only meeting – 7 March Scope of contracts with discretionary participating features (DPF) Background  Currently contracts with DPF are not insurance contracts because there is minimal or no insurance risk  IASB has extended the scope of insurance contracts accounting to these contracts, restricting this to insurance industry only (28 February IASB only meeting)  FASB noted that IASB new definition would include re-insurance contracts that do not transfer insurance risk both written by insurers and held by insurers as cedants/policyholders Summary of Staff recommendation To scope investment contracts with discretionary participating features out of the insurance contracts standard Conclusions Unanimous approval of the Staff recommendation 15IFRS 4 Phase II - Webcast (March 2012)

17. © 2012 Deloitte LLP. Private and confidential Details of IASB only meeting – 20 March Paper 2B – Recognising changes in the insurance liability in OCI Education session  IASB Staff presented a series of papers summarising the reasons for and against using an OCI solution for insurance contracts  In addition they discussed the mechanics of the OCI solution presenting two main alternatives that will include in OCI ‒ all changes from discount rate; and ‒ all changes in cash flows from interest rate sensitive assumptions (options, guarantees, inflation assumptions, lapses)  The unwind of a locked in discount rate, release of margin, experience and changes in cash flows due to changes in non-interest rate sensitive assumptions will always be presented through profit or loss ‒ Alternative A would present in the income statement the adjustment to the current interest expense to remove the differential to OCI ‒ Alternative B would present directly the locked in interest expense with the differential being recognised directly in OCI 16IFRS 4 Phase II - Webcast (March 2012)

18. © 2012 Deloitte LLP. Private and confidential Details of IASB only meeting – 20 March Paper 2B – Recognising changes in the insurance liability in OCI (cont.)  In addition Staff also proposed that the recycling through income of losses recognised in OCI should be accelerated under a “loss recognition test”  The loss recognition trigger could be based on:  [Liability discounted at current discount rate – Liability discounted at inception rate] > margin  [Liability discounted using rate of return on investment – Liability discounted at inception rate] > margin  Other qualitative factors indicate that insurer expects to use own capital to satisfy insurance liability  If loss recognition test is triggered the discount rate would have to be re-set  Amount of loss to be recycled if test is triggered:  The entire amount of losses recognised in OCI  The loss calculated under the selected trigger  The loss above the margin  A combination of the above but the discount rate is not re-set 17IFRS 4 Phase II - Webcast (March 2012)

19. © 2012 Deloitte LLP. Private and confidential Details of IASB only meeting – 20 March Paper 2B – Recognising changes in the insurance liability in OCI (cont.) Discussion The Board members raised a number of objections, some already considered by the Staff:  Lack of principle around the use of OCI  Need to consider IFRS 9 proposals  Reduced relevance of the income statement  Changes in interest sensitive cash flows as well as discount rate may be in OCI  Accounting mismatch from having investments at amortised cost will merely shift to OCI  Options and guarantees are economic cash flows which may never be reflected through income  The loss recognition test brings losses from declines in interest rates result through income while gains remain in OCI Overall there was no desire to use an OCI solution 18IFRS 4 Phase II - Webcast (March 2012)

20. © 2012 Deloitte LLP. Private and confidential Next steps  Minor matters carried forward from March – IASB and FASB ‒ Unit of account – FASB and IASB Staff to ensure convergence on principle even if different wording ‒ Disaggregation of investment components – Staff to do more work around alternative C+, to unbundle distinct components first ‒ No separation of investment components on the Balance Sheet – to permit or require  Matters carried forward from March – IASB ‒ Staff to develop a detailed paper around use of OCI / financial instruments accounting  Matters carried forward from March – FASB ‒ FASB to have another meeting on measurement of investment components excluded from presentation in comprehensive income 19IFRS 4 Phase II - Webcast (March 2012)

21. © 2012 Deloitte LLP. Private and confidential Next steps and timetable  Next joint meeting on insurance expected in week of 16-21 April with new education sessions likely to be held in the prior week  Major topics that remain to be deliberated: ‒ Unlocking of residual margin / subsequent measurement of single margin ‒ Presentation of premiums in the income statement ‒ Reinsurance – cedant’s accounting ‒ Transition and effective date ‒ Financial assets held to back insurance contracts – redeliberation on IFRS 9 classification and measurement  Publication of next due process document is currently delayed to Q3-Q4 2012 (both IASB and FASB) ‒ Decision awaited on status of next IASB due process document  Final accounting standards should be released by the end of 2013 20IFRS 4 Phase II - Webcast (March 2012)

22. © 2012 Deloitte LLP. Private and confidential Contact details Francesco Nagari Deloitte Global IFRS Insurance Leader +44 20 7303 8375 fnagari@deloitte.co.uk Link to Deloitte IFRS Insurance materials: http://www.iasplus.com/agenda/insure2.htm Insurance Centre of Excellence: insurancecentreofexc@deloitte.co.uk 21IFRS 4 Phase II - Webcast (March 2012)

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