1. *connectedthinking  Discussion Paper Preliminary Views on Insurance Contracts Sabine Wuiame

2. Agenda  History of the IASB Insurance Project  Summary of the Discussion Paper

3. History of the IASB Insurance Project

4. PricewaterhouseCoopers Page 4 History of the IASB Insurance Project IASC starts insurance project in 1997 “Issue Paper” published in 1999 – followed by issuance of a “Draft Statement Of Principles” Not feasible to complete a project on insurance contracts before 2005. Phase I = IFRS4 = Wide variety of accounting practices DP issued on 3rd May 2007 -Comment period : 16 November -Will be used to develop Exposure Draft (? End 2008/2009) -Final Standard should be published in +/- End 2009/2010? -Effective transition date more than one year later (Jan. 2011?) Start of insurance project 1997 19981999 December: Issue Paper /DSOP 20002001200220032004 Project split in two phases March: IFRS4 20052006 May: D.P. 20072008 ED? 2009 IFRS?

5. PricewaterhouseCoopers Page 5 Principles of Phase I – IFRS4 Contract classification and measurement: -Insurance contracts and investment contracts with dpf : IFRS4 -Investment contracts with no dpf: IAS39 Phase I of the insurance project (IFRS4) is an interim phase -Continuation of local accounting policies with amendments: Elimination of equalisation reserves Liability adequacy test Reinsurance impairment test Change in accounting policies permitted: -Aimed at eliminating accounting mismatch -Shadow accounting -Use of current interest rates -Extensive disclosure requirements

6. PricewaterhouseCoopers Page 6 Convergence with other projects Convergence project with US GAAP Convergence with other IASB projects -Revenue recognition -Fair value measurement -Financial instruments -IAS37 -Framework -Definitions of liability and equity -Financial statements presentation Convergence with Solvency II

7. Summary of the Discussion Paper

8. PricewaterhouseCoopers Page 8 Published in May 2007 7 Chapters: 1-Scope 2-Recognition and Derecognition 3-Measurement - core issues 4-Policyholder behaviour, customer relationship and acquisition costs 5-Measurement- other issues 6-Policyholder participation 7-Changes in insurance liabilities Summary of the Discussion Paper

9. PricewaterhouseCoopers Page 9  Scope  Measurement  Policyholder Participation  Changes in insurance liabilities Summary of the Discussion Paper

10. PricewaterhouseCoopers Page 10  Scope  Measurement  Policyholder Participation  Changes in insurance liabilities Summary of the Discussion Paper

11. Scope

12. PricewaterhouseCoopers Page 12 Scope Definition of an insurance contract in IFRS4: -“contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder” Insurance liability = insurer’s obligations under an insurance contract Insurance asset = insurer’s rights under an insurance contract Applies to all types of contracts (life, non life, accepted reinsurance)

13. PricewaterhouseCoopers Page 13  Scope  Measurement  Policyholder Participation  Changes in insurance liabilities Summary of the Discussion Paper

14. Measurement

15. PricewaterhouseCoopers Page 15 Measurement Concept of “current exit value” Based on building blocks Best estimate of future cash- flows Discount Rate Risk Margin Service Margin

16. PricewaterhouseCoopers Page 16 Measurement Best estimate of future cash-flows (1) No detailed guidance Explicit Consistent with observable market prices If observable: direct inputs without adjustments Not observable : All available data, external and internal Should not contradict market data Include – in an unbiased way- information about amount, timing and uncertainty of all cash flows Full range of possible outcomes and their probabilities

17. PricewaterhouseCoopers Page 17 Measurement Best estimate of future cash-flows (2) Current >< “locked-in” assumptions Exclude entity-specific cash-flows Economic characteristics of the liability Do not capture CF arising from synergy with other assets and liabilities Do not capture CF that are specific to the insurer and would not arise for other market participants with the same obligations Portfolio specific vs entity specific

18. PricewaterhouseCoopers Page 18 Measurement Discount rate Applies to all types of contracts Including non life Should not reflect the characteristics of the assets Consistent with observable current market prices for cash flows whose characteristics match those of the insurance liability No detailed guidance

19. PricewaterhouseCoopers Page 19 Measurement Risk margin (1) Effects of uncertainty Liability with fixed cash flows vs liability with uncertain cash flows “Explicit and unbiased measurement of the compensation that entities demand for bearing risk” NOT a shock absorber Captures all risks associated with liability List of compliant actuarial methods Should not reflect the benefits of diversification between portfolios and negative correlation between portfolios

20. PricewaterhouseCoopers Page 20 Measurement Risk margin (2) Calibrating the risk margin per unit of risk Two approaches: Implementation A : calibrates at inception directly to actual premium charged (less relevant acquisition costs) -Need to define acquisition cost, liability adequacy test Implementation B: use actual premium only as reasonableness check -Profit at inception Majority of Board Members in favor of implementation B

21. PricewaterhouseCoopers Page 21 Measurement Service margin Insurer might provide other services as well Should be included if market participants require such a margin

22. PricewaterhouseCoopers Page 22 Measurement Future premiums Future premiums (+ related benefits) included if any of the following criteria is met: a)Policyholder must pay premium to retain guaranteed insurability b)The insurer can compel the policyholder to pay the premium c)Including the premiums and the resulting policyholder benefits will increase the measurement of the liability

23. PricewaterhouseCoopers Page 23 Measurement Acquisition costs Should be recognized as an expense Not as the cost of an asset

24. PricewaterhouseCoopers Page 24 Measurement Assets backing insurance contracts Phase I: accounting mismatches Existing options to avoid accounting mismatches Assets at fair value through P&L Fair value model for investment property These are not required Shadow accounting Shadow accounting no longer relevant for non-participating insurance liabilities For participating business -Could be considered if assets classified as “available for sale”

25. PricewaterhouseCoopers Page 25 Measurement Reinsurance assets No offset Current exit value Risk of default (or disputes) of the reinsurer should be considered based on the expected loss model

26. PricewaterhouseCoopers Page 26 Measurement Unbundling Preliminary view based on interdependence : If components so interdependent that can be measured only on an arbitrary basis, Phase II should apply to the whole contract If components not interdependent, Phase II applies to insurance component and IAS39 applies to the deposit component If components interdependent but can be measured on basis that is not arbitrary, then insurance component = measurement of whole contract under Phase II less IAS39 measurement of deposit component

27. PricewaterhouseCoopers Page 27 Measurement Other Current exit value should reflect liability’s credit characteristics Unit of account does not affect the expected PV of future cash flows No specific proposals for investment contracts

28. PricewaterhouseCoopers Page 28  Scope  Measurement  Policyholder Participation  Changes in insurance liabilities Summary of the Discussion Paper

29. Policyholder Participation

30. PricewaterhouseCoopers Page 30 Discretion (with constraints) over amount or timing of distribution to policyholders Definition of DPF is not discussed Is such right creating a liability? Include in each scenario policyholder dividends that satisfy a legal or constructive obligation at the reporting date Applies to participating insurance and investment contracts Participating contracts

31. PricewaterhouseCoopers Page 31  Scope  Measurement  Policyholder Participation  Changes in insurance liabilities Summary of the Discussion Paper

32. Changes in insurance liabilities

33. PricewaterhouseCoopers Page 33 Changes in Insurance Liabilities Are insurance premiums revenue or deposits? No preliminary view yet No preliminary view yet on separate presentation of specified components of the changes in insurance liabilities: Income or expense at inception of new contracts Cash flows Expected changes Changes in circumstances Policyholder participation Income or expense from reinsurance held Effects of business combinations and changes in foreign exchange rates

34. PricewaterhouseCoopers Page 34 Changes in Insurance Liabilities Profit or loss should include all changes in the carrying amount of insurance liabilities

35. Questions?