1. Insurance Contracts Jeong-Hyeok, Park Research Fellow September 29, 2010 Agenda-D-2

2. Contents 1 1.Background 2.Working Group 3.Discussion Issues

3. Contents 2 Working Group Background Discussion Issues

4. Background 2004 ~ 2007 2011 Project history 2010 We are here 1 1 Issued in 2004 Aimed at making only limited improvements DP Preliminary Views on Insurance Contract (Phase ll) Issued in 2007 ED ‘ Insurance Contracts’ (Phase ll) IFRS ‘ Insurance Contracts’ (Phase l) Issued in July 2010, comment due November 30, 2010 Final standard : expected for Q2 2011 Joint Project with FASB Since 2008 2 2 3 3 4 4 1 1 2 2 3 3 4 4 20082009 3

5. Background continued 4 Project Objective Improve financial reporting for Insurance contracts Making it easier for users to understand Enhance comparability and transparency

6. Contents 5 Discussion Issues Working Group Background

7. Working Group 6 Purpose To assist the AOSSG in preparing improved proposals to the IASB regarding the ED ‘Insurance Contracts’ Lead country Korea Co-lead country China Members Australia, Hong Kong, Indonesia, Japan, Malaysia, Nepal, Thailand

8. Working Group continued 7 Chronology of Working Process September 03, 2010: WG members’ preliminary views on ED September 14, 2010 : Circulate draft of AOSSG WG’s preliminary views on questions in IASB’s ED September 16, 2010: All AOSSG members’ comments on AOSSG WG’s preliminary views September 29, 2010: 1st AOSSG meeting 1 1 2 2 3 3 4 4 September Sun Mon Tue Wed Tur Fri Sat 1 1 2 2 3 3 4 4

9. Contents 8 Working Group Discussion Issues Summary

10. Key Issues to be discussed 9 Issue 1. Two Margin approach vs Single Margin Approach Issue 2. Discount Rate Issue 3. Acquisition Costs Issue 4. Issue 5. Transition Presentation

11. Issue 1. Two Margin approach vs Single Margin Approach 10 cash outflows cash outflows risk adjustment residual margin composite margin Two Margin Approach = Best Estimate of Liability + RA + RM Single Margin Approach = Best Estimate of Liability + CM 1 2 1 2

12. 11 Issue 1. Two Margin approach vs Single Margin Approach Two Margin ApproachSingle Margin Approach Convey useful information about the amount of insurance risks Reduce the amount of RM for arbitrary release patterns Easier Application to practice Reduce possibility of a loss at the point of the first measurement Reduce fluctuation of gains or losses in subsequent measurement

13. 12 cash outflows Which model do you prefer? Two Margin vs Single Margin. (Opinion) Diverse views existing Do you agree with the definition of Risk Adjustment? (Opinion) Diverse views existing, Some concern that definition of RA is not appropriate for a description of insurance liability Do you agree with the measuring RA at a portfolio level? (Opinion) Most agree./ Options should be given / Entity wide basis WG Preliminary Views Issue 1. Two Margin approach vs Single Margin Approach

14. 13 cash outflows Do you agree with no recognition of gain at inception?. (Opinion) Most agree. / Gradual recognition of such gain Do you agree with estimating margin at the level of portfolio? (Opinion) Diverse views existing. Do you agree with the method of releasing the margin ? (Opinion) Diverse views / Remeasurement. / More guides Do you agree with the accretion of interest on the margin? (Opinion) Pros and Cons exiting WG Preliminary Views Issue 1. Two Margin approach vs Single Margin Approach

15. Liabilities 14 Issue 2. Discount Rate Reflecting characteristics of the insurance contract According to the dependence on the performance of specific assets No ⇒ risk-free plus adjustment for illiquidity Yes ⇒ consider performance of assets How to determine discount rate? NO Yes AssetsLiabilities Risk-free rate + illiquidity Liabilities AssetsLiabilities performance of assets

16. 15 cash outflows Do you agree with the proposed discount rate? (Opinion) Pros and Cons existing / Asset earned rate / Credit Spread should be reflected. Do you agree with considering the effects of liquidity? (Opinion) Some concerns about how this might be done. Do you agree with concerns that discount rate misrepresent the economic substance? (Opinion) Views are divergent. WG Preliminary Views Issue 2. Discount Rate

17. 16 Issue 3. Acquisition Costs incremental acquisition costs (on a contract level) are included in the cash flows non-incremental acquisition costs are expensed Measurement Level Measurement Building Blocks = Cash flows + Risk adjustment + Residual margin incremental acquisition costs non-incremental acquisition costs → expensed

18. 17 WG Preliminary Views Issue 3. Acquisition Costs Do you agree that the incremental acquisition costs should be included in the initial measurement? (Opinion) Most agree. / The scope of acquisition costs Do you agree that non-incremental acquisition costs should be recognized as expenses when incurred? (Opinion) All agree.

19. 18 Issue 4. Presentation (Summarized Margin Approach) Inceptionsix months 1 Janto 30 Junto 31 Dec Risk margin2126 Residual margin22 Insurance margin02328 Experience adjustment (10) Changes in estimates (20)0 Net gain at inception000 Investment income4038 Interest on insurance liability(25)(23) Net interest and investment015 Profit0833 Examples

20. 19 WG Preliminary Views Issue 4. Presentation (Summarized Margin Approach) Do you agree with the summarized margin presentation? (Opinion) Most prefer premium approach(Traditional method) Extended margin approach can be a choice. Do you agree with presenting all income and expense in P&L? (Opinion) Diverse views existing. OCI presentation needs to be considered.

21. 20 Issue 5. Transition` existing insurance liabilities cash flows intangible assets deferred acquisition costs Risk adjustment Previous GAAP Transition IFRS 4 Phase II Difference to retained earnings

22. 21 WG Preliminary Views Issue 5. Transition Do you agree with the proposed transition requirements? (Opinion) Diverse views existing. (Modified) Retrospective / Prospective Application No recognition of residual margin at the transition date may have some problems * Alternative - Residual Margin = Max [(A) – (B), 0] (A) Existing provision on the date of transition (Assuming that LAT was passed) (B) PV of fulfillment cash flows

23. Thank you !! 22