Accounting for Insurance Liabilities:

IFRS 17 – Finally There!

Cardi van Capelle
IFRS and Solvency II Specialist
NN Group

Global Association of Risk Professionals

June 2017
The views expressed in the following material are the
author’s and do not necessarily represent the views of
the Global Association of Risk Professionals (GARP), its
Membership or its Management.

© 2016 Global Association of Risk Professionals. All rights reserved. (12.15.16)

Poll

Who is working for an EU listed insurer?

2 | © 2014 Global Association of Risk Professionals. All rights reserved. 2

IASB Insurance: a marathon project

3 | © 2014 Global Association of Risk Professionals. All rights reserved. 3

IFRS 17 has a long history……
• The project to have an international standard
on insurance accounting started in 1997

• The plan was to have it when IFRS was

implemented in Europe in 2005
as this was unsuccessful: temporary IFRS

• Initially the project was directed to

• implement full fair value accounting for insurance businesses
• achieve a joint outcome with the US (US GAAP)

• Along the way however:

• profit recognition for insurance moved away from fair value
• the US has take its own (different) approach

4 | © 2014 Global Association of Risk Professionals. All rights reserved. 4

……and we are not there yet
• IFRS 17 was issued final in May 2017

• Many elements of the standard will result

in discussions, interpretations and best practices
over the coming years:
• industry, auditors, regulators

• The IASB intends to establish a Transition Resource Group – a

forum to discuss implementation issues that may result in
interpretations or amendments to the standard

• The EU will now start its endorsement process – IFRS 17 is only

effective in the EU if and when endorsed
• endorsement process likely to continue for the full 2017 (or
longer…)
• EFRAG (the EU body that advises on endorsement) is under
significant pressure to first perform a complete impact assessment

5 | © 2014 Global Association of Risk Professionals. All rights reserved. 5

IFRS 9
Implementation of IFRS 17 will go together with IFRS 9 on assets

• IFRS 9 on Financial Assets is final

• Implementation for insurers (likely) together with IFRS 17
in 2021
• For non-insurers effective in 2018; for insurers certain
disclosures as of 2018
• Main changes:
⁻ More assets accounted for at fair value through P&L
⁻ Expected loss provisioning to replace current impairment model
• This presentation focusses on IFRS 17 only

6 | © 2014 Global Association of Risk Professionals. All rights reserved. 6

Why is it a big change?
“Temporary” IFRS since 2004

• No accounting standard for insurance contracts when IFRS was

implemented (2005)
• A temporary IFRS was issued that allowed continuation of pre-IFRS
accounting
• NN Group uses pre-IFRS “NN GAAP”:
- mostly fixed discount rate
- mostly mortality tables used for pricing the contract at inception
- NN Group’s RAT to test adequacy
- towards fair value for specific portfolios (Japan Closed Block VA)

• The final outcome of IFRS 17 reflects the long and difficult discussions:
complexity!

7 | © 2014 Global Association of Risk Professionals. All rights reserved. 7

The core measurement model (balance sheet)
The core measurement model is the Building Block Approach
(“BBA”)- general model

4th Building Block: Unearned profits (Contractual Service Margin)

CSM

3rd Building Block: Compensation for risk

Fulfilment Cash Flows

Risk adjustment

2nd Building Block: Discounting at current rate

Time value of money (discounting)

1st Building Block:

Expected value of the future cash flows
Best estimate of fulfillment cash flows

8 | © 2014 Global Association of Risk Professionals. All rights reserved. 8

Level of aggregation
1. A portfolio is a group of contracts subject to similar risks and managed
together.
2. Portfolio’s are further split into groups based on profitability:
1. Onerous at inception
2. Not onerous at inception and no significant risk of becoming
onerous
3. Other profitable contracts
3. Groups are set for maximum one year layers
If required for management reporting, a more detailed split is allowed.

Exception: if, and only if, a split in profitability is a result of specific

constraints in law or regulation to set price of benefit based on individual
policyholder characteristics.

9 | © 2014 Global Association of Risk Professionals. All rights reserved. 9

Measurement - summary
• profit at inception of the contract
(4) • avoids recognition of day-1 gain
• must be positive; any day-1 loss is recognised immediately in P&L
CSM

• compensation for the uncertainty about the amount and timing of future cash
(3) flows
Risk • equivalent to a Risk Margin in Solvency 2
adjustment • method not prescribed

• discounting against a market consistent yield, updated every reporting period

Total
(2) • top down rate (asset return adjusted for default) or bottom up (risk free plus
insurance
illiquidity) are both allowed
liability Discounting

• expected cash flows from premiums, claims, benefits, expenses, etc.

• includes acquisition costs (i.e. no DAC, but reflected in cash flows)
(1) • current estimates, i.e. updated every reporting period, using all available info
Cash Flows • on a “fulfillment” basis – i.e. not market value but entity-specific; however, must
be market consistent where possible

10 | © 2014 Global Association of Risk Professionals. All rights reserved. 10

Poll

IFRS 17 measurement will provide the same

numbers as measurement under Solvency II

11 | © 2014 Global Association of Risk Professionals. All rights reserved. 11

Some additional observations on
measurement
Similarities and differences with Solvency 2

• Blocks 1 to 3 (discounted cash flows plus a risk margin) are similar to

Solvency 2
• However, there are likely many detailed differences in each (scope of
cash flows in the best estimate liability, discount rate, risk
adjustment, level of aggregation)
• Especially for discount rate: differences with Solvency II to be
considered
• Therefore, the market value liability in the Solvency II balance sheet
will be different from the market value liability in the balance sheet
under IFRS 17
• The Contractual Service Margin (block 4) only exists in IFRS

12 | © 2014 Global Association of Risk Professionals. All rights reserved. 12

Changes in measurement
Beginning of the period End of the period

Interest
Absorbing
(4) Release for accretion (4)
changes in
CSM the period (locked in CSM
estimates
rate)

(3) (3)
Change in Release for
Risk future Risk
adjustment the period
estimate adjustment

Unwind for
(2) Change in Discounting the period (2)
Discounting discount rate (locked in) (locked in Discounting
rate)

Experience –
(1) Change in Change in actual vs (1)
Cashflows
financial non-financial expected
Cash Flows in/out Cash Flows
assumptions assumptions cashflows

Other Comprehensive Some changes are Profit and loss :

Income (OCI), i.e. absorbed in CSM - Underwriting result
“revaluation reserve" in - Investment result
13 | © 2014 Global Association equity or P&L All rights reserved.
of Risk Professionals. 13
Accounting model modified by type of
contract
BBA – General model Life & pension –
traditional
Non-
participating
BBA- general model Non-Life – car
or optional: PAA insurance

Insurance
contract
Direct BBA – Variable fee Unit Linked

Participating

BBA – General Model Profit sharing based

Indirect + limited modification on index or company
profit

14 | © 2014 Global Association of Risk Professionals. All rights reserved. 14

Poll

IFRS 17 will not have any impact on

my daily business

15 | © 2014 Global Association of Risk Professionals. All rights reserved. 15

Questions

16 | © 2014 Global Association of Risk Professionals. All rights reserved. 16

Creating a culture of risk awareness®
About GARP | The Global Association of Risk Professionals (GARP) is the leading globally recognized
association dedicated to the education and certification of risk professionals, connecting members in more than
190 countries and territories. GARP’s mission is to elevate the practice of risk management at all levels, setting
the industry standard through education, training, media, and events.

Main Office London Office

111 Town Square Place 2nd Floor
14th Floor Bengal Wing
garp.org Jersey City, New Jersey
07310, U.S.A.
9A Devonshire Square
London, EC2M 4YN, U.K.
© 2016 Global Association of Risk Professionals. All rights reserved. (12.20.16) +1 201.719.7210 +44 (0) 20 7397 9630