Fair Value Measurement

International Accounting Standards Board

The views expressed in this presentation are those of the presenters,not necessarily those of the IASB .

Taking stock

As at 31 October 2011

A high level overview of progress on the insurance contracts project

Where we were:The proposals in the exposure draft

Cash flows

Time value of money

Risk adjustment

Residual margin

The amounts the insurer expects to collect frompremiums and pay out for claims, benefits andexpenses, estimated using up-to-date information

An adjustment that uses an interest rate to convertfuture cash flows into current amounts

An assessment of the uncertainty about the amountof future cash flows

Contract profit (reported over the life of the contract)

Total

insurance

liability

Other matters: presentation, scope, unbundling and disclosure

Tentative decisions

•No gains at inception

•Adjust prospectively for changes in estimates of cash flows

•Include independently measured and updated riskadjustment

•Adjust for time value of money using rate that reflectscharacteristics of liability

•Expected value considering all relevant information

•Includes all direct costs incurred in acquiring the contracts

Where we are: high level overview

Cash flows

Time valueof money

Risk adjustment

Residual margin

What we still need to do

•Complete remaining topics

–Unbundling of non-insurance components

–Residual margin

–Presentation

–Short duration contracts

–Transition

•Assess whether any differences between IASB andFASB can be reconciled

•Review draft or re-expose

What’s changed since the ED:overview

Exposure draft

Decisions so far

Definition andscope

No significant change from ED except financialguarantee contracts

•To discuss investment DPF

Unbundling

Some changes from ED. On-going discussions

Which cashflows, includingacquisitioncosts

Minor changes in response to comment letters

•Recognition point

•Contract boundary

•Acquisition costs

Discount rate

Some changes in application. No change in principle

Risk adjustment

Minor changes from ED. No change in principle

Residual margin

On-going discussions: unlocking is a significant changefrom ED

What’s changed since the ED:overview (continued)

Exposure draft

Decisions so far

Participatingfeatures

On-going discussions: minor change from ED

Short durationcontracts

On-going discussions

Reinsurance

On-going discussions: some changes from ED inresponse to comment letters

Presentation

On-going discussions: some changes from ED inresponse to comment letters

Disclosures

On-going discussions

Transition andeffective date

To be discussed

International Accounting Standards Board

The views expressed in this presentation are those of the presenters,not necessarily those of the IASB .

Details

* Indicates change from ED proposals

Which cash flows?

Cash flows

Time valueof money

Risk adjustment

Residual margin

ED proposal

Tentative decisions

Fulfilment cash flows

Expected value of cash flowsincurred in fulfilling the contract,considering all relevantinformation

Confirm use of expectedvalue

+Add guidance that not allpossible scenarios need to beidentified and quantified

Acquisition costs*

Include only acquisition costsincremental at contract level

•Include all direct costsincurred in originating aportfolio of insurancecontracts

* Indicates change from ED

Which cash flows?

Cash flows

Time valueof money

Risk adjustment

Residual margin

ED proposal

Tentative decisions

Recognition point*

Recognise when insurer isbound or first exposed to riskfrom contract

•Recognise when coverageperiod begins

•Onerous test before then

Contract boundary*

Ends when insurer:

•No longer required to providecoverage or

•Can set price that fullyreflects risk of particularpolicyholder

Confirm ED proposal

•Add clarification: risk can beassessed at portfolio level insome cases

Some details yet to be resolved

* Indicates change from ED proposals

Time value of money

Cash flows

Time valueof money

Risk adjustment

Residual margin

ED proposal

Tentative decisions

Discount rate

•Adjusts future cash flows fortime value of money

•Reflects only thecharacteristics of theinsurance contract liability

•Current and updated eachreporting period

Confirm discount rate

Do not prescribe method

+Add guidance:

•‘Top-down’ and ‘bottom-up’ both acceptable

•Remove any factors thatinfluence observablerates not relevant to theliability

Risk adjustment (IASB decisions)

Cash flows

Time valueof money

Risk adjustment

Residual margin

ED proposal

Tentative decisions

Objective

•“The maximum amount theinsurer would rationally payto be relieved of the risk thatthe ultimate cash flowsexceed those expected.”

•“The compensation theinsurer requires to bear therisk that the ultimate cashflows could exceed thoseexpected”

Risk adjustment vs composite margin

•Include explicit estimate ofthe effects of uncertaintyabout future cash flows.

Measurement of liabilityshould include explicit riskadjustment

Techniques

•Restrict techniques that canbe used to determine riskadjustment

•No restriction on techniques,as long as technique meetsobjective

Risk adjustment (IASB decisions)

Cash flows

Time valueof money

Risk adjustment

Residual margin

ED proposal

Tentative decisions

Disclosure

•Disclose confidence levelequivalent

•Included in disclosures ofmethods and inputs used todetermine estimates

Confirmed requirement forconfidence level disclosure

Confirm disclosures ofmethods and inputs to beconsistent with thoserequired for other estimates.

+Add requirement to discloseeffect of change in methods

To complete

? Whether to take account of diversification benefits

Residual margin (IASB decisions)

Cash flows

Time valueof money

Risk adjustment

Residual margin

ED proposal

Tentative decisions

Gains at inception

•Include residual margin toeliminate gains at inception

Confirm no gain at inception

Residual margin after inception: unlocking*

•Residual margin locked-in atinception

•Adjust residual marginprospectively for changes inestimates of cash flows(unlocking)

•Do not unlock for riskadjustment

Residual margin (IASB decisions)

Cash flows

Time valueof money

Risk adjustment

Residual margin

ED proposal

Tentative decisions

Residual margin after inception: allocation*

•Residual margin allocatedover coverage period

Residual margin allocated:

•Over coverage period

•On a systemic basis that isconsistent with the pattern oftransfer of the servicesprovided

To complete

? Whether changes in discount rate adjust residual margin or arerecognised in profit or loss

? Whether and how to address any accounting mismatches

? Level of aggregation

What do these decisions mean?

Cash flows

Time value of money

Risk adjustment

Residual margin

A component representing the obligation toprovide services in fulfilling the contract

Total

insurance

liability

A component representingthe risk-adjusted presentvalue of cash flows neededto fulfill the contract

Guidance on applying building blocks

Cash flows

Time valueof money

Risk adjustment

Residual margin

ED proposals

Status of discussions

Participating contracts

(Some details tocomplete)

Discount rate reflects dependence ofcash flows on specific assets

Cash flows adjusted to reflect themeasurement basis of the itemsunderlying participation*

Guarantees measured at current value

Reinsurance

(Some details tocomplete)

Confirm insurer uses same estimatesfor reinsurance asset and underlyingdirect insurance liability

Gains arising from reinsurance contractrecognised over contract term*

Losses arising from reinsurancecontract recognised immediately if forpast events, otherwise deferred*

* Indicates change from ED proposals

How to present changes in theinsurance contract liability

Tentative decisions

•Line items to show:

•Premiums

•Claims and expenses

•Gross underwriting margin

?Exploring whether somechanges should bepresented in othercomprehensive income

Risk adjustment

Residual margin

Profit or loss

Net interest and investment

Investment income

Interest on insurance liability

Changes in estimates

Underwriting result

Experience adjustment

20XX

ED proposals

Income statement

Underwriting margin

What does the insurance contractsstandard apply to?

Tentative decisions

Issues to be resolved

Scope

•Confirm proposed definition ofinsurance contract

•Confirm most scope exceptionsproposed in ED

•Financial guarantee contractsincluded if previously consideredinsurance

•Investment contracts withdiscretionary participationfeatures

Unbundling

Unbundle:

•Embedded derivatives not closelyrelated to host insurance contract

•Using approach from revenuerecognition for:

•Goods and services

•Some explicit accountbalances

•Allocation of fees andcharges

•Remaining explicit accountbalances

•Permit or require

•Prohibit when not permittedor required

IASB and FASB: Key decisions incommon

•Measurement of insurance contract using all cashflows expected to fulfil contract

•Cash flows discounted using a rate that reflects onlythe characteristics of the liability

•No gain at inception

•Presentation that shows information about keydrivers of profitability, including volume information

IASB and FASB: Differences

•Differences so far

–Acquisition costs

–Treatment of policyholder participation

–Explicit risk adjustment, therefore residual margin

–Scope – financial guarantee contracts

•Further possible differences

–Other comprehensive income

–Short duration contracts

–Investment contracts with discretionary participation features

Stay up to date

Where to find out more

•Sign up for our email alert

•www.ifrs.org

•go.ifrs.org/insurance_contracts

•Project staff:

–Andrea Pryde, apryde@ifrs.org

–Rachel Knubley, rknubley@ifrs.org

–Izabela Ruta, iruta@ifrs.org

–Leslie Vermaak, lvermaak@ifrs.org

–Joanna Yeoh, jyeoh@ifrs.org

–Matthias Zeitler, mzeitler@ifrs.org

Resources

•IASB Update

•Meeting webcasts

•Project podcasts

•Investor resources

•Effects of boardredeliberations on EDInsurance Contracts

•Project timetable