9.5 Published vs Prudential supervision reporting Flashcards
IFRS 17
IFRS 9
APN 112
APN 105
APN 11O
IAN100
Prudential standards FSI 2
FSI 2.2
FSI GN 2.2
APN 106
Published:
IFRS 17 for investment contracts with discretionary participation features and insurance contracts
IFRS 9 for pure investment contracts
SAM:
Apply to both
IFRS 17 - directly attributable expenses and fixed overheads directly attributable
SAM – all expenses
IFRS 17- exists to defer future profits
SAM- No profit deferral mechanism, all profits/losses capitalised at inception
IFRS 17 RA:
Comp for bearing uncertainty abt timing and amount of CFs arising from non-financial risks
“Own view” of risk tolerance
Must disclose confidence level of RA
Includes non-financial risks
Excludes risks not arising from contracts, e.g. general op risks
Principles based
SAM:
Premium over and above BEL that 3rd party would be willing to pay to take over obligations to ph
“external” view of risk
Incl. all non-hedgeable rosks as well as op risks
Could include certain market risks not hedgeable (e.g. interest rate risk)
Prescribed, i.e. CoC approach
IFRS 17:
Can construct own RFR yield curve subject to requirements
Bottom up (RFR + illiquidity premium) OR top down (A returns minus credit and liquidity risks
SAM:
RFR curve from PA
Swap curve if matching Ls with swap-based A
Life annuities can add illiquidity premium
Both:
Require ph tax to be allowed for
Incl. effects of tax on expected future investment returns
Consider any changes in future tax position
IFRS 17:
Can exclude certain indirect tax FCFs e.g. when expense relief not passed on to ph
SAM:
All ph tax CFs must be included
Similar but may be cases where investment contracts will have short (or zero) contract boundary under Prudential, but long boundary under IFRS
E.g. discretionary participation contracts will need to be measured using VFA under IFRS»_space; requires CSM»_space; requires long contract boundary calcs
Similar
IFRS 17 makes reference to onerous contracts on 25c of the standard
IFRS:
More granular
Typically:
Portfolio
Cohort period
Profitability criteria
Create 1 additional group for each year policies have been sold (can’t group policies sold more than 1 year apart together)
Policies sold within 1 year unlikely to fall in same profitability group, so 2-3 groups per across all years during which policies sold within portfolio.
SAM:
Segmented into lines and sub-lines of business
Dimensions:
Broad product type (Risk/ Annuities / Investments)
Ph type (IL or GL)
Level of inherent guarantee in group (Guaranteed/ market-related/ w discretionary participation features ect.)
Both require insurance and reinsurance contracts to be disclosed separately.
Diff in calc of liabilities will differ as above, e.g. CSM, RA/RM etc
Align ph benefits w sh charges in sizing and timing
Sh charges were expressed as proportion of declared and allocated bonuses to ph
Sh profits thus linked to declared business, varying with smoothed ph returns
Doesn’t align with IFRS 17- IFRS 17 requires profits are recognised based on services provided even if no bonuses declared
Similar as other insurance business
Calc CSM using BEL (excl future shareholder transfers from bonus declarations) and RA
Use VFA since meets criteria (CFs vary with A performance)
Financial assumptions changes and experience variations unlock CSM
BEL must account for:
Positive (bonus stabilisation reserve) BSR: additional future bonuses from any undistributed surplus earmarked for ph
Negative BSR: due to bonus smoothing and negative fluctuations of A market values»
Allow for under-distribution of bonuses over remaining term, assuming board agrees future bonuses will adjust if values don’t recover
Calcs must reflect:
Realistic management actions, e.g.
Dynamic bonus rates
Equity backing rations
Policyholder behaviour:
Withdrawals that vary according to relative attractiveness of guarantees under diff eco conditions
Include expected normal bonus distributions only.
Exclude estate distributions unless formally approved by the regulator.
Use same BEL calc methodology as for IFRS
Differences
No CSM, RA»_space; RM
BEL must separately cal liabilities for:
Guaranteed benefits (e.g. vested bonuses)
Future discretionary benefits (e.g. non vested but expected bonuses)
Stochastic modelling may be used for future discretionary benefits
IFRS 17
Discount using RFR based on bottom up/ top down approach
Inflation-linked»_space; valued in real terms using adjusted real curve
SAM:
RFR provided by PA minus illiquidity premium
Represents FV of underlying items = nr of units x unit price @ val date
Adj made for tax on unrealised investment gains
Under actuarial funding, companies may hold lower unit reserve, offset by an increase in non-unit reserve to maintain overall liability consistency
Actuarial funding impact on unit reserve diminishes over time
Permissible in both IFRS and SAM
L not included in unit reserve:
Expected future mortality and morbidity experiences in excess of unit reserve +
Expected future commissions, expenses, expense inflation; +
Cost of guarantees; -
(Expected future risk premiums
Expense charges
Mgmt fees
Charges for guarantees)
Can exclude certain indirect expense and tax CFs
Set up CSM
L dependent on:
Unit allocation %s
Mgmt charge fluctuations due to movements in unit fund’s value
Expected future mgmt. charges due to changes in UF’s growth
Allocation of “bonus” units at certain durations
Cashflows:
Projected up to contract boundary and discounted
Account for all decrements: lapse, surrender, mortality
SV calced using contractual basis
Transfers from unit account to sh and vice versa must be considered
E.g. surrender penalties or surrender payments in excess of unit fund
Only account for modelled surrender payout and projected unit reserve
Must value financial guarantees and options
Under IFRS 9 for IFRS reporting
Market consistent methods for SAM
APN 110
Negative non-unit reserve manages new business strain
At point-of-sale, setting it up will release funds for upfront costs: acquisition and commission
Negative non-unit costs increase market risk since fluctuations in unit fund will affect fees into non-unit reserve
Increased surrender risk- negative non-unit reserve (A for company) lost when surrender occurs»_space; higher surrender strain
IFRS - CSM limits size of negative non-unit reserve for profitable contracts
SAM- hold full negative non-unit reserve»_space; exposed to full increased market and surrender risk
Unit growth rate
Market consistent return on A in which units invested
Must be consistent with other assumptions and market yields at val date
IFRS 17
Self-derived -yield curves
For tax funds- direct taxes modelled explicitly
SAM
Use PA’s published yield curves
For tax funds- rate used can be net of tax or modelled explicitly
Non-unit interest rate
Market consistent return on assets in which non-unit reserve invested in
Must be consistent with other assumptions incl. unit growth rate and market yields at val date
IFRS 17- self derived; SAM- PA published yield curves
Use recent past experience + future budgeted expenses
Typically modelled using going-concern basis
May make allowance for expected total business’s shrinkage over time
May exclude one off expenses
Tax relief at applicable rate modelled explicitly
IFRS: exclude expenses not directly attributable to contracts
Expense inflation
Consistent relationship between expense inflation and unit growth rate
Consistent relationship with market inflation
SAM- prescribed real and nominal yield curves
IFRS- own derived
Mortality
Realistic asmt of future mortality, based on recent experience adj for expected trends
Allowance for AIDS where necessary
Tax
Current and expected future position accounted for when assessing level of expense relief AND tax on investment returns
IFRS- may exclude tax CFs not directly attributable if chosen to do so
Terminations
Best estimate allowance based on recent experience
Company’s ability to vary future mgmt/benefit charges
Assume they’ll stay at current levels
Unless definite expectation (e.g. an inflation link) that charge will increase
Ability of ph to stop paying premiums for certain period, without policy being paid-up.
Approach can be to derive best estimate of premium collection rates based on recent experience
Paid up policy terms
Must allow for conversion to paid up status when assessing any unit-reserve
Must explicitly model charges applying to paid-up policies
Allow for minimum surrender, paid-up and other values payable due to legislation.
In particular reg 5 which covers ‘Requirements and Limitations Regarding the Values and Benefits of Policies’ issued under the Long-term Insurance Act.
Allow for future voluntary premium and / cover increases
Use best estimate take-up rate of future premium increases
May need to vary over time and under diff eco conditions
Must use recent experience and expert judgement
Allow for premium or rate reviews if applicable
E.g. after any premium guarantee terms when actual experience is different than assumed in pricing basis
Model explicitly on best estimate basis relative to:
Pricing basis
Policy t+cs
Professional guidance
Regulatory restrictions
Legislation
Circumstances under which insurer will choose to review premiums
Simplifications typically result in retrospective reserving methodology for short contract boundaries
Similar to PAA, but differences:
UPR
Fraction of annual premium corr. proportion of a year up to next annual renewal date
Premium paid monthly in practice»_space; UPR must only cover unexpired portion of month’s premium paid prior to val date
IBNR – consider past experience re IBNR and stringency of UPR
Deficiency reserves
Cover future inadequacy of premium
Compare premiums charged over rest of guarantee period vs what should be charged
Reserves above must incl. provisions for claims handling expenses
Experience refund/ profit share reserve
Must be acc over period until next refund is made
Ideally reflects scheme experience to date, but may be based on premiums received and expected overall experience
Differences for SAM:
UPR, Experience refund and Deficiency reserve- same as GLA
IBNR- 2 components
Claims in deferred period
Assume premium not earned until DP has been completed**
Calc IBNR (e.g. % of premiums) based on past experience
“True” IBNR claims
Same as GLA
CIP reserve- can use disability annuities, i.e. account for death and recoveries
Must include provision for claims handling expenses (likely significant for group PHI)
Can use DCF under SAM until contract boundary, but simplifications as described above can be used
IFRS 17:
For immaterial classes can use PAA approach if certain criteria met
SAM:
Simplifications proportionate to nature, scale and complexity of risks
