9.5 Published vs Prudential supervision reporting

Answer 1

IFRS 17
IFRS 9
APN 112
APN 105
APN 11O
IAN100

Answer 2

Prudential standards FSI 2
FSI 2.2
FSI GN 2.2
APN 106

Answer 3

Published:
IFRS 17 for investment contracts with discretionary participation features and insurance contracts
IFRS 9 for pure investment contracts
SAM:
Apply to both

Answer 4

IFRS 17 - directly attributable expenses and fixed overheads directly attributable
SAM – all expenses

Answer 5

IFRS 17- exists to defer future profits
SAM- No profit deferral mechanism, all profits/losses capitalised at inception

Answer 6

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

Answer 7

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

Answer 8

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

Answer 9

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

Answer 10

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&raquo_space; requires CSM&raquo_space; requires long contract boundary calcs

Answer 11

Similar
IFRS 17 makes reference to onerous contracts on 25c of the standard

Answer 12

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.)

Answer 13

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

Answer 14

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

Answer 15

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

Answer 16

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

Answer 17

Include expected normal bonus distributions only.
Exclude estate distributions unless formally approved by the regulator.

Answer 18

Use same BEL calc methodology as for IFRS
Differences
No CSM, RA&raquo_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

Answer 19

IFRS 17
Discount using RFR based on bottom up/ top down approach
Inflation-linked&raquo_space; valued in real terms using adjusted real curve
SAM:
RFR provided by PA minus illiquidity premium

Answer 20

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

Answer 21

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

Answer 22

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

Answer 23

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

Answer 24

Must value financial guarantees and options
Under IFRS 9 for IFRS reporting
Market consistent methods for SAM
APN 110

Answer 25

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 >> higher surrender strain IFRS - CSM limits size of negative non-unit reserve for profitable contracts SAM- hold full negative non-unit reserve >> exposed to full increased market and surrender risk

Answer 26

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

Answer 27

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

Answer 28

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

Answer 29

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

Answer 30

Mortality Realistic asmt of future mortality, based on recent experience adj for expected trends Allowance for AIDS where necessary

Answer 31

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

Answer 32

Terminations Best estimate allowance based on recent experience

Answer 33

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

Answer 34

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

Answer 35

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 >> 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

Answer 36

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

Answer 37

IFRS 17: For immaterial classes can use PAA approach if certain criteria met SAM: Simplifications proportionate to nature, scale and complexity of risks