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Insurance Contracts

Agenda-D-2. Insurance Contracts. Jeong-Hyeok, Park Research Fellow September 29, 2010. Contents. 1.Background. 2.Working Group. 3.Discussion Issues. Contents. Background. Working Group. Discussion Issues. Background. Project history. Issued in 2004

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Insurance Contracts

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

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

  3. Contents Background Working Group Discussion Issues

  4. Background Project history • Issued in 2004 • Aimed at making only limited improvements We are here 2004 ~ 2007 2011 2008 2009 2010 • Issued in 2007 2 3 1 • IFRS ‘ Insurance Contracts’ (Phase l) 4 • Issued in July 2010, comment due November 30, 2010 • Final standard : expected for Q2 2011 1 • DP Preliminary Views on Insurance Contract (Phase ll) • Since 2008 • ED ‘ Insurance Contracts’ (Phase ll) 2 • Joint Project with FASB 3 4 3

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

  6. Contents Background Working Group Discussion Issues

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

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

  9. Contents Summary Working Group Discussion Issues

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

  11. Issue 1. Two Margin approach vs Single Margin Approach 1 Two Margin Approach = Best Estimate of Liability + RA + RM 2 Single Margin Approach = Best Estimate of Liability + CM residualmargin 1 2 compositemargin premium riskadjustment cash outflows cash outflows 10

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

  13. Issue 1. Two Margin approach vs Single Margin Approach WG Preliminary Views • 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 cash outflows 12

  14. Issue 1. Two Margin approach vs Single Margin Approach WG Preliminary Views • 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 cash outflows 13

  15. Issue 2. Discount Rate How to determine 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 Yes NO Assets Liabilities Assets Liabilities Liabilities Liabilities • Risk-free rate • performance of assets • + • illiquidity 14

  16. Issue 2. Discount Rate WG Preliminary Views • 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. cash outflows 15

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

  18. Issue 3. Acquisition Costs WG Preliminary Views • 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. 17

  19. Issue 4. Presentation (Summarized Margin Approach) Examples 18

  20. Issue 4. Presentation (Summarized Margin Approach) WG Preliminary Views • 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. 19

  21. Issue 5. Transition` Previous GAAP IFRS 4Phase II Transition deferredacquisition costs existinginsurance liabilities intangible assets cash flows Risk adjustment Difference toretained earnings 20

  22. Issue 5. Transition WG Preliminary Views • 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 21

  23. Thank you !! 22

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