NAS Virtual Industry Conference 2021 IFRS 17 for

NAS – Virtual Industry Conference 2021 IFRS 17 for Life Insurers 30 June 2021 Kruti Malde, Fellow of Institute of Actuaries of India Member of IFo. A’s IFRS 17: CSM Working Party

Agenda • Introduction to IFRS 17 • Level of aggregation • Measurement models • Fulfilment cash flows • Contractual Service Margin • Financial statements • Question & Answers 30 June 2021

Introduction to IFRS 17 • Published on May 17, 2017 to replace IFRS 4 • Amendments to IFRS 17 published in June 2020 • Effective date of standard revised to January 01, 2023 • Local implementation dates may vary for different countries May 2017 • IFRS 17 published 30 June 2021 June 2020 • Amended standard Jan 01, 2022 • Comparative period begins Jan 01, 2023 • Effective date / Go Live

Level of Aggregation • Grouping by portfolio i. e. similar risk and managed together • Loss making contracts to be grouped separate from profit making contracts • Contracts within a group cannot be more than one year apart Insurance contracts Savings Protection Nononerous Onerous 20 X 0 30 June 2021 20 X 0 Nononerous Onerous 20 X 1 20 X 0 20 X 1

Measurement models General model Premium allocation approach Variable fee approach Why is it needed? Applies to all insurance contracts Variation on general model to adjust liability for fair value changes Simplify measurement of liability for short term contracts Types of contract • • Long term protection Annuities Reinsurance contracts With-profits Unit linked • Mandatory? 30 June 2021 • Mandatory unless VFA applies • Mandatory for direct participating contracts • Short term protection Short term reinsurance contracts Most general Insurance contracts Optional

Measurement: Fulfilment cash flows • Fulfilment cash flows (FCF) = Best estimate liability (BEL) + Risk adjustment (RA) Discount rates: Top down or bottom up approach? Contract boundary? Risk adjustment: Va. R or Co. C? Acquisition costs? Investment component? 30 June 2021 Operational challenges?

Measurement: Onerous vs. Non-onerous Contractual service margin Present value of future cash inflows Risk adjustment Present value of future cash outflows Group of profitable contracts 30 June 2021 Excess of inflows over outflows and risk adjustment Shortfall of inflows compared to outflows and risk adjustment Loss component Risk adjustment Present value of future cash inflows Present value of future cash outflows Group of loss-making contracts

Measurement: Contractual Service Margin • CSM at inception represents expected future profits – Results in no day 1 gain or loss before any cash flows are exchanged – Day 1 losses from insurance contracts are recognized in financial statements – CSM can be negative for reinsurance contracts • CSM at subsequent measurement: CSM at start of period 30 June 2021 Unwind Unlock Release CSM at end of period

What unlocks CSM? General model Variable fee approach • Premium and related cash flow variance • Non-distinct investment component variance • Entity’s share of fair value movements Changes related to future service: • Non-economic assumptions • Economic assumptions 30 June 2021

CSM release: Coverage units • Identifying coverage units for a group of contract: – Quantity of benefits provided and – Expected coverage period • Key considerations: – Reflect both insurance and investment related services – Reflect variability in level of cover provided across policy term – Reflect likelihood of events occurring to the extent they affect expected duration of contracts in the group – Do not reflect amount expected to be claimed in a period 30 June 2021

CSM release: Discounted vs. Undiscounted • Entity may choose whether to discount or to use undiscounted coverage units • Discounted coverage units result in: – Faster release in initial years compared to undiscounted coverage units – Smooth release pattern as a proportion of expected coverage units 30 June 2021

CSM: Other considerations Coverage units for multi-benefit contracts? E. g. CI, ADB Proxy coverage units? 30 June 2021 Insurance and reinsurance mismatch for direct participating contracts? Timing of adjustments that unlock CSM? Onerous to non-onerous & vice-versa? Coverage units for reinsurance contracts? Operational challenges?

Financial statements: IFRS 4 vs. IFRS 17 Particulars IFRS 4 Particulars IFRS 17 Premium xxx Insurance revenue xxx Investment income xxx Insurance service expense (xx) Operating expense (xx) Insurance service result xxx Commission (xx) Investment income xxx Benefits paid (xx) Insurance finance expense (xx) Change in liability (xx) Financial service result xxx Profit / loss for the year xxx • How do I explain this change? 30 June 2021

Financial statements: IFRS 4 vs. IFRS 17 Particulars IFRS 4 Premium xxx Investment income Particulars IFRS 17 Insurance revenue xxx Insurance service expense (xx) Operating expense (xx) Insurance service result xxx Commission (xx) Investment income xxx Benefits paid* (xx) Insurance finance expense (xx) Change in liability (xx) Financial service result xxx Profit / loss for the year xxx ? ? *Assuming there is no investment component 30 June 2021

Financial statements: IFRS 4 vs. IFRS 17 Particulars IFRS 4 Particulars IFRS 17 Premium xxx Insurance revenue xxx Investment income xxx Insurance service expense (xx) Operating expense (xx) Insurance service result xxx Commission (xx) Investment income xxx Benefits paid* (xx) Insurance finance expense (xx) Change in liability (xx) Financial service result xxx Profit / loss for the year xxx *Assuming there is no investment component ** This is only for ease of understanding, actual movements will be lot more complex in practice 30 June 2021

Financial statements: Key changes Split financial statements by sources of profit Reflect revenue when it is earned and not when received Losses and recoveries of losses shown separately 30 June 2021 Deferral of profit and realization in line with service provided Gains / loss on reinsurance shown separately

Questions / Comments 30 June 2021

Further reading • https: //www. actuaries. org. uk/practice-areas/life/research-working-parties/ifrs-17 -contractual-servicemargin-csm • https: //www. actuaries. org. uk/practice-areas/life/research-working-parties/ifrs-17 -future-discount-rates • https: //www. actuaries. org. uk/practice-areas/life/research-working-parties/ifrs-17 -transversal • https: //www. cambridge. org/core/journals/british-actuarial-journal/article/ifrs-17 -contractual-servicemargin-a-life-insurance-perspective/87830 D 0400867787 F 9048 CE 072 E 53 E 2 B 30 June 2021

Thank you The views expressed in this presentation are those of invited contributors and not necessarily those of the IFo. A or their employers. The IFo. A do not endorse any of the views stated, nor any claims or representations made in this presentation and accept no responsibility or liability to any person for loss or damage suffered as a consequence of their placing reliance upon any view, claim or representation made in this presentation. The information and expressions of opinion contained in this publication are not intended to be a comprehensive study, nor to provide actuarial advice or advice of any nature and should not be treated as a substitute for specific advice concerning individual situations. On no account may any part of this presentation be reproduced without the written permission of the IFo. A. For any further queries, reach me at krutimalde@gmail. com 30 June 2021