www pwc com IFRS 17 Insurance contracts July

www. pwc. com IFRS 17 Insurance contracts July 2017

Content • Background • Scope • Recognition and measurement - Overview - General model - Premium allocation approach - Participating contracts - Reinsurance • Modification and derecognition • Portfolio transfers and business combinations • Presentation and disclosure • Transition • Practical considerations Pw. C July 2017 2

Background

Background IASB’s project on insurance contracts Insurance project started Mar 2004 Discussion paper Jan 2005 1997 IFRS 4 issued IFRS standards adopted in Europe Jul 2010 May 2007 Exposure Draft of proposals Exposure Draft of revised proposals Jun 2013 Effective date May 2017 IFRS 17 issued Jan 2021 • IFRS 9 – some insurers will use deferral option until 1 January 2021 based on IFRS 4 amendments • IFRS 15 is effective 1 January 2018, IFRS 16 is effective 1 January 2019 • Investment contracts without discretionary participation features (e. g. unit linked investments) are in scope of IFRS 9/ IAS 39 • EU endorsement may take more than 2. 5 years • FASB decided to only make targeted amendments to US GAAP July 2017 Pw. C 4

Background IFRS 17 improvements Existing issues How IFRS 17 improves accounting Variety of treatments depending on type of contract and company Consistent accounting for all insurance contracts by all companies Estimates for long-duration contracts not updated Estimates updated to reflect current market-based information Discount rate based on estimates does not reflect economic risks Discount rate reflects characteristics of the cash flows of the contract Lack of discounting for measurement of some contracts Measurement of insurance contract reflects time value where significant Little information on economic value of embedded options and guarantees Measurement reflects information about full range of possible outcomes The information presented on the slide was prepared by IFRS Foundation. http: //www. ifrs. org/Current-Projects/IASB-Projects/Insurance-Contracts/Documents/2016/project-overview-Feb-2016. pdf Pw. C July 2017 5

Background Overview of key changes for insurers Issuers of short duration contracts • • • Issuers of long duration contracts More granular calculations Potentially more onerous contracts Less income statement matching for reinsurance contracts Balance sheet and income statement presentation Consolidation accounting No margins for fulfilment cash flows Discounting of incurred claims liability Past business combinations of long tail contracts Explicit risk adjustment • • Pattern of profit recognition for new contracts Smoothed effect of future assumption changes Revenue not equal to premiums Effect on transition for existing contracts July 2017 Pw. C 6

Scope

Background Scope Insurance contracts No significant changes in the scope compared to IFRS 4 Investment contracts with discretionary participation features In scope of IFRS 17 only if entity also issues insurance contracts Fixed fee service contracts Contract by contract choice: IFRS 17 or IFRS 15 Policyholder accounting is out of scope of IFRS 17 (except for reinsurance contracts held) NEW – time value of money for assessment of significant insurance risk July 2017 Pw. C 8

Background Scope – fixed fee services Fixed fee service contracts Risk of individual customer does not impact price Examples: • Maintenance contracts such as boiler service contracts • Road-side assistance programmes All 3 conditions should be met Providing service, not cash payments Insurance risk arises primarily from the customer’s use of services July 2017 Pw. C 9

Products issued by non-insurers Out of scope In scope Manufacturer, dealer or retailer warranties Loan contract that waives repayment of Employee benefit plans and obligations from defined the entire loan balance benefit retirement plans if the borrower dies. Licence fees, royalties, variable and other contingent lease payments and similar items Financial guarantees (unless in the scope of NEW* Manufacturer, dealer or retailer residual value IFRS 9) guarantees Lessee’s residual value guarantees Contingent consideration payable or receivable in a business combination * Changes in the scope of IFRS 17 from IFRS 4. Product warranties issued by a third party. July 2017 Pw. C 10

Recognition and measurement Overview

Overview of initial recognition Separate not closely related embedded derivatives and distinct investment components Remaining host contract Yes 1. In scope of IFRS 17? No Guidance in other IFRSs Yes Are there non-distinct 2 a. Embedded derivatives? 2 b. Investment components? No 3. Are there nondistinct service components? Yes No 4. Determine the level of aggregation 5. Determine the measurement model Remaining host contract Separate distinct service components July 2017 Pw. C 12

Separating components from an insurance contract Embedded derivative (IFRS 9 guidance) (1) Characteristics and risks are not closely related (2) Separate instrument would meet definition of a derivative (3) Hybrid is not measured at FVPL Accounting requirements: use IFRS 9 Distinct investment component (1) Not highly interrelated • Cannot measure one component without the other, or • Lapse/ maturity of one component causes lapse/ maturity of the other (2) Contract with equivalent terms is sold separately Accounting requirements: use IFRS 9 Promise to transfer distinct goods or services • Activities to fulfil a contract are not separated • Distinct if policyholder could benefit from good/ service on its own or together with other resources • Not distinct if interrelated cash flows + insurer provides integration services Accounting requirements: use IFRS 15 July 2017 Pw. C 13

Earliest of Time of initial recognition of a group Coverage period starts First payment from policyholder is due or actually received Group of contracts is onerous Pw. C Can include individual contracts in already existing group only when issued July 2017 14

Level of aggregation Summary 1. Objective Profitable vs onerous contracts No CSM at the end of coverage period 2. Aggregation requirements* Top-down approach: Start at portfolio level (similar risks, managed together) 3 groups at inception **: • Onerous; • Profitable with no significant risk of becoming onerous; and • Other profitable contracts Risk of contracts becoming onerous: • Internal reporting • Sensitivity of fulfilment cash flows Requires that a group shall not include contracts issued more than one year apart Effect of regulation Some laws or regulations prevent insurers from pricing for certain risk indicators (eg gender) If a law or regulation specifically constrains - insurer's practical ability to set a different price or level of benefits for policyholders with different characteristics, - then ignore that characteristic for grouping (eg male or female drivers) *Exception for the level of aggregation on transition. **There may be no contracts in one or two of the indicated profit groups. Pw. C July 2017 15

Level of aggregation Portfolios and groups of contracts • A portfolio: insurance contracts subject to similar risks and managed together • Entity divides each portfolio of contracts into groups based on profitability and initial recognition date. Portfolio 1 Portfolio 2 Portfolio 3 Whole-life insurance Annuities Car insurance Group AA Group BB Group CC Group D Pw. C Minimum requirement July 2017 16

Level of aggregation Examples 1 100 'identical' contracts are written with a probability that 5 of the policyholders will claim. IFRS 17 100 contracts are a group; company does not treat the 5 contracts as a separate group Pw. C 2 A company issues 500 contracts; there is information that 200 'identical' contracts are onerous (loss making), but the company expects that the 300 profitable 'identical' contracts will cover losses on the 200 onerous contracts. IFRS 17: Group A Losses on the 200 onerous contracts are recognised immediately IFRS 17: Group B Profits on 300 contracts recognised over the coverage period July 2017 17

Overview of IFRS 17 measurement models General model Premium allocation approach (PAA) Variable fee approach Why is it needed? Default model for all insurance contracts To simplify for short term contracts with little variability To deal with participating business where payments to policyholders are linked to underlying items like assets Types of contract • Long-term and whole life insurance, protection business • Certain annuities • US style universal life • Reinsurance written • Certain general insurance contracts • General insurance • Short-term life and certain group contracts • Unit-linked contracts, US variable annuities and equity index-linked contracts • Continental European 90/10 contract • UK with profits contracts Mandatory Optional Mandatory? Pw. C July 2017 18

General model

Contractual service margin Fulfilment cash flows Change in estimates Overview of measurement model Risk adjustment + Probability weighted discounted expected present value of cash flows Release of contractual service margin Interest accretion at inception rate Experience adjustments** Profit or loss (insurance service result) Release of risk adjustment* Time value of money and other assumptions related to financial risk* Profit or loss and/or other comprehensive income (insurance finance income or expenses) * Accounting policy choice for future cash flows and risk adjustment. ** Experience adjustments for premiums to CSM. Pw. C July 2017 20

Overview of measurement model Future cash flows – overview Contractual service margin Risk adjustment Present value of future cash flows • Current estimate • Consistent with observable market prices • Probability weighted mean of range of possible outcomes Probability weighted discounted expected present value of future cash flows • Entity perspective for other cash flow estimates • Incorporates all available information in unbiased way • Include options, forwards and guarantees related to insurance coverage under existing contract unless separated • Loss component of the liability for remaining coverage is maintained for onerous contracts Pw. C July 2017 21

Overview of measurement model Contract boundaries Is the cash flow in the boundary of an insurance contract? No Policyholder obliged to pay related premiums? Yes OR OUT Yes Practical ability to reprice risks of the particular policyholder to reflect the risks? Practical ability to reprice portfolio of contracts to reflect the risks? IN No No Yes No Pw. C Premiums reflect risks beyond the coverage period? Yes July 2017 22

Overview of measurement model Fulfilment cash flows Excluded Included* • Premiums and related payments • Claims and benefits, including paid in kind • Discretionary payments and payments that vary with returns on underlying items • Some not directly attributable acquisition costs, such as product development and training costs • Assets investment returns • Payments from embedded derivatives, including options and guarantees • Cash flows from reinsurance contracts held • Insurance acquisition cash flows • • Claim handling costs • Cash flows related to components separated from insurance contracts • Administration and maintenance costs Income taxes • Transaction-based taxes and levies • Recoveries such as salvage and subrogation • Fixed and variable overheads • Other costs * Only if directly relate to the fulfilment of the contract Pw. C July 2017 23

Overview of measurement model Discount rate – Top down vs. bottom up Top down discount rate Contractual service margin Risk adjustment Actual or expected reference portfolio rate 7. 0% Duration mismatches 0. 3% Market risk premium for expected credit losses -1. 0% Market risk premium for unexpected credit losses -0. 6% Insurance contract discount rate 5. 7% Difference between the two methods not required to be reconciled Bottom up discount rate Probability weighted discounted expected present value of future cash flows Pw. C Insurance contract discount rate 5. 5% Liquidity premium 1. 5% Risk free rate of return 4. 0% July 2017 24

Overview of measurement model Risk adjustment Contractual service margin Risk adjustment • Reflects compensation that entity requires for bearing uncertainty • Measures compensation to make entity indifferent between: - Range of possible outcomes - Fixed cash flows with same expected value Probability weighted discounted expected present value of cash flows • The CSM is unlocked for changes in risk adjustment for future coverage and other services • Includes diversification benefit considered in pricing • Loss component of the liability for remaining coverage is maintained for onerous contracts • Entities will be required to disclose the confidence level Pw. C July 2017 25

Overview of measurement model Contractual service margin (CSM) Contractual service margin • Represents unearned profit in contract • Unlocked for changes in fulfilment cash flows related to future services Risk adjustment • CSM cannot be negative, but can be reinstated • Previous losses have to be reversed before reinstating the CSM • Released over coverage period based on coverage units • Coverage units reflect quantity of benefits and expected coverage duration Probability weighted discounted expected present value of cash flows Pw. C • Locked in rates should be used for accretion of interest and calculation of changes in cash flows that offset the CSM July 2017 26

Overview of measurement model Contractual service margin – initial measurement Amount Adjustments Expected probability-weighted cash inflows Time value of money Expected probability -weighted cash outflows Risk adjustment Cash inflows on the date of initial recognition Cash outflows on the date of initial recognition Contractual service margin Pw. C July 2017 27

Overview of measurement model Initial recognition of an insurance contract - example Description Cash - premiums received Acquisition costs paid Fulfilment cash flows: risk adjustment Fulfilment cash flows: present value of expected future cash flows Contractual service margin Insurance contract issued (that is, liability) Pw. C Amount, CU Clarification Fulfilment cash inflows paid at the inception date Pre-coverage cash flows that qualify (50) as insurance acquisition cash flows To recognise risk adjustment for non(90) financial risks 1, 000 (545) To recognise present value of expected future cash flows To recognise contractual service margin – balancing number Total liability recognised on initial (950) recognition of the contract (315) July 2017 28

Overview of measurement model Contractual service margin – subsequent measurement Amount and adjustments Time - reporting period Contractual service margin - beginning of period New contracts added to the group Accretion of interest* Decrease of FCF** relating to future services Increase of FCF* relating to future services Currency exchange differences*** Amount reflecting transfer of services Contractual service margin - end of period Pw. C * Using locked-in discount rate ** Future cash flows *** Can be positive or negative July 2017 29

Change in estimates - profit or loss or CSM? Changes in investment components Changes in risk adjustment Other changes in assumptions about future cash flows Experience adjustments Cash flows experienced in period compared to actual cash flows For future services CSM* Premiums related to future services Claims and expenses and other premiums Profit or loss Changes in incurred claims *As long as the CSM is not negative. Pw. C July 2017 30

Coverage units - example Reporting periods T 0 T 1 T 2 T 3 @reporting date T 1: £ 1, 000 – CSM after all adjustments but before release to PL Insured amount, in thousands Reporting and coverage periods, in thousands Current Future 0 -1 1 -2 2 -3 Total, in thousands Contract 1 100 100 300 Contract 2 150 150 - 300 250 100 600 Total 250 350 600 In % CSM amortisation, £ 42% £ 420, 000 58% £ 580, 000 100% £ 1, 000 Adjustment to Profit or loss CSM Coverage units Pw. C In units July 2017 31

Premium allocation approach

Premium allocation approach Overview Liability for incurred claims (expired risk) Start of insurance contract coverage period Reporting date General model Pw. C Liability for remaining coverage (unexpired risk) Insurance liability is extinguished General model or Premium allocation approach (PAA) July 2017 33

Premium allocation approach Optional model for short term contracts Optional simplified model For liability for remaining coverage Similar to unearned premium Incurred claims liability (including IBNR) calculated using general model Eligibility: coverage period <= 1 year OR where ‘not materially different’ to general model* Pw. C July 2017 34

Liability for incurred claims (expired risk) Liability for remaining coverage (unexpired risk) Premium allocation approach Measurement models for general insurers Pw. C Current IFRS/GAAP PAA and undiscounted* incurred claims Premium (less acquisition costs) unearned** Risk adjustment Discounting General model throughout Contractual service margin UPR less DAC Risk adjustment Discounting Expected value of future cash flows Undiscounted reserves for past claims (including IBNR) Expected value of future cash flows * No discounting is required if cash flows are expected to be received/ paid within one year. ** Adjustment for time value not required for unearned premium if provision of each part of coverage and premium due date is no more than a year. July 2017 35

Overview of measurement model Liability for remaining coverage – initial measurement Amount Adjustment Premiums received Insurance acquisition cash flows paid Derecognition of precoverage cash inflows Derecognition of precoverage cash outtflows Liability for remaining coverage Pw. C July 2017 36

Premium allocation approach Liability for remaining coverage – subsequent measurement Amount and adjustments Liability for remaining coverage - beginning of period Time - reporting period Premiums received Insurance acquisition CF paid Accretion of interest Currency exchange differences Release of insurance acquisition cash flows Insurance revenue for coverage provided Investment component paid or transferred Liability for remaining coverage - end of period Pw. C July 2017 37

Participating contracts

Participating contracts Overview of measurement models Indirect participating contracts Direct participating contracts General model* • “US style” universal life *Profit or loss presentation allows for movement in discretion Pw. C Variable fee approach • • Unit linked Continental European 90/10 UK with profit US variable annuities July 2017 39

Participating contracts: variable fee approach Eligibility Direct participating contracts Step 1: Is contract eligible for variable fee approach? Participates in a clearly identified pool of underlying items Pay policyholder substantial share of the FV returns Substantial proportion of change of policyholder payments vary with change in FV of underlying items All other participating contracts are defined as indirect (general model). Pw. C July 2017 40

Pw. C 1. Change in the obligation to pay General model the policyholder an amount equal to VFA the fair value of the underlying items. VFA General model VFA 2. Changes in entity’s share of fair value of underlying items. 3. Effects on fulfilment cash flows of changes in financial risks not arising General model from the underlying items such as minimum return guarantee. 4. Other changes in estimates of the fulfilment cash flows relating to future services. Fair value for all underlying items is required Statement of comprehensive income Contractual service margin Participating contracts: variable fee approach Mechanics July 2017 41

Participating contracts: variable fee approach Financial risk mitigation option Accounting mismatch Eligibility Changes in value of hedging derivative Changes in value of hedged guarantee Use of derivative to mitigate risk in insurance contracts Fair value Profit or loss Fulfilment CF CSM Economic offset between derivative and related group of insurance contracts Risk mitigation option Fulfilment CF Profit or loss Credit risk does not dominate the economic offset Documentation requirements: BEFORE recognizing changes in the value of the financial variables in profit or loss Discontinue using the for using the derivative Objective approach prospectively from to mitigate financial the date when the economic risk embedded in Strategy insurance contract offset does not exist Transition – prospective application from date of initial application Pw. C July 2017 42

Participating contracts: variable fee approach Measurement of underlying assets Some assets cannot be measured at fair value under other IFRSs Investments in associates Investment property Result Accounting mismatches Solution Own debt Permitted to measure at fair value through profit or loss Own shares Owner occupied property July 2017 Pw. C 43

Participating contracts: general model Discretion vs financial risks Change in discretion: future services Contractual service margin Change in discretion: past services Change in financial risks Profit or loss (insurance service result) Profit or loss and OCI (insurance finance income or expense) • Specify at inception difference between discretion and change in financial risks (commitment) • Default – commitment is the return implicit in the estimate of the fulfilment cash flows at inception. Pw. C July 2017 44

Participating contracts: general model Discretion vs financial risks Define commitment at inception of insurance contract. Actual payment – commitment = discretion. Change in commitment related to financial risks treated as change in financial risks. Change in remaining payments are treated as change in discretion. Example of a participating contract Contractual returns 2% guaranteed + discretionary Expected asset return 5% Asset return retained by shareholder 0. 5% Return on underlying assets Fixed for two years One day after inception, interest rates fall to 1%. Asset return expected to be paid to policyholder 4. 5% for two years, then 2% Possible options to define discretion: • Commitment - return on assets held, less 0. 5% spread, or the guaranteed return if higher. Entity has not used its discretion to change the promise. • Commitment - return based on market conditions, less 0. 5% spread, or the guaranteed return if higher. Entity uses its discretion to increase the return to policyholders to 4. 5% for the first two years. July 2017 Pw. C 45

Participating contracts Mutualisation – cash flows of a participating contract affect or are affected by cash flows from other contract (including future contracts). Implications: Consider impact on fulfilment cash flows Level of aggregation is generally not affected but can avoid annual cohorts if there is no difference in the measurement Fulfilment cash flows may remain after the end of the term of the contract if they will be paid in the future to other policyholders July 2017 Pw. C 46

Participating contracts Comparison of IASB models General model 1. Building blocks at inception Variable fee approach • Present value of expected cash flows • Risk adjustment • Contractual service margin (‘CSM’) 2. Changes in assets supporting insurer’s share Recognise changes in assets supporting insurer’s share in line with asset accounting Recognised in CSM subject to financial risk mitigation 3. Changes in value of financial options and guarantees Discount rate changes follow accounting policy choice Recognise in CSM subject to financial risk mitigation 4. Changes in estimates from non-financial assumptions (including application of discretion and risk adjustment) • Recognise in CSM if related to future services • Recognise in profit or loss if related to current or past services 5. Allocation of CSM in profit or loss Pw. C Financial risks vs discretion: define discretion at inception based on the promise the entity makes to its policyholders n/a • Allocate based on coverage units July 2017 47

Participating contracts Comparison of IASB models General model Variable fee approach Underlying items Indirect participating contracts Underlying items 6. Interest expense and OCI Accounting policy choice for a portfolio: • Apply current rate through profit or loss OR • Apply a cost measurement basis (constant rate or a crediting rate) • Change due to discounting using (1) current rate and (2) cost measurement basis is recognised in OCI 7. Accretion of interest on CSM 8. Reassessment Pw. C Rate at inception of the group of insurance contract Underlying assets Accounting policy choice for a portfolio: • Apply current rate through profit or loss OR • Insurance finance expenses or income in profit or loss exactly matches income or expenses included in profit or loss for the underlying items, resulting in nil net finance income or expenses. • Difference between liability change due to discounting using a current rate and the amount in profit or loss is recognised in OCI Implicitly included in liability measurement * Determine accounting approach at inception with no reassessment July 2017 48

Participating contracts Investment contracts with discretionary participation features Exceptions for investment contracts with discretionary participation features: Initial recognition When entity becomes party to the contract Contract boundary Substantive obligation ends when the contract can be repriced so that new price reflects the promise to deliver cash in the future and related risks Release of contractual service margin Based on the transfer of investment management services July 2017 Pw. C 49

Reinsurance

Reinsurance contracts Overview Claims Policyholder • Insurance contract held Premiums Insurer • Insurance contract issued Claims Premiums Reinsurer • Reinsurance contract issued • Reinsurance contract held Accounting: • Reinsurance contracts issued = insurance contracts issued • Reinsurance contracts held – special requirements Pw. C July 2017 51

Reinsurance contracts held (ceded risk) Initial recognition date • Proportional reinsurance When first underlying insurance contract is recognised or beginning of coverage of reinsurance contracts, whichever is the later; • Other When the coverage period of the reinsurance contract begins Onerous direct insurance contracts • • Cash flows measurement • • Pw. C Assumptions consistent with underlying insurance contracts Non-performance risk affects cash flows At inception there can be positive or negative CSM on reinsurance contracts held Subsequently changes in future estimates are recognised in profit or loss if changes for related underlying contracts are recognised in profit or loss July 2017 52

Reinsurance contracts held (ceded risk) Initial recognition date • Proportional coverage The later of when first underlying insurance contract is recognised or coverage begins • Other contracts When the coverage period of the reinsurance contract begins Coverage period includes coverage period of all expected underlying insurance contracts. If expectation about coverage period for underlying insurance contracts is changing, coverage period for reinsurance contract should be reconsidered prospectively. Time T 1 T 0 Insurance contracts Reinsurance contract Pw. C #1 T 2 #2 T 3 #3 #1 July 2017 53

Reinsurance contracts held (ceded risk) Measurement No onerous reinsurance contracts At inception there can be positive or negative CSM on reinsurance contracts held, no impact on profit or loss. Subsequently changes in future estimates are recognised in profit or loss if changes for related underlying contracts are recognised in profit or loss. Example: Reinsurance contract held cedes 50% of all losses in exchange for 50% of all premiums. Initial recognition Day 1 premium Underlying insurance contract Reinsurance contract held FCF* CSM* FCF* Loss/ (gain) CSM* 90 (100) - (120) 20 - (45) 50 (5) 60 (10) - * FCF – fulfilment cash flows, CSM – contractual service margin. Pw. C Subsequent measurement No onerous contracts, net loss -> CSM Subsequent adjustments to CSM for underlying contracts are considered for reinsurance contracts CSM adjustment July 2017 54

Modification and derecognition

Modification and derecognition Summary • • • Modification – amendment to an insurance contract. Exercise of rights under original terms is NOT a modification. Can result in derecognition, otherwise treated as a change in estimate. • • Derecognition – extinguishment, transfer or modification. Extinguishment - obligation expires, is discharged or cancelled. Fulfilment cash flows The present value of the future cash flows and the risk adjustment for non-financial risk that relate to the contract that is derecognised are eliminated. Number of coverage units The number of coverage units for the expected remaining coverage is adjusted to reflect the coverage units extinguished. Adjustment of the CSM – different requirements for: Extinguishment Pw. C Transfer Modification July 2017 56

Modification • • Modification – amendment to an insurance contract. Exercise of rights under original terms is NOT a modification. Modification results in derecognition: • Scope of IFRS 17 • Different separated components • Substantially different contract boundary • Different group • Not in scope of variable fee approach • Not in scope of the premium allocation approach • • Pw. C Original contract is derecognise New contract is recognised OR Other modifications Change in estimate July 2017 57

Derecognition as a result of modification Adjustments to the original contract Fulfilment cash flows The present value of the future cash flows and the risk adjustment for non-financial risk that relate to the contract that is derecognised are eliminated. The contractual service margin is adjusted. Contractual service margin Number of coverage units Pw. C The number of coverage units for the expected remaining coverage is adjusted to reflect the coverage units extinguished. July 2017 58

Derecognition as a result of modification Adjustments to the original contract - CSM Amount Adjustments Contractual service margin of a group before adjustments for derecognised contracts Fulfilment cash flows for derecognised rights Fulfilment cash flows for derecognised obligations Additional premium charged for the modification Premium that a third party would have charged for a contract with equivalent terms Contractual service margin of a group after adjustments for derecognised contracts Pw. C July 2017 59

Derecognition as a result of extinguishment/ transfer Adjustments to the original contract - CSM Extinguishment – obligation expires, is discharged or cancelled. Adjustments for extinguished or transferred contracts are the same as for modified contracts except for the CSM Extinguishment Transfer CSM adjustment = fulfilment cash flows adjustment less premium charged by the transferee Pw. C July 2017 60

Portfolio transfers and business combinations

Portfolio transfer and business combinations General considerations Initially recognise by purchaser as if purchase date is the date of issue of a contract Consideration received/ paid = proxy of premiums Profitable contracts -> recognize CSM Onerous contracts -> liability = fulfilment cash flows, difference goes to profit or loss or goodwill (IFRS 3) July 2017 Pw. C 62

Portfolio transfer and business combinations Long-tail PAA contracts acquired in the settlement period Issuer of insurance policies Entity acquiring insurance contracts* One of three options for liability for incurred claims (expired risk) Contract has new coverage period (discovery of ultimate claims amount) and CSM has to be set-up Expired risk General model throughout PAA and undiscounted* incurred claims Contractual Service Margin Risk adjustment Discounting** Best estimate of fulfilment cash flows Discounting Best estimate of fulfilment cash flows * No discounting is required if cash flows are expected to be received/ paid within one year. Pw. C July 2017 63

Presentation and disclosure

Presentation Statement of financial position - example Assets (Currently) Assets (New) Cash and cash equivalents Financial investments Segregated fund assets Accrued investment income Investment property Investments in associates Receivables from insurance business Reinsurance assets Insurance contracts assets* Reinsurance contracts assets* Deferred acquisition costs (where applicable) … Property and equipment Goodwill and other intangible assets Deferred income tax assets Current income tax assets Other assets Total assets * including non-distinct investment and service components = no changes to presentation 2017 IFRS Update Pw. C Separate presentation of group of insurance contracts in an asset and liability position Ceded reinsurance contracts are presented separately from insurance contracts DAC, PVIF and premium receivable are not separate assets but part of fulfilment cash flows 65

Presentation Statement of financial position - example Liabilities and equity (Currently) Insurance contract liabilities Liabilities and equity (New) Insurance accounts payable Reinsurance contracts liabilities* Investment contract liabilities Employee benefit obligations Employee benefit liabilities Derivative liabilities Deferred tax liabilities Other liabilities Senior debentures Subordinated debt Segregated fund liabilities Total liabilities Issued share capital and contributed surplus** Retained earnings and accumulated OCI** Issued share capital and contributed surplus Retained earnings and accumulated OCI Total Equity Total liabilities and equity Insurance contracts liabilities* *including non-distinct investment and service components = no changes to presentation 2017 IFRS Update Pw. C Separate presentation of insurance contracts in an asset and liability position Ceded reinsurance contracts are presented separately from insurance contracts Insurance payables are not separate liabiliites but part of fulfilment cash flows 66

Presentation Statement of comprehensive income • Revenue and expense are recognised as services delivered and incurred respectively • Investment components are excluded from revenue Contractual service margin Risk adjustment ~ ~ Current unbiased probability weighted estimates of present value of future cash flows Insurance components Nond inves istinct comp tment onent s * Premiums due or premiums written, is prohibited. Pw. C Interest expense is current or locked-in depending on accounting policy choice 20 XX X X (X) Insurance service result X X Investment income X X (X) Net interest and investment income X X Profit or loss X X Gains and losses on financial assets at FVOCI X X Insurance finance income or expenses (optional) (X) Total comprehensive income X X Insurance revenue* Insurance service expenses Insurance finance income or expenses If OCI option is chosen, difference between current and locked-in financial variables are presented in OCI July 2017 67

Overview of financial statements Statement of comprehensive income - example Income Statement (Currently) Revenue Premiums gross Less ceded Net premiums Net investment income (loss) Interest and other investment income Fair value and foreign currency changes on assets and liabilities Net gains (losses) on available-for-sale assets Fee income Total revenue Benefits and expenses Gross claims and benefits paid Increase (decrease) in insurance contract liabilities, reinsurance assets and investment contract liabilities Reinsurance expenses (recoveries) Commissions Operating expenses Premium taxes Interest expense Total benefits and expenses Income tax expense Net income (loss) attributable to participating policyholders Preferred shareholders dividend Income Statement (New)* Insurance revenue Insurance service expenses Insurance service result Insurance finance income or expense Investment income Investment result Profit or loss Other comprehensive income (if elected) Insurance finance income or expense Changes in FVOCI assets Total other comprehensive income Common shareholders’ net income (loss) = no changes to presentation Pw. C July 2017 68

Premium due or Overview of financial statements Statement of comprehensive income - revenue written are prohibited Revenue = • Expected insurance service expenses excluding: • Loss component Change in liability for remaining coverage Excluding changes related to: • Premiums received • Investment components • Transaction-based taxes collected • Insurance finance income or expenses; • Insurance acquisition cash flows • Liabilities transferred to a third party • Loss component OR Investment component • Transaction-based taxes collected • Insurance acquisition expenses • Change in risk adjustment excluding: • Insurance finance income or expenses • Pw. C • • Adjustments to the CSM • Loss component Release of the CSM PLUS Release of insurance acquisition cash flows July 2017 69

Interaction of IFRS 9 and IFRS 17 OCI option and mismatches between assets and liabilities Insurers will make an accounting policy choice on whether to apply the OCI option in IFRS 17 in order to match profit or loss as much as possible with the results from assets. Equities, derivatives, debt instruments Assets (IFRS 9) Liabilities (IFRS 17) FVTPL Discount rate changes to P&L Equities FVOCI with no recycling Debt instruments FVOCI with recycling Debt instruments Pw. C But • • Discount rate changes to OCI • • Regular premiums Assets sold prior to maturity Equities at FVOCI Mixed portfolios Amortised cost July 2017 70

Disclosure Under IFRS 17 more disclosures will be required compared to IFRS 4 Judgements Risks Balance sheet • Present value of probability-weighted estimated value of future cash flows • Risk adjustment • Contractual service margin for general model and VFA • Liability for the remaining coverage (PAA) Income statement • Underwriting revenue • Underwriting expense • Finance income/ expense • Measurement methods • Processes for estimating the inputs • Changes in methods and processes • Methods used to calculate finance income/ expense if OCI option is used • Confidence level for risk adjustment measurement • Yield curves • Nature and extent of risks • Exposure • Procedures used to manage risks • Concentration of risks • Insurance risk: sensitivity analysis, claims development • Credit risk • Liquidity risk: maturity analysis by estimated timing of cash flows • Market risks: • Interest rate risk • Foreign currency risk • Prices risk Reconciliations Amounts New disclosures compared to IFRS 4 are highlighted in red. Pw. C July 2017 71

Transition

Transition Approaches Impracticable: (a) Amounts are not determinable Default: full retrospective • • (b) Requires assumptions about past management’s intent (hindsight) Have to apply unless impracticable or cannot identify groups retrospectively (c) Requires significant past estimates (hindsight) Requires day 1 data and assumptions and full history to date of transition If impracticable • Comparison of fulfilment value to ‘fair value’ • Given data requirements, may end up here • Objective - as close to retrospective approach as possible. • A list of available simplifications is provided. OR Modified retrospective approach If impracticable Pw. C Fair value July 2017 73

Modified retrospective approach Major simplifications T 0 – transition date (1 July 2020) Assessment @T 0, not initial recognition of contract: • Grouping • Scope of VFA • Defining discretion T 1 - date of initial application (1 July 2021) CSM in the general model (based on information @T 0 and actual/ expected changes before T 0) Annual cohorts for grouping are not required CSM in the VFA (based on information @T 0 and actual changes before T 0) Insurance contract revenue (for liability for remaining coverage and onerous contracts) Pw. C T 2 – first reporting date (31 December 2021) Insurance finance income or expenses (to determine split between retained earnings and accumulated OCI if OCI option is used) July 2017 74

Fair value approach Major considerations Use IFRS 13! 1 2 3 4 Fair value – price that would be received to sell an asset or paid to transfer a liability in an Contract Discount Profit Cost of orderly boundary rate margin capital transaction between market participants at the measurement Onerous contracts have CSM if fair value approach is used date. Pw. C July 2017 75

Treatment of business combinations/portfolio transfers Transition Contract inception date Legal entity view Transaction date Transition to IFRS 17 Group view Group vs. Legal entity view – ‘”Double transition’? Group view - Recognised from date of transaction. - Full & modified retrospective approaches to IFRS 17 transition are assessed from the transaction date based on the known consideration paid/received. For example, ‘locked-in’ assumptions are set as at this date. Legal entity view - For acquired entities reporting under IFRS 17, full & modified retrospective approaches is assessed from the contract inception date. - So, two sets of transitional calculation (impacting CSM, OCI, unit of account, revenue etc. ). - However, fair value option on IFRS 17 transition would appear to result in same approach? Pw. C July 2017 76

Practical considerations

Strategic and tactical decisions to be made Strategic Pw. C Tactical How do you ensure optimal delivery of IFRS 17 - learning and leveraging from Solvency II and other projects? Should investment in system architecture extend beyond the minimum required? Which in-flight projects could potentially address IFRS 17 requirements and when is the right time to assess those projects? What current limitations do you have in terms of data availability and what will you put in place now for 2021? What KPIs will you use to manage the business? How will you develop a strong investory through the transition? To what extent are data models, systems and processes designed and built at Group vs Segment vs Reporting Unit levels? What is your vision for the operating model for Actuarial, Risk and Finance? Have you got all of the relevant stakeholders buy in to the project? July 2017 78

IFRS 17 – Where is the impact? Adoption will have wide-ranging, significant impacts on investor education, underlying processes, systems, internal controls, valuation models, and other fundamental aspects of the insurance business. Business Operational Systems • Investor education, including the need for revised non-GAAP measures • Increased risk of incorrect, inaccurate or incomplete financial information • Record, process and report a greater volume of data with an increased level of complexity • Timing and volatility of profit emergence, and its impact on distributable earnings • New financial reporting, impacts on Integrated Reporting. IT and actuarial controls and processes • Enhance actuarial models • Reconsider product design • Education and people strategy • Additional load on infrastructure (processing and storage capacity) • Overhaul planning, budgeting and forecasting functions • Business combination and acquisition activity Pw. C • Redesign or replace source, feeder and reporting systems • Implications for 3 rd party arrangements July 2017 79

Market ambition A Some insurers are taking this opportunity to transform their finance function - redefining finance, actuarial and risk functions, establishing the operating model, tools and capabilities to support the business use the new metrics that are emerging Strategic Redefinition A Operational Efficiency B Benefits Compliance B Strategic Path Compliance Path Some firms may seek to address the requirements in a low-cost compliance manner, either through work-around solutions or by increasing resources. Implementation Time and Costs Pw. C July 2017 80

IFRS 17 implementation Lessons learned to date Financial and operational implications of adoption will vary by insurer Areas already identified by early IFRS 17 movers include the following: Length of implementation project required Challenges to year end reporting timetables Data collection and storage Resource planning Managing market expectations Informing policy choices and options Other areas of the business will be impacted such as product design, remuneration policies and business planning. Pw. C 81

Profit emergence: Non-profit immediate annuity Base Scenario IFRS 4 IFRS 17 Longevity stress in year 5 IFRS 4 IFRS 17 Pw. C July 2017 82

Profit emergence: Participating endowment Base Scenario IFRS 4 IFRS 17 Volatile economic scenario IFRS 4 Pw. C IFRS 17: BBA IFRS 17: VFA July 2017 83

Building on Solvency II? General model Contractual service margin Risk adjustment Ability to use SII Brand new calculations New systems and processes required • Requires retrospective information • Level of aggregation for measurement Approach is not prescribed • Data storage requirements Potential to leverage SII Risk Margin • Build new or amend existing system • Local or Group held model Discounting Rates used may differ but some similarities to SII Best estimate of fulfilment cash flows Closely aligned to SII best estimate liabilities – may be certain specific differences, e. g. expenses Pw. C Implementation Considerations:

Steps to consider up to expected IFRS 17 adoption date Project setup, governance and resources Transition to the new standard Assess impact Gather and validate data Project planning Key activities in an impact assessment: 1. Vision, principles and requirements 2. Training 3. Gap analysis 4. Systems impact assessment 5. Financial impact 6. Roadmap, detailed planning and budget Pw. C Implement systems and processes – design, build, test, deploy Adoption Get organized 2021 Understand the impact and plan the project Dry run and comparatives Need to start now July 2017 85

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