3blocks - IFRS 17 PDF

3Blocks ®
Introduction to IFRS 17
Pawel Wozniak, Agnieszka Hupert
March 2019
Introduction to IFRS 17 3Blocks ®
Table of content
Introduction ……………………………………… 3 Onerous contracts …………………............. 80

General Model …………………………………. 10 Acquisition costs ................................... 86
Risk Adjustment ………….……………………. 19 Full Retrospective Approach ................ 91
Contractual Service Margin …...………….. 24 Mod. Retrospective Approach ............. 95
Reinsurance ………….............................. 33 Fair Value Approach ............................. 104
IFRS 17 Reporting …………….................... 41 Implementation considerations ........... 108
Variable Fee Approach …….................... 52 IFRS 17 vs Solvency II …........................ 124
Premium Allocation Approach .............. 62 Appendix ….......................................... 130
www.3blocks.co Introduction to IFRS 17 – Mar 2019 2

Background
Introduction

What is wrong with IFRS 4
Insurance Contracts IFRS

IFRS 4 allows for a wide range of insurance liabilities modelling methods
Phase I (2005) Phase II (2022)
that can be applied as long as they satisfy the Liability Adequacy Test.
IFRS 4 IFRS 17
Different levels of safety embedded in

Lack of comparability between countries Lack of comparability between companies
insurance liabilities calculations
Valuation of insurance liabilities does

Discounting is not always required, typically Insurance liabilities may be calculated
not have to be cash flow based
non-life TPs valued on an undiscounted basis based on historical assumptions

Timeline
First Exposure IFRS 17 Transition First IFRS 17

Draft publication date fin. statements
2010 2013 2017 2018 2019 2020 2021 2022 2023

... ...
Second Effective date

Exposure Draft Initial application
Drafting the new standard Implementation IFRS 17 reporting
Retrospective implementation

Measurement models overview [1]
General Variable Fee Premium Allocation

Model (GM) Approach (VFA) Approach (PAA)
Contracts linked to Short term contracts PVCF - Present

Application Default approach
underlying assets (less than 1 year) Value of Cash Flows
RA – Risk
Adjustment
Endowments, Terms, Unit Links, 1-year non-life,
Examples Annuities, Whole Life With Profits health or life insurance CSM - Contractual
Service Margin
LFRC - Liability for
(FV Assets) - (Var. Fee) Similar to unearned Remaining
LFRC PVCF + RA + CSM
+ RA + CSM premium reserve Coverage
LIC - Liability for
Incurred Claims
LIC PVCF + RA PVCF + RA PVCF + RA
Insurance issued Insurance issued (*) measured using

Ins/Reins Reinsurance held Insurance issued
Reinsurance held the fulfilment CF
measurement
Non-onerous Non-onerous Non-onerous,
Onerousness Onerous Onerous (*) Onerous(*)

Measurement models overview [2]
IFRS 17 scope: Insurance Risk No insurance Risk
Insurance Direct No Direct Direct No Direct

contracts Participation Participation Participation Participation
Features Features Features Features
No Discretionary
Reinsurance Participation Out of IFRS 17 scope
held Features
VFA GM/PAA
Discretionary
Investments Participation VFA GM/PAA
with DPF Features
Investment contracts with Discretionary

Participation Features (DPF)

Components of insurance liability
Non-
Onerous Claims
onerous
contracts incurred
contracts
Liability for
LFRC Loss
Fulfilment Liability for Incurred
excluding Component
Cash Flows Remaining Claims
the LC (LC)
Coverage (LIC)
Treatment of insurance
(LFRC) liabilities’ movements
* recognised in the
CSM
insurance result
Revenue Expenses * Recognition of the loss component

and reversals of the loss
component recognition

Unit of account
Insurance Portfolio
• Subject to similar risks
• Managed together Profitability
• Within the same product line
• Onerous at initial recognition
IFRS 17 • At initial recognition no significant
possibility of becoming onerous
group • Remaining contracts
Groups established at initial recognition and their

composition should not be changed
Cohorts
Groups may be smaller that that prescribed above e.g.
Contracts issued more than quarterly instead of yearly cohorts
one year apart should not be Onerous contract group may be identified by measuring
included in the same group. the set of contracts instead of on the individual basis
Regulatory pricing restrictions (e.g. Gender Directive)
driven profitability differentiation may be ignored

Measurement - GM
Measurement
General Model (GM)

Overview
Insurance The General Model is a default

Liabilities IFRS 17 insurance liabilities
Sign convention:
measurement approach
Future cash “+” for inflows
flows “-” for outflows The same approach
Fulfilment Cash Flows

for the initial and
subsequent
Time value “+” or “-” dep. on measurement
of money the CF sign & struc
Risk “+”, Risk Adj.

Adjustment increases the TP
Contractual Initial and subsequent

“+”, CSM
CSM
Service measurement methods
Margin increases the TP are different

Cash flows
Best estimate cash flows Best estimate of cash flows

Insurance
Reassessed at each reporting date
Liabilities
Assumptions based on experience
Reflect conditions existing at the
measurement date
Future cash 0 1 2 3 4 5
Within boundary of the contract
flows
Expenses Claims Unbundle distinct components:
Acquisition Premium investments, derivatives or service
Can be done at portfolio level and
Time value allocated to insurance groups
of money
Recognition Cashflow boundary

Risk The earliest of the following • Ability to reassess the risk and change
Adjustment
• beginning of the coverage period the premiums or benefits
• date when the first premium becomes due • Possibility to do the reassessment at the
Contractual • when the group becomes onerous portfolio level
Service
Margin

Discounting [1]
Insurance Insurance cash Top-Down Insurance Yield on the

flows are not cashflows underlying assets
Liabilities directly linked directly linked
to assets to assets Adj. yield on the
Bottom-up
underlying assets
Future cash
flows
Assets reference portfolio rate 5.5%
Time value Duration mismatch adjustment 0.5%

of money Top-Down
Credit Risk premium for expected losses (Probability of Default) -1.5%
Credit risk premium for unexpected losses (Cost of Downgrade) -0.5%
Risk Top-down IFRS 17 discount rate 4.0%

Adjustment
Bottom-up IFRS 17 discount rate 3.5%
Contractual Liquidity premium 1.5% Bottom-up
Service
Margin Swap rate (risk free rate) 2.0%

Discounting [2]
Insurance Liquid liabilities

Not-liquid liabilities Semi-liquid liabilities
Liabilities
Examples e.g. Annuities, Single P. Terms e.g. Endowments, Terms e.g. Unit Links
Future cash Surrender risk No surrender risk Some surrender risk Substantial surrender risk
flows • Only u/w risks are longevity • Mortality, longevity, • No longevity risk
Other liquidity risk and expense risk morbidity, expense risk
indicators • Premiums have been paid • Not all premiums paid
Time value
The swap yield curve plus the The swap yield curve plus The swap yield curve
of money liquidity premium. some portion of the liquidity appropriate to the currency of
Bottom-up premium. the related cash flows.
approach
Risk [Swap Rate] + [Liq Prem] [Swap Rate] + F x [Liq Prem] [Swap Rate]
Adjustment
Reference portfolio rate adjusted for mismatches and credit risk
Top-down
Contractual [Ref Portfolio rate] - [Mismatch adj.] - [Probability of Default] - [Cos of Downgrade]
approach
Service
Top-Down = Bottom-Up Top-Down ≠ Bottom-Up
Margin

Risk Adjustment
Insurance Risk Adjustment calculation method not specified in the

Liabilities standard but it should follow the fallowing principles:
- longer duration
- higher severity Higher risk
Future cash Greater Risk Adjustment
flows - wider distribution
- less is known
Time value
of money Confidence level based methods
18%
Mean
16%
Risk 14%
Adjustment 12%
10%
Value at Risk
8%
Contractual 6%
Conditional Tail Expectation
Service 4%
2%
Margin
0%

CSM initial measurement [1]
Insurance
Liabilities Discount
Recognise Day 1 gain as the CSM
Risk Adj.
Future cash Initial
flows
Initial measurement
Future cash flows
cash flows
Pre-recong.
Acquisit. CF
Time value
of money CSM
Risk
Adjustment
Insurance Insurance
FCF FCF FCF FCF/Bank
Contractual asset liability
Service
Margin

CSM initial measurement [2]
Insurance
Liabilities
Recognise Day 1 loss in the P&L
Discount
Future
cash flows Risk Adj.
Future cash
flows
Initial measurement
Initial
cash flows
Initial
loss
Time value Pre-coverage
Acquisit. CF
of money
Risk
Adjustment
Insurance Insurance
FCF FCF FCF FCF/Bank
asset cost
Contractual
Service
Margin

CSM subsequent measurement
Insurance Contractual Service Margin

Liabilities Interest Estimate
variance
New
contracts
Future cash Release to
Subsequent measurement
flows revenue
CSM
[opening] CSM
Time value [closing]
of money
Opening Additions to Accreted Fulfilment Release to Closing

balance the group interest CF variances revenue balance
Risk
Adjustment
The effect of any new Interest accrete Future fulfilment Release to revenue in
Contractual contracts added to the at the locked-in cashflows estimate proportion to coverage
group in case the group discount rate variance measured at units e.g. number of
Service is not closed yet. locked-in discount rate policies in-force
Margin

Risk Adjustment
Risk Adjustment

Confidence level techniques
20%
Confidence level techniques Mean
Easy to communicate to users 15%
Calculated with reference to a „confidence level”

10% Value at Risk (VaR)
Require calculating of risk profile (risk distribution)
Possibility to leverage Solvency II calculations 5% Conditional Tail Expectation (TVaR)
0%
Value at Risk Conditional Tail Expectation

How bad is my loss going to be? If things get bed – what is my expected loss?
What loss will not be exceeded (with high probability)?
Focuses on probability of loss Takes into account the size of loss (shape in the tail)
vs
Less useful for shewed distributions Better reflection of extreme values
More common, simple concept, clear interpretation More advanced, more difficult
Lack of subadditivity (coherence) Superior mathematical properties (coherence)

Cost of capital method
Cost of Capital method

Risk Adjustment = Discounted Cost of Capital at risk free rate
Risk Adjustment
Benefits of using Solvency II

Risk Margin may not be as
Cost of Capital = Capital x [CoC Rate] great as could be expected.
If Solvency II Risk Margin was to be used, entities need to consider

Only non-financial risks included (non-hedgable market and general Companies already have Solvency II Risk
operational risk should not be covered by the RA) Margin based on a CoC method
Separate calculations for insurance contracts and reinsurance contracts but…
Allocation to IFRS 17 groups of contracts Under IFRS 17, the equivalent
Discount rates should be consistent with cash flows „confidence level” has to be disclosed –
RA at the consolidated level is the same as the RA at entity level additional work for CoC method.

Provision for adverse deviation method
Provision for adverse deviation (PAD)
What is it?
Explicit margins on best estimate assumptions (non-fiancial risks)
RA equal to the difference between base scenario and shock scenario
Examples:
Easy to implement – entities need to repeat base calculations
- Adjustment to mortality
Easy to divide into groups of insurance contracts (policy by policy calculations)
- Adjustment to morbidity
Becoming more popular among companies
- Minimum loss ratio
- Lower discount rate
Challenges
- RA as fixed percentage of discounted
Confidence level still needs to be assessed cash flows (by line of business)
Setting up explicit margins (selection of risks, selection of margins)
RA should be in line with principles defined in IFRS 17

Reinsurance risk adjustment
Reinsurance RA
Risk adjustment for reinsurance contracts (i.e. the risk transferred
to the reinsurer)
IFRS 17.64:
Instead of applying paragraph 37, an entity shall determine
the risk adjustment for non-financial risk so that it represents REINS.
the amount of risk being transferred by the holder of the RA
group of reinsurance contracts to the issuer of those contracts
Main consequence
Reinsurer share in RA cannot be calculated in separation GROSS
RA
from underlying contracts. NET
For proportional reinsurance (quote share) a percentage RA
of gross RA can be a good proxy for reinsurer risk
(depending on the size of risks on entity’s share).
Gross Risk Adjustment Net Risk Adjustment

(i.e. excluding the reinsurance (i.e. excluding the reinsurance
risk minitagion effects) risk minitagion effects)

Contractual Service Margin
Contractual Service Margin

CSM roll-forward
Ref Roll-forward step GM VFA
44(a), 45(a) Effect of any new contracts added to the group Yes Yes
Difference between
the GM and VFA
Interest accreted on the CSM during the reporting period,
44(b)
measured at the discount rate locked-in at inception
Yes No
Entity’s share of the change in the fair value of the

45(b)
underlying items
No Yes
44(c), 45(c) Changes in fulfilment cash flows relating to future service Yes Yes
44(d), 45(d) Effect of any currency exchange differences on the CSM Yes Yes
Amount recognised as insurance revenue because of the

44(e), 45(e) Yes Yes
transfer of services in the period

Initial measurement and locked-in discount rates
Q1 Q2 Q3 Q4
Possible approach to the initial measurement discount rates

Avr Q1 Avr Q2 Avr Q3 Avr Q4
Possible approach to the locked-in discount rates

One of the possible
Avr Q1 approaches
Avr Q1-Q2
Avr Q1-Q3
Avr Q1-Q4

Coverage Units concept
For GM determined by reference to

insurance services only
Reflect quantity of coverage provided by For VFA determined by reference to both

the contracts in the group insurance and investment services
Coverage Units
Determined on contract level i.e. CU for a Characteristics Reflect likelihood of ins. events to the extent
group is a sum of CU for each contract they affect duration
Not represent the pattern of expected cash Not reflect the likelihood of ins. events to the extent
flows or the changes in the risk adjustment that they affect amount expected to be claimed
Reflect size of the contract and different level of Pattern of investment related services is not determined
cover provided by contracts in different periods by investment returns.
Can be calculated both on discounted and

undiscounted basis

CU examples - no investment component
Product Description Coverage Units
Credit life loan insurnce Death benefit equal to principal and insterest Loan balance
Credit life - variable amount Benefit equal to the outstanding credit balnce Expected credit balnce
Default losses on mortgage after recovering the value of the Mortgage balance or mortgage
Mortgage loss cover
property on which the mortage is secured balncess less propety value
Product waranty Replacement of a purchased item if it fails to work properly Product price
Replacement of a purchased item if it fails to work properly, after Product price, no CU in orginal
Extended product warranty
orginal waranty has expired warranty period
Live contingent annuity Pays a fixed monthly amount until the annuitant dies Monthly benefit
Annuity in future at a fixed rate Monthly benefit, no CU in pre-

Deferred annuity
annuity peiod

CU examples - with investment component
Product Description Coverage Units
• Death Benefit in the first 5 years equal to the higher of 110% of Coveregare period 10 years, CU should
the premium paid or the accum. account value reflect both insurance and investmnt
Insurance and investment • An investment contract matures in year 10 and pays the component (no method has been
component with different durations customer the account value at maturity sepcified)
• Death Benefit has been assessed to represent a significant
insurance risk
• Regular level premiums Amount payable on death (Sum

• Sum insured payable upon death or reaching the policy insured including allocated investemnt
maturity of the life insurance returns and bonuses)
• Policyholder is entitled to share of the investment returns from
an underlying pool of assets
Endowment Policy (WP)
• Possibility to allocate revisionary or terminal bonuses
• The investment returns are allocated to the policyholder
though bonuses that are added to the policy sum insured
• Defined surrender value payable when the policy lapses before
the maturity date

CU discounting
Interest rate 10%
Undiscounted coverage units

1 2 3 4 5
CSM opening balance 500 440 363 266 146
Interest accretion 50 44 36 27 15
Allocated to P&L 110 121 133 146 161
CSM closing balance 440 363 266 146 0
Coverage units 1 1 1 1 1
Coverage units - cumulative 5 4 3 2 1
Discounted coverage units

1 2 3 4 5
CSM opening balance 500 418 328 229 120
Interest accretion 50 42 33 23 12
Allocated to P&L 132 132 132 132 132
CSM closing balance 418 328 229 120 0 Discounted coverage units result in more uniform
release of the profit to income statement
Coverage units 1 1 1 1 1
Coverage units - discounted 0.91 0.83 0.75 0.68 0.62
Coverage units - cumulative 3.79 2.88 2.06 1.30 0.62

Interim reporting
IFRS 17.B137:
Semi-annual reporting
2000 x 1/4
Notwithstanding the requirement in IAS 34

(1500-300) x 1/3 Interim Financial Reporting that the
frequency of an entity’s reporting shall not
affect the measurement of its annual results,
an entity shall not change the treatment of
accounting estimates made in previous
interim financial statements when applying
IFRS 17 in subsequent interim financial
statements or in the annual reporting period.
Difference Main consequence

(2000-300) x 2/4
Annual reporting
- IFRS 17 calculations will not be on a ‘year-

to-date’ basis.
- Annual financial result for IFRS 17 will be
the sum of the four individual quarters or
two semi-annual periods.

Premiums and acquisition cost experience adjustment
Expected premium/acq. cost cash flows in the period 100

Actual premium/acq. cost cash flows in the period (80)
Premium/acq. cost experience adjustment 20
B96(a) B113(a)/B96(a)
GM Future service -
CSM
VFA Future service FCF not assets dependent
GM Current service -
VFA Current service - Revenue
VFA Current service FCF assets dependent

Reinsurance
Reinsurance

Reinsurance mismatches
Reinsurance mismatches
Reinsurance CSM – underlying losses need to be recognised on
day one but gains on reinsurance held must be deferred
Different models – reinsurance held does not have to be
measured with the same model as related insurance contracts.
Additionally the VFA cannot be applied to the reinsurance held.
Contract boundaries – contract boundary of the reinsurance
contract held can be different that the contract boundary of the
related insurance.
Grouping – Reinsurance contracts held can follow different
grouping that do not map one-to-one with the related insurance
contracts groups.
Recognition - there are different reinsurance held recognition
rules comparing to the related insurance contract recognition.

Reinsurance CSM
Insurance contracts Reinsurance contracts held
Day 1 Gain recognised in the BS as Both Day 1 Gains and Day 1 Loss
the CSM. Day 1 Loss recognised as an recognised in the BS as the CSM.
expense in the Income Statement.
CSM P&L CSM CSM

Reinsurance CSM
Underlying losses need to be
Day 1
Day 1 recognised on day one but
Loss
Loss losses on reinsurance held
(CSM)
must be deferred
Day 1 Day 1
Gain Gain
(CSM) (CSM)

Reinsurance measurement models
VFA Ins. liability GM Reinsurance asset
VFA Ins. liability PAA Reinsurance asset
Different models
GM Ins. liability GM Reinsurance asset Reinsurance held does not
have to be measured with the
same model as related ins.
GM Ins. liability PAA Reinsurance asset contracts. Additionally the
VFA cannot be applied to the
reinsurance held.
PAA Ins. liability GM Reinsurance asset
PAA Ins. liability PAA Reinsurance asset

Reinsurance contract boundaries
Insurance Reinsurance
contracts held
Contract boundaries
Insurance liability
Contract boundary of the
reinsurance held can be
Reinsurance asset
different that the contract
boundary of the related
insurance.

Reinsurance grouping
Insurance Reinsurance
Grouping
contracts held
Reinsurance contracts held
can follow different grouping
that do not map one-to-one
with the related insurance
Ins Gr A
contracts groups.
Re Gr X
In Gr B
Re Gr Y
Ins Gr C

Reinsurance recognition
An entity shall recognise a group of Proportional reinsurance

insurance contracts it issues from the At the beginning of the coverage
earliest of the following: period of the group of reinsurance
a) the beginning of the coverage period contracts held or at the initial
of the group of contracts; recognition of any underlying
b) the date when the first payment contract, whichever
Reinsurance recognition
from a policyholder in the group is the later;
There are different
becomes due; and Non-proportional reinsurance reinsurance contracts held
c) for a group of onerous contracts, From the beginning of the coverage recognition rules comparing
when the group becomes onerous period of the group of reinsurance to the related insurance
contracts held contract recognition.

Reinsurance risk adjustment
Insurance contracts risk adjustment has a Insurance contracts risk adjustment has a
credit balance i.e. it reduces the insurance debit balance i.e. it increases the insurance
assets and increases the insurance liabilities assets and reduces the insurance liabilities.
Reinsurance contracts held

Insurance contracts
Assets Liabilities Assets Liabilities
RA RA
RA RA

IFRS 17 Reporting
IFRS 17 Reporting

IFRS 17 Reporting – Example 1
Example 1 - profitable; no variances
Expected cash flows 0 1 2 Total Income statement 1 2 Total

Premiums 1000 - - 1000 Expected claims & expenses 300 300 600
Claims & expenses - (300) (300) (600) Release of the CSM 200 200 400
Acquisition costs - - - - Acquisition costs experience adj. - - -
Total 1000 (300) (300) 400 Premiums experience adj. - - -
Acquisition costs recognition - - -
Actual cash flows 0 1 2 Total Insurance revenue 500 500 1000

Actual claims and expenses (300) (300) (600)
Premiums 1000 - - 1000
Acquisition cost recognition - - -
Claims & expenses - (300) (300) (600)
Loss component recognition - - -
Acquisition costs - - - -
Loss component run-off - - -
Total 1000 (300) (300) 400
Insurance service costs (300) (300) (600)
Profit or loss 200 200 400
CSM 400 200 - n/a

Loss component - - - n/a

Example 2 - profitable, no variances, acquisition costs recognition

Acquisition costs (200) - - (200) Acquisition costs experience adj. - - -
Acquisition costs recognition 100 100 200

Premiums 1000 - - 1000
Acquisition cost recognition (100) (100) (200)
Claims & expenses - (300) (300) (600)
Acquisition costs (200) - - (200)
Total 800 (300) (300) 200
CSM 200 100 - n/a


Example 3 - onerous at recognition and onerous subsequently, no variances

Premiums 1000 - - 1000 Expected claims & expenses (*) 500 500 1000
Claims & expenses - (600) (600) (1200) Release of the CSM - - -
Total 1000 (600) (600) (200) Premiums experience adj. - - -

Premiums 1000 - - 1000
Claims & expenses - (600) (600) (1200)
Loss component recognition (200) - -
Loss component run-off 100 100 200
Total 1000 (600) (600) (200)
Profit or loss (200) - (200)
CSM - - - n/a
Loss component (200) (100) - n/a
(*) less the loss component run-off

Example 4 – profitable; claims experience adjustment in year 1


Premiums 1000 - - 1000
Claims & expenses - (500) (300) (800)
Total 1000 (500) (300) 200
Profit or loss - 200 200
CSM 400 200 - n/a


Example 5 - profitable; change in claims estimates in year 1

Expected cash flows 2 Total Insurance revenue 450 550 1000
Premiums - - Actual claims and expenses (300) (400) (700)
Claims & expenses (400) (400) Acquisition cost recognition - - -
Acquisition costs - - Loss component recognition - - -
Total (400) (400) Loss component run-off - - -
Actual cash flows 0 1 2 Total Profit or loss 150 150 300
Premiums 1000 - - 1000
CSM 400 150 - n/a
Claims & expenses - (300) (400) (700)
Total 1000 (300) (400) 300

Example 6 - profitable at recognition, onerous subsequently; change in claims estimates in year 1

Premiums 1000 - - 1000 Expected claims & expenses (*) 400 600 1000
Claims & expenses - (400) (400) (800) Release of the CSM - - -
Expected cash flows 2 Total Insurance revenue 400 600 1000
Premiums - - Actual claims and expenses (400) (700) (900)
Claims & expenses (700) (700) Acquisition cost recognition - - -
Acquisition costs - - Loss component recognition (100) - -
Total (700) (700) Loss component run-off - 100 -
Actual cash flows 0 1 2 Total Profit or loss (100) - (100)
Premiums 1000 - - 1000
CSM 200 - - n/a
Claims & expenses - (400) (700) (1100)
Loss component - 100 - n/a
(*) less the loss component run-off
Total 1000 (400) (700) (100)

Example 7 - profitable; premium experience adjustment in year 1

Total 1000 (300) (300) 400 Premiums experience adj. 200 - -

Premiums 1000 200 - 1200
Claims & expenses - (300) (300) (600)
Total 1000 (100) (300) 600
CSM 400 200 - n/a


Example 8 - profitable, acquisition costs experience adjustment in year 1

Acquisition costs (200) - - (200) Acquisition costs experience adj. (100) - (100)
Acquisition costs recognition 200 100 300

Premiums 1000 - - 1000
Acquisition cost recognition (200) (100) (300)
Claims & expenses - (300) (300) (600)
Acquisition costs (200) (100) - (300)
Total 800 (400) (300) 100
Profit or loss - 100 100
CSM 200 100 - n/a


Balance Sheet – IFRS 4 vs IFRS 17
IFRS 4 BS IFRS 17 BS
Explicit deferred Balance Sheet Balance Sheet

acquisition costs asset Financial assets Financial assets
Deferred acquisition costs Reinsurance assets Groups of insurance
Reinsurance in assets Premiums receivable Other assets and reinsurance
position netted with Reinsurance assets Total assets contacts in an asset
reinsurance in liabilities potions presented
Other assets Insurance liabilities
position separately from that in
Total assets Other liabilities an a liability position
Insurance liabilities Equity
Insurance contracts in Unearned premium Total liabilities and equity
liabilities position No explicit deferred
netted with insurance Other liabilities acquisition costs asset
contracts in assets Equity
position Total liabilities and equity

Income Statement – IFRS 4 vs IFRS 17
IFRS 4 P&L IFRS 17 P&L

Revenue excludes
Income Statement Income Statement deposit components
Premiums are cash
based and include Gross premium Insurance revenue and reflects provision
deposit components Premium ceded to reinsurers Incurred claims of services
Investment income Insurance contracts expenses
Claims include Total Income Acquisition costs

Reinsurance result is
repayments of Gross claims and benefits Result on reinsurance
shown separately
deposit components Claims ceded to reinsurers Insurance service expenses
Change In insurance contract liab. Insurance service result
Confusing adjustment Expenses Investment income
that incorporates
Acquisition costs Insurance financial expenses Separation of
multiple factors
Total expenses Net financial result insurance and
financial result
Profit before tax Profit before tax

Measurement - VFA
Measurement
Variable Fee Approach (VFA)

VFA overview
Insurance with Direct Participation Features

Policyholder participates in a share of a clearly identified pool of underlying items;
VFA
Policyholder gets a substantial share of the fair value returns on the underlying items;
Change in the amounts to be paid to the policyholder vary with the change in fair value of the underlying items.
Variable Fee
Fair value of Share of FV of Fulfilment CF

Insurance Risk
underlying underlying that do not vary CSM
liabilities Adjustment
assets assets on returns

VFA CSM
Entity’s share
CSM Change in future Release to CSM
in the FV
[opening] estimates revenue [closing]
change
Fair value of Share of FV of Fulfilment CF

Insurance Risk CSM
underlying underlying that do not vary
liabilities Adjustment [closing]
assets assets on returns
P&L CSM CSM CSM/P&L

VFA - Differences comparing to the GM
Area General Model Variable Fee Approach
Fulfilment cash flows PV of Cash Flows + Risk Adjustment Investment Component + Variable Fee +
Risk Adjustment
Accreting interest on the CSM Interest accreted, the related financial cost No interest accretion on the CSM
recognised in the income statement
Time value of money, variances in Financial cost/income recognised in the 1) Not related to the investment
estimates of financial variables income statement component : allocated to the CSM except
it is subject to qualified hedging
2) Related to the investment component:
financial cost/income recognized in the
income statement
Measurement of the variances in Locked-in discount rates Current discount rates

estimates of non-financial variables
Coverage period i.e. the period over Insurance services Insurance and investment services
with the CSM is amortised

VFA – Risk Mitigation
Risk mitigation Risk mitigation

option not applied option applied
Financial
(100) CSM
Variable Fee
costs
Financial Financial
Variable Fee
100
hedging
income income
impact
P&L
100 0

VFA - Example [1]
Product description Assumptions
• Single premium UL with a death benefit • Risk Adjustment assumed to be zero

• Policy term: 3 years • No estimate or experience variances
• Maturity benefit: fund value • Contract is not onerous
• Surrender value: fund value • AMC and expenses at the beginning of the year,
• Death benefit: 1.5% of the fund value all other cash flows at the end of the year
• Asset Management Charge (AMC): 5% • Credit (liabilities and incomes) shown with minus
• Debits (assets and expenses) shown with plus
Single premium 1,000 • No hedging qualifying as a risk mitigation under VFA
Policy term 3 years • One coverage unit delivered each year
AMC 5% • Future coverage units calculated on discounted basis
Death benefit 150%
Maturity benefit 100% Expenses 10
Surrender value 100% Rete of return on assets 10%
Risk free discount rate 3%
Probability of death 1%
Lapses 20%

VFA - Example [2]
Variable Fee Approach General Model
Assets – Inv. Comp. 1 2 3 Assets – Inv. Comp. 1 2 3

Opening b/ce 1,000.0 836.0 698.9 Opening b/ce 1,000.0 836.0 698.9
AMC (50.0) (41.8) (34.9) Bank acc. AMC (50.0) (41.8) (34.9) Bank account
Investment return 95.0 79.4 66.4 Financial income Investment return 95.0 79.4 66.4 Financial income
Lapses (209.0) (174.7) (146.1) Liab. - Inv. Comp. Lapses (209.0) (174.7) (146.1) Fulfilment CF
Maturity - - (584.3) Liab. - Inv. Comp. Maturity - - (584.3) Fulfilment CF
Closing b/ce 836.0 698.9 - Closing b/ce 836.0 698.9 -
Death benefit 15.7 13.1 11.0 Death benefit 15.7 13.1 11.0
Expenses 10.0 10.0 10.0 Expenses 10.0 10.0 10.0
Initial Fulfilment CF 1 2 3 Total Initial Fulfilment CF 1 2 3 Total

AMC (discounted @10%) 50.0 38.0 28.9 116.9 Death benefit (discounted @10%) (14.3) (10.8) (8.2) (33.3)
Death benefit (discounted @10%) (14.3) (10.8) (8.2) (33.3) Lapses (discounted @10%) (190.0) (144.4) (109.7) (444.1)
Expenses (discounted @3%) (10.0) (9.7) (9.4) (29.1) Maturity (discounted @10%) - - (439.0) (439.0)
Variable Fee 54.4 Expenses (discounted @3%) (10.0) (9.7) (9.4) (29.1)
Investment component (1,000.0) Insurance liability (945.6)
Insurance liability (945.6)

VFA - Example [3]
Liability – Inv. Comp. 1 2 3

Opening b/ca (1,000.0) (836.0) (698.9)
AMC 50.0 41.8 34.9 Variable Fee
Financial costs (95.0) (79.4) (66.4) Financial costs
Fulfilment CF 1 2 3
Lapses 209.0 174.7 146.1 Assets - Inv. Comp.
Opening balance 54.4 (803.1) (683.9)
Maturity - - 584.3 Assets - Inv. Comp.
Premium (1,000) - - Assets
Closing b/ce (836.0) (698.9) -
Death benefit 15.7 13.1 11.0 Revenue
Expenses 10.0 10.0 10.0 Revenue
Variable Fee 1 2 3
Lapses - surrender value 209.0 174.7 146.1 Assets
Opening balance 54.4 32.9 15.0
Maturity benefit 0.0 0.0 584.3 Assets
AMC (50.0) (41.8) (34.9) Liab. - Inv. Comp.
Discounting unwind (92.2) (78.6) (67.4) Financial costs
Death benefit 15.7 13.1 11.0 Revenue
Closing b/ce (803.1) (683.9) -
Expenses 10.0 10.0 10.0 Revenue
Share of FV changes 2.8 0.8 (1.0) CSM
Closing b/ce 32.9 15.0 -
Inv. Comp. + Var. Fee (803.1) (683.9) -

VFA - Example [4]
Coverage Units 1 2 3 Coverage Units 1 2 3

Coverage Units (CU) 1.00 1.00 1.00 Coverage Units (CU) 1.00 1.00 1.00
CU - discounted @3% 0.97 0.94 0.92 A CU - discounted @3% 0.97 0.94 0.92 A
CU - disc. cumulative 2.83 1.86 0.92 B CU - disc. cumulative 2.83 1.86 0.92 B
Release to P&L 0.34 0.51 1.00 A/B Release to P&L 0.34 0.51 1.00 A/B
CSM 1 2 3 CSM 1 2 3
Opening balance (54.4) (37.6) (18.9) Opening balance (54.4) (36.8) (18.7)
Share of FV change (2.8) (0.8) 1.0 Variable Fee Interest (1.6) (1.1) (0.6) Financial cost
Release to P&L 19.6 19.5 17.9 Revenue Release to P&L 19.2 19.2 19.2 Revenue
Closing b/ce (37.6) (18.9) - Closing b/ce (36.8) (18.7) -

VFA - Example [5]
Income Statement 1 2 3 Income Statement 1 2 3

Death benefit (15.7) (13.1) (11.0) Variable fee Death benefit (15.7) (13.1) (11.0) Fulfilment CF
Expenses (10.0) (10.0) (10.0) Variable fee Expenses (10.0) (10.0) (10.0) Fulfilment CF
CMS amortisation (19.6) (19.5) (17.9) CSM CMS amortisation (19.2) (19.2) (19.2) CSM
Revenue (45.3) (42.6) (38.9) Revenue (44.9) (42.3) (40.2)
Death benefit 15.7 13.1 11.0 Bank acc Death benefit 15.7 13.1 11.0 Bank acc
Expenses 10.0 10.0 10.0 Bank acc Expenses 10.0 10.0 10.0 Bank acc
Insurance service cost 25.7 23.1 21.0 Insurance service cost 25.7 23.1 21.0
Financial income (95.0) (79.4) (66.4) Assets - Inv. Comp. Financial income (95.0) (79.4) (66.4) Assets
Financial costs 95.0 79.4 66.4 Liab - Inv. Comp. Financial costs - - -
Unwind of discount - - - - Unwind of discount 92.2 78.6 67.4 Fulfilment CF
Interest on CSM - - - - Interest on CSM 1.6 1.1 0.6 CSM
Financial result - - - Financial result (1.1) 0.3 1.6
Gross result (19.6) (19.5) (17.9) Gross result (20.4) (18.9) (17.7)

Measurement - PAA
Measurement
Premium Allocation Approach (PAA)

PAA eligibility criteria
The PAA measurement of the

LFRC does not differ materially
at inception
from the GM measurement The Coverage period of
The criterion is not met if an entity

or each contract in the group
is one year or less
expects significant variability in
the fulfilment cash flows
1 Materiality assessment
2 Comparison to the GM PAA or not PAA,

that is the question
3 Variability assessment

PAA eligibility – Materiality Assessment
1 Materiality assessment
IFRS Materiality Definition (IAS 1) - effective 1 Jan 2020
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence
the decisions that the primary users of general purpose financial statements make on the basis of
those financial statements, which provide financial information about a specific reporting entity.
The primary users of general purpose financial reporting are present and potential investors, lenders
and other creditors, who use that information to make decisions about buying, selling or holding equity
or debt instruments, providing or settling loans or other forms of credit, or exercising rights to vote on,
or otherwise influence, management’s actions that affect the use of the entity’s economic resources.
Typical materiality thresholds:
Revenue Gross Profit Total Assets

0.5 - 1% 5 - 10% 1 - 2%

PAA eligibility – Comparison to the GM [1]
2 Comparison to the GM [1]
Factors driving the PAA and GM difference
Premiums: single or regular Single premium contracts have significantly smaller differences
Level of premiums Materiality is an absolute concept i.e. big relative diff. may be still immaterial
Contract duration
The shorter duration and lower discount rate the smaller the difference
Discount rates
Ultimate loss
The higher UL and RA and the bigger the difference
Risk adjustment
Risk distribution The better PAA and CSM run-off patterns are aligned the smaller the diff.

PAA eligibility – Comparison to the GM [2]
2 Comparison to the GM [2]
Possible practical ways to assess materiality of the PAA and GM diff
Exact method Simplified method
Excel calculation Decision tables

Inputs: Single/regular; level of premiums, duration, • Separate table for single and regular premiums
discount rates, ultimate loss, risk adjustment, risk • Separate tables for small, medium and large
distribution groups in terms of premiums
Calculation: projection of LFRC under PAA and GM • Assume duration and discount rates on prudent
Output: PAA and GM diff level e.g. discount 4%, duration 3 years
• Decision table for different level of UL and RA

PAA eligibility – Variability significance assessment
3 Variability significance assessment
Standard deviation = 10m GBP

UL
Standard deviation = 3m GBP
Example of the variability significance criterion

If the UL standard deviation over the last 5 years
is greater than 5m GBP then the variability is
significant.
Years

PAA initial measurement
Acquisition
cash flows Initial Acquisition costs deductions not
acquisition applicable if the entity opted to recognise
Pre-recog.
costs acquisition costs directly in the P&L
acq. CF
Initial measurement
Premium
received
Insurance
liability
Insurance Insurance
Bank Bank
assets liability

PAA subsequent measurement
Investment
Acquisition comp.
costs
Acquisition
Premiums cash flows Interest Release to
Subsequent measurement
revenue
Insurance
liabilities Insurance
[opening] libilities
1 2 3 4 5 6 [closing]
Opening Premiums Acquisition Accreted Acquisition cost Investment Release to Closing

balance received costs CF interest recognition component revenue balance
Bank acc. Bank acc. Financial Acquisition Fin. Assets Revenue

(BS) (BS) cost (P&L) costs (P&L) (BS) (P&L)

PAA subsequent measurement [2]
Premiums Actual premiums cash flows, in particular the amount does not include
1
received premiums receivable
Acquisitions
2 (A)
cash flows
3 Interest (B) Interest accreted at the locked-in interest rate
Acquisition costs Systematic recognition of the initial acquisition cash flows as well as the cost
4 (A)
recognition of subsequent acquisition cash flows
Investment
5 (C) Investment component paid or transferred to the liability for incurred claims
component
Release to Amount recognised as insurnce revenue for insurnce coverage provided in

6
revenue the period. Release pro rata temporis or in proportion to risk.
(A) - Not applicable if the entity opted to recognize acquisition cash flows as expenses when it incurs those costs
(B) - Optional if the time between providing each part of the coverage and the related premium due date is no more than a year
(C) - Investment component is the amount that an insurance contract requires entity to repay to a policyholder even if an insurance event does not occur

Onerous contracts test [1]
Change in the Onerous contracts test

regulatory Comparison of the PAA measurement
environment
of the LFRC with the measurement
Major shifts
based on the fulfilment cash flows.
in economic
environment
Major changes
in cost Events triggering the test
allocation Onerous contracts test should be done
Facts and if the facts and circumstances indicate
circumstances that the group of contracts is onerous.
PAA measurement of onerous contracts

Intentional
pricing strategy The PAA measurement of onerous
Local GAAP, SII or leading to the contracts should include the unexpired
MI combined loss loss risk adjustment resulting from the test.
ratio greater than
100%

Onerous contracts test [2]
Facts and Onerous contracts test

circumstances
indicate that the At the group At the reporting
group is onerous recognition date date
IFRS 4 N/a No Yes LAT Reserve / URR
No No No
IFRS 17
Yes Yes Yes GM measurement
Impacts grouping
May impact the

recognition date

PAA measurement summary summary
PAA Measurement
PPA
Non-Loss Liability
Component Estimate
Unexpired Risk
(Remaining
Coverage)
Loss
Component
Insurance

RA
Liability
Disc.
Liability for
Incurred Claims Future
(Past Coverage) cashflows

Non-life insurance fulfilment CF example
An example of general Expected value of the Combined Loss Ratio

insurance fulfilment
Combined LR
Combined Loss Ratio at the confidence level
cash flows calculation
corresponding to the adopted risk adjustment methodology
[ Fulfilment
Cash Flow ] [ Unearned
Premium ] [ Combined
Loss Ratio
Risk
Adjustment ] [ Present Value
of Premiums CF ]
Claims and expenses (including Including
acquisition costs calculated on premiums
discounted basis) receivable

Onerous contracts at recognition – PAA vs GM
GM vs PAA for onerous contracts at recognition
Calculation of
opt. (56, 57b)

Invest comp.
If PAA options are not used
option (59a)
Claims disc.
adjustment
option 59b
Cash flows
projection
Acq. costs
then the PAA liability
the CSM measurement is not simpler
Risk
than under the GM
GM
Required disclosures under
the PAA are simpler
comparing to the GM
PAA

PAA – Differences comparing to the GM
Area General Model Premium Allocation Approach
Scope LFRC and LIC LFRC and LIC (LIC measured at the FCF value)
All except contracts with Direct Non-DPF contracts with the insurance
Application
Participation Features (DPF) coverage no more than a year
Initial measurement PVCF + RA + CSM Premiums less initial acquisition costs
Subsequent measurement PVCF + RA + CSM Recurrent formula (see slides 64-67)
Cash flow projections Yes No (except for the LC and LIC)
Risk adjustment Yes No (except for the LC and LIC)
CSM Yes (if non-onerous and insurance issued) No

Immediate acquisition costs
No Yes
recognition option
In line with insurance service measured Pro rata temporis or
Revenue
with claims, expenses and coverage units in proportion to the risk release
Onerous contract test No Yes (depending on facts and circumstances)

PAA - Example [1]
• Single premium one year accident insurance Single premium 1,000

• Uniform risk distribution over the insurance coverage period Initial acquisition CF 120
• Coverage period starts on the first day of the financial year Pre-recognition acquisition CF 80
• All acquisition costs are paid on day one Claims - projected 600
• The entity opted to accrete interest on the PAA liability Claims - actual 500
• The entity opted to recognise acquisition costs over the coverage period Expenses - projected 100
• Credit (liabilities and incomes) shown with minus Expenses - actual 150
• Debits (assets and expenses) shown with plus Risk free discount rate 3%
Investment component -
Premium Allocation Approach General Model

Initial measurement Ins. liab. Bank DAC Initial measurement FCF CSM Bank DAC
Premiums received (1,000.0) 1,000.0 Premium - (1,000.0) 1,000.0
Initial acquisition costs 120.0 (120.0) Initial acquisition CF - 120.0 (120.0)
Pre-recognition acquisition CF 80.0 - (80.0) Pre-recognition acquisition CF - 80.0 - (80.0)
Total (800.0) 880.0 (80.0) PV of projected claims (582.5) 582.5 -
PV of projected exp. (97.1) 97.1 -
Total (679.6) (120.4) 880.0 (80.0)

PAA - Example [2]

Opening b/ce (679.6)
Unwind of discount (20.4) Financial costs
Insurnce liability
Claims - projected 600.0 Revenue
Opening b/ca (800.0)
Expenses - projected 100.0 Revenue
Interest (24.0) Financial costs
Closing b/ce -
Amortisation of acquisition costs (200.0) Ins. service costs
Release to revenue 1,024.0 Revenue
Closing b/ce - CSM
Opening b/ce (120.4)
Interest (3.6) Financial cost
Release to revenue 124.0 Revenue
Closing b/ce -

PAA - Example [3]
Income Statement Income Statement

Claims - projected (600.0) Fulfilment cash flows
Expenses - projected (100.0) Fulfilment cash flows
Acquisition costs (200.0) Ins. service costs
CMS amortisation (124.0) CSM
Revenue (1,024.0) Insurance liability Revenue (1,024.0)
Claims - actual 500.0 Bank/LIC Death benefit 500.0 Claims reserve

Expenses - actual 150.0 Bank/LIC Expenses 150.0 Liabilities
Acquisition costs 200.0 Insurance liability Acquisition costs 200.0 Revenue
Insurance service cost 850.0 Insurance service cost 850.0
Financial costs 24.0 Insurance liability Financial costs 0.0

Unwind on discount 0.0 Discounting unwind 20.4 Fulfilment cashflows
Interest accreted on CSM 0.0 Interest accreted on CSM 3.6 CSM
Financial insurance income 24.0 Financial insurance income 24.0
Gross result (150.0) Gross result (150.0)

Onerous contracts
Onerous Contracts

Onerous contract concept
Example of a profitable insurance contract that at the same time is onerous under IFRS 17
Expected Loss Expected Premiums Exp Loss + Risk Adj.

A
Contract is profitable
because the expected
losses are lower than the
expected premiums.
B
Contract is profitable
because the expected
losses are lower than the
expected premiums.
A B

Loss component - Initial measurement
Claims, expenses and the risk adjustment movement related to the

current service (CERA) have to be allocated to the LC and the LFRC The loss component determines the amounts that are
excluding LC in systematic way. (Art 50, 51) presented in P&L as reversals of losses on onerous
groups and are consequently excluded from revenue.
(Art 49)
CERA - Claims, Expenses, Risk Adjustment
Acquisition
costs
Loss
PV of Risk Adj. Component
PV of
Claims
premiums
PV of
Expenses
Acquisition cost should not be allocated to the loss component
as they are fully recognised in revenue (Art B125 and Art 51)
Premiums are not accounted through income statement therefore cannot

be allocated to the loss component (Art 51 Art B123)

Loss component - Example [1]
• 3-year insurance • No experience variances

• Premiums 70 per year, paid at the beginning of the year • No changes in estimates in the first version of the example
• Claims 40 per year, paid at the end of the year • Claims and expenses estimates for the year 3 changed
• Expenses 10 per year, paid at the end of the year From 50 (40+10) to 10 (5+5) in the second version of the example
• Acquisition costs 90, paid at inception • Risk margin ignored
• Recognised evenly over the insurnce period • Discounting ignored
• CERA movement allocated to the LC in proportion to • Credit (liabilities and incomes) shown with minus
LC/CERA at the beginning of the year • Debits (assets and expenses) shown with plus
Cash flows 0 1 2 3 Total Initial accounting FCF CSM Bank P&L

Premiums 70.0 70.0 70.0 - 210.0 Initial premium - (70.0) 70.0 -
Claims - (40.0) (40.0) (40.0) (120.0) Future premiums 140.0 (140.0) - -
Expenses - (10.0) (10.0) (10.0) (30.0) Claims (120.0) 120.0 - -
Acq. Costs (90.0) - - - (90.0) Expenses (30.0) 30.0 - -
Total (20.0) 20.0 20.0 (50.0) (30.0) Acq. Costs - 90.0 (90.0) -
Initial loss - (30.0) - 30.0
Total (10.0) 0.0 (20.0) 30.0

Loss component 0 1 2 3
LC (30.0) (20.0) (10.0) - First version of the example
CSM - - - - No changes in estimates
CERA (150.0) (100.0) (50.0) -
LC/CERA 20.0% 20.0% 20.0% -
Income statement 1 2 3 Total

Claims (32.0) (32.0) (32.0) (96.0) Claims x (1-LC/CERA)
Expenses (8.0) (8.0) (8.0) (24.0) Expenses x (1-LC/CERA)
Acq. Cost (30.0) (30.0) (30.0) (90.0) Acq. Costs/3
CSM amortisation - - - -
Revenue (70.0) (70.0) (70.0) (210.0)
Claims 40.0 40.0 40.0 120.0

Expenes 10.0 10.0 10.0 30.0
Acq. Coss 30.0 30.0 30.0 90.0
Initial loss 30.0 - - 30.0
Reversal of losses (10.0) (10.0) (10.0) (30.0) (Claims+Expenses) x LC/CERA
Insurnce service cost 100.0 70.0 70.0 240.0
Result 30.0 - - 30.0

Loss component 0 1 2 3
LC (30.0) (20.0) - - Second version of the example
CSM - - 30.0 - Claims and expenses estimate for the year 3 changed
CERA (150.0) (100.0) (50.0) - from 50 (40+10) to 10 (5+5)
LC/CERA 20.0% 20.0% - - Impacted elements market in yellow
As a result of the positive estimate variance of 40, the remaining LC
has been reduce to 0 and the CSM of 30 has been set up
Income statement 1 2 3 Total
Claims (32.0) (32.0) (5.0) (69.0)
Expenses (8.0) (8.0) (5.0) (21.0)
Acq. Cost (30.0) (30.0) (30.0) (90.0)
CSM amortisation - - (30.0) (30.0)
Revenue (70.0) (70.0) (70.0) (210.0)
Claims 40.0 40.0 5.0 85.0

Expenes 10.0 10.0 5.0 25.0
Acq. Coss 30.0 30.0 30.0 90.0
Initial loss 30.0 - - 30.0
Reversal of losses (10.0) (20.0) - (30.0)
Insurnce service cost 100.0 60.0 40.0 200.0
Result 30.0 (10.0) (30.0) (10.0)

Acquisition costs
Acquisition Costs

Acquisition costs recognition in P&L
Result Revenue Costs
The CSM mechanism on its own

Acq.
does not guarantee that:
costs
• Revenue includes the portion of
PVFC premiums covering acq. costs
CSM • Service costs include acq. costs
incurred by an entity
Revenue 100
Costs (100)
Result -

Acquisition costs recognition in BS
Pre-recognition Post-recognition
acq. cost cash flows acq. cost cash flows
Recognised in the balance Recognised as a Systematic recognition of

sheet as an insurance asset reduction to the CSM acquisition cost in P&L
(pre-recognition acq. cf) (all acq. cash flows) (all acq. cash flows)

Acquisition cash flows definition
Acquisition cash flows

Option A Option B Option C
Cash flows arising from the
costs of selling, underwriting
Incremental sales and underwriting and starting a group of
costs (e.g. commissions, costs of insurance contracts that are
medical test and inspections) directly attributable to the
portfolio of insurance
Allocation of non-incremental sales contracts to which the group
and underwriting costs (e.g. belongs. Such cash flows
Marketing costs and u/w department include cash flows that are not
salaries. directly attributable to
individual contracts or groups
Allocation of non sales or of insurance contracts within
underwriting related overheads (e.g. the portfolio.
IT, management, accounting costs)
IFRS 17 acquisition cash flow definition is not restricted

to incremental cost of selling or underwriting

Acquisition cost accounting

Balance Sheet Income Statement
Acquisition
Cash Flows
Fulfilment
Insurance
Expenses
Expenses
Revenue
Incurred
Incurred
Account
Account
Claims
Asset
Bank
CSM
Pre-recognition period
Pre-recognition acquisition cost cash flows Cr Dr
Upon recognition
Pre-recognition acquisition cost cash flows Dr Cr
Acquisition cost cash flows upon recognition Dr Cr
Future projected acquisition costs cash flows Cr Dr
Post-recognition
Systematic recognition of acquisition costs Cr Dr
Actual acquisition cost cash flows - current service Cr Dr Experience adjustment

Expected acquisition cost cash flows - current service Dr Cr current service
Acquisition costs experience adjustment - current service D/C D/C
Actual acquisition cost cash flows - future service Dr Cr

Experience adjustment
Expected acquisition cost cash flows - future service Dr Cr future service
(Art B96a, Art B113a)
Acquisition costs – changes in estimates D/C C/D

Full retrospective approach
Full Retrospective Approach

Transitional provisions - Introduction
Transition Effective Date First IFRS 17

Date Initial Application Fin. Stat.
2019 2020 2021 2022
IAS 8 Article 19(b)
CSM Transitional Provisions: IAS 8 Article 19(b)

Changes an accounting policy upon initial application
1 Modified Retrospective Approach of a Standard or an Interpretation that does not
include specific transitional provisions applying to that
2 Fair Value Approach change, or changes an accounting policy voluntarily, it
shall apply the change retrospectively

Application of transitional provisions
FV Approach Modified Retrospective

Full
Ret. XXXX-XXXX
A B C D E F
Different generations may
P1 be covered by different sets
of transitional provisions
1970-1989 P2
P3
P1 P2 P3
P1
Different portfolios may be
1990-2009 P2 covered by different sets of
transitional provisions
P3
P1 A B C
2010-2021 P2 There may be different sets

of modifications within the
P3 given transitional approach

Full retrospective approach steps
IFRS 4 IFRS 17
3
Recognize any resulting
Equity
Equity net difference in equity
Other
Other 1 Liab.
Liab.
Other Assets
Derecognize any existing

balances that would not exist
A had IFRS 17 always applied CSM
Assets
For example DAC, DIR, VOBA
Risk Adj.
2
B B
Identify, recognize and measure
each group of insurance contracts
as if IFRS 17 had always applied
C
C
DAC

Modified retrospective approach
Modified Retrospective Approach

Modified retrospective approach - Introduction
16 1 The objective of the modified retrospective approach
64
= 4
is to achieve the closest outcome to retrospective
application possible without undue cost or effort
Risk Adjustment
Cashflows A B C
Discount Rates CSM
D E F
• Use of the actual cashflows vs • Approximate discount rates • Use the Risk Adjustment at • Contracts without DPF:
projected cashflows curve vs exact calculation the Transition Date adjusted calculation of cumulative
• Ins. contracts identification • Two methods to determine for estimated Risk effect of CSM movements
and classification date the approximate discount Adjustment releases • Contracts with DPF:
• Cohorts with duration rates curve calculation based on the fair
exceeding 1 year value at the transition date

Cashflows modification
FULL Retrospective Projection

Approach
Transition
date or earlier
Actual Projection
MODIFIED Retrospective
Approach
Transition
date or earlier

Risk adjustment modification
FULL Retrospective
Approach
Transition date Transition

or earlier date
MODIFIED Retrospective
Estimated releases of
the Risk Adjustment
Approach
Transition date Transition

or earlier date

Discount rates modification
T-1 Average [A]-[B] spread IFRS 17 yield curve [A]

Based on T-1, T-2, T-3
Observable yield curve [B]
Average A-B spread [C]
Yield curve B adj. for C
T-2
Use observable curve yield curve if it Use observable yield curve adjusted for the
approximates well IFRS 17 yield curve average spread in relation to the IFRS 17
yield curve
T-3

CSM modification – Contracts without DPF
Coverage Units provided

CSMT
since the inception date
CSM0 (Transition)
(Initial)
CSM0 [CU Provided]

Accreted
Release to CSM0 x
interest
Revenue [CU Provided] + [CU Remaining]
Coverage Units remaining

CSM0 x { [1+r(0,1)] x [1+r(0,2)] x …. x [1+r(0,T)] -1 } at the transition date
or
CSM0 x { [1+r(T,1)] x [1+r(T,2)] x …. x [1+r(T,T)] -1 }
allowed if the cohorts modification applied

CSM modification – Contracts with DPF
Fair Value of underlying items
Fulfillment Cashflows Deduct
Charges to the policyholder prior to the transition

Add
(including amounts deducted from underlying items)
Payments made prior to transition that
Deduct
would not have varied with the underlying items
Estimated reduction in the Risk Adjustment
Deduct
prior to the transition
CSM at the Inception Date
CSM that relates to the period

Deduct
before the transition date
CSM at the Transition Date

MRA - other modifications
Default Treatment Modified Retrospective Approach
Identification of insurance groups

Determined at Determined at
Assessment against the VFA criteria
initial recognition date transition date
Identification of discretionary cash flows
Size of cohorts 1 year or less Cohorts can be bigger than 1 year
Cohort Locked-in discount rates initial recognition date Determined at transition date
simplifi-
Calculated retrospectively i.e. At nil or in case of contracts with DPF
cation OCI options
at each reporting date on cumulative basis calculated at the transition date
No At nil if financial assumptions changes have

cohort a substantial effect on the benefits
simplifi-
cation Calculated retrospectively i.e. PAA: Systematic allocation based on the discount rates at
OCI options
at each reporting date transition date instead of claim date
For contract with DPF equal to amount recognised in OCI

on underlying assets

Fair value approach
Fair Value Approach

Fair value approach - Introduction
Fair Fulfillment CSM or Loss Component at the Transition Date calculated

CSM
Value Cashflows as the difference between the fair value of a group of
insurance contracts and the fulfilment cash flows
PV of Future
Cashflows Fair
PV of Future
Value
Cashflows
Fair
Value Risk Adj.
Loss
CSM Risk Adj. Comp.

FVA - Insurance contracts issued
Risk Adjustment has always CSM has always credit

For insurance contracts issued: RA
credit (liability) balance
CSM
(liability) balance
RA
RA
PVCF
CSM
PVCF
PVCF
FV TP
CSM FV RA TP
FV TP
CSM
FV
FV
Loss
PVCF
PVCF
FV RA Loss
PVCF
TP
TP
TP Loss
RA
RA

FVA - Reinsurance contracts held
Risk Adjustment has always CSM CSM may have both credit
For reinsurance contracts held: RA
debit (asset) balance (liability) or debit (asset) balance
CSM
CSM
FV Re
FV Re
PVCF
FV RA Re CSM
CSM
PVCF
RA
PVCF
RA
RA RA
PVCF
CSM
PVCF
PVCF
CSM FV RA Re
FV Re FV Re CSM

FVA - Other modifications
Default Treatment FV Approach Modification
Identification of insurance groups
Identification of discretionary cash flows

Determined at
initial recognition date Determined at
Assessment against the VFA criteria
transition date
locked-in discount rate determination
PAA claims discount rates Determined at claim incurred date
Size of cohorts Cohorts should be 1 year or less Cohorts can be bigger than 1 year
OCI option application At nil or in case of contracts with DPF on

Calculated retrospectively i.e. at each
cumulative basis calculated
reporting date
at the transition date

Implementation considerations
Implementation considerations

IFRS 17 Target operating model
Implementation from the process perspective
Metho-
Systems Process
dology
Process 1
Ensuring the process complies

Implementing systems/tools
with the methodology

to support the process
IFRS 17 Target Operating Model
Sourcing data
Process 2
Process 3
Data Processes
Process 4
www.3blocks.co Introduction to IFRS 17 – Mar 2019

IFRS 17 High level solution design
Department 1 Department 2 Department 3 Department 4
System A Process P1 Process P3
System B Process P4
System C Process P2
System D Process P5 Process P6

Implementation approach
Impact Implementation
Methodology Solution design
assessment and testing
▪ Consider implications of ▪ Build prototypes models ▪ Ensure availability of ▪ Implement IT solution

gap analysis and identify for all major products data ▪ Check the data flow from
which areas are most ▪ Perform financial impact ▪ Decide on appropriate the source till reporting
important assessment external system or result
▪ Deep dive into specific ▪ Select options decide on internal ▪ Perform dry run
aspects of methodology ▪ Prepare position papers system calculations
▪ Identify points of / accounting policies ▪ Review processes to
decision (IFRS 17 leaves identify impacts from
▪ Consider operational
room for decision) IFRS
impacts

Solution design process
Methodology Methodology Consultation Business requirements documents

team papers with the auditor (needed if the solution design leaders do have
sufficient understanding of the requirements)
Impact
Impact
assessment
assess. team
Methodology Methodology
committee approval
Solution design
Solution
architecture Systems
Solution
design team Data
High level solution design
Processes
Solution design
Solution design decisions
committee

Teams
Project management and governance
External
Internal
Representatives of different operating entities
Actuaries
impact assessments
Accounting specialists
Prototyping and
Discount rates
Methodology
Transitional
adjustment
Accounting
movement
Analysis of
Cash flows
Allocation
Premium
and CSM
Testing
team
team
CSM
Risk
Business analysis
IT specialists
Testers

Project governance
Steering Committee Methodology Committee
Set goals and objectives for the IFRS 17 programme Monitor and control the management of IFRS 17
Approves the budgets and makes project strategic methodology deliverables
decisions (e.g. selection of the CSM solution) Review and challenge methodology proposals (e.g. use
Review the progress and technical content of the of the OCI option,
programme The Methodology Committee has the methodology
Escalates issues to the relevant bodies: Management decision making powers, approves proposed accounting
Board, Audit Committee, Risk/Capital Committee policies and methods
Working Groups Solution Design Committee

Working groups are set up across the programme to Monitor and control the management of IFRS 17
concentrate on specific topics (e.g. actuarial working solution design deliverables
group, accounting working group) The Solution Design Committee has the solution design
Working groups do not have decision making powers decision making powers, approves proposed IFRS 17
but they act as “think tanks” to apprise the proposed solution design papers)
solutions before they are passed to the Methodology or If required escalates the strategic solution design
Solution Design Committee decisions to the Steering Committee

IFRS 17 methodology sources
IASB meetings Industry

IFRS 17 IFRS 17 publications
standard papers
IFRS 17
TRG papers
Basis for
conclusions Industry
IFRS 17 groups
Illustrative
examples
Consultations
with advisors
IFRS 4 Solvency II

Methodology development
Deals with Sets out methodology for a given

interpretation Methodology area taking into account conclusions
questions Position form the position paper issues
Paper Paper
Flagging potential
interpretation issues Auditor’s Impact
Review Assessment
- Build prototypes models
for all major products
- Perform financial impact
assessment for tested
Approves the Design elements and options
proposed Authority
methodology

Impacts
Profits Revenue
Coverage Units
OCI option Transitional

methods (FRA,
MRA, FVA) Risk Adjustment
Method and
impacts
impacts
IFRS 17
IFRS 17
Discount Rates
method and calibration
Different options
calibration available within the
transitional methods
Expense
assumption
Justification of the
methodology
divergence from
rules on materiality Acquisition cost
grounds immediate
recognition option
Costs Equity

Prototype models
Prototype models
Using simple Excel spreadsheet with formulas (ensures visibility and

How they traceability)
are built? For typical / average policy
Using standard assumptions
Major cashflows
What do they Draft balance sheet and income statements
calculate? Liability and CSM calculations
To facilitate impact analysis

To perform financial impact assessment for options allowed under IFRS 17
Why use them?
To trigger discussion on accounting treatment
For education purposes (enhance understaning of IFRS 17)

Products matrix
Product matrix
the IFRS 17 implementation

First step and foundation of
Line of business / product
IFRS 17 portfolio
Solvency II HRG
Profitability
Ins. / Invesr. with DPF / Re. held
Contract boundary
Coverage period
IFRS 17 model: GM, VFA, PAA
Transitional CSM: FRA, MRA, FVA
Profitability profile
Portfolio

Data flow - without a central warehouse
Process without the central data warehouse
Process P1 Process P3
Process P4
Process P2

Data flow - with a central warehouse
Process with the central data warehouse
Process P1 Data Process P4

Warehouse

Processes
Processes with Reporting • IFRS 17 requires new reporting process

high impact from
IFRS 17
Budgeting, planning and forecasting • Budgeting and planning needs to be done
according to IFRS 17 metrics
• External communication of financial results
External communication will be more complex
• Materiality thresholds for internal control
Internal control and internal audit processes need to be redefined
Reinsurance strategy • Reinsurance impact on income statement will

be different
• Risk management metrics based on equity or
Risk management profits need to be adjusted
• Product requirements such as payback period
Pricing and product development and IRR need to be modified
Processes with
low impact from
IFRS 17 HR • Incentives schemes based on new metrics

IFRS 17 vs Solvency II
IFRS 17 vs Solvency II

Solvency II and IFRS 17 – Differences [1]
Solvency II IFRS 17
Goal Capital adequacy and risk management Show financial position and result for the
reporting period
Scope Assets and liabilities, own funds, capital Recognition, measurement, presentation and
requirements disclosure of insurance liabilities
Contracts covered All contracts giving rise to asset or liabilities (Re)insurance contracts issued, Reinsurance
contracts held, investments with DPF
Geographical coverage EEA i.e. the European Union plus Iceland, All insurance and reinsurance companies in
Liechtenstein and Norway the world reporting under IFRS
Acquisition cost Recognized immediately Recognized in systematic way over the

insurance period
Discounting Risk free rate with adjustments: matching adj., Risk free rate plus illiquidity adjustment
volatility adj., discount rate transitional
Initial gain Recognized immediately in P&L Initial gain recognized gradually over the
insurance coverage period

Solvency II IFRS 17
Contract beginning Earlier of the coverage period and policy date Earlier of the coverage period, first premium
due, the group becomes onerous
Contract end Unilateral right to terminate contract, amend Similar as SII however only insurance and
premiums or benefits financial risk considered
Short-term contracts No special treatment of short-term contracts Simplification allowed for short term contracts
Grouping Homogeneous Risk Groups Groups based on portfolio, profitability and

underwriting period
Risk Adjustment Cost of Capital method, applied only to the No method prescribed; RA applied to both
insurance liabilities insurance liabilities and reinsurance held
Unbundling Not required Distinct derivative, investment or service

components should be unbundled
Expenses Cashflow models include overhead expenses Cashflow models include only expenses that
relate directly to the ins. contract fulfilment

Solvency II IFRS 17
Reinsurance modeling Reinsurance modelling mirrors the related Reinsurance held and the related insurance
insurance contract calculations contract are modelled independently
Transition Possibility to apply transitional measures on Possible simplifications related to the

the TPs or TPs discount rates transitional CSM
Disclosures Disclosures focused on the solvency position Disclosures focused on explaining the financial
and risk management (QRT, SFCR, ORSA) position and result for the period
Contracts with DPF “Surplus Funds” defined in the UK regulations Does not regulate the country specific
excluded from the TPs elements, IFRS are principle based
Effective date 1 January 2016 1 January 2022 with an earlier

implementation option

Solvency II vs IFRS 17 – Balance Sheet
Solvency II IFRS 17 Spot the difference
Free Surplus
Shareholder equity
Own
Funds
SCR
MCR
Other Liabilities
Other Liabilities
Contractual
Service
Margin
Assets Risk Assets
Risk
Margin
Adjustment
Technical
Technical Provisions
Provisions
Best Best
Estimate Estimate
Liability Liability

Wrap-up
Wrap-up

Thank you
Pawel Wozniak
Director
pawel.wozniak@3blocks.co
tel. +44 7492 750133
London [UK]
Agnieszka Hupert
Manager
agnieszka.hupert@3blocks.co
tel. +48 79305 4440
Warsaw [Poland]

Appendix
Appendix

Unbundling
Embedded • Separate an embedded derivative if it is not closely related and a separate instrument
Financial
Inc/Exp
with the same terms as the embedded derivative would meet the definition of a
IFRS 9
derivatives
derivative;
• Account for the separated embedded derivative under IFRS 9 (FVTPL)
Investment • Separate a distinct investment component
Other Comp. Income

Financial Inc/Exp or
components • The component is distinct if it is not highly interrelated and could be sold separately in
IFRS 9 the same market
• The component is highly interrelated if it cannot be measured without considering the
other and the policyholder is unable to benefit from only one component.
• Account for the separated investment component under IFRS 9 (FVTPL, FVTOCI,
Amortised Costs)
Service • Separate a distinct service component i.e. promise to transfer goods or non-insurance
component services to a policyholder.
IFRS 15
Revenue
• The component is distinct if it is not highly interrelated and a policyholder can benefit
from the good or service on its own.
• Account for the separated service component under IFRS 15 (allocate revenue to the
service component and recognize it when the service is rendered)

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3Blocks ®

Introduction ……………………………………… 3 Onerous contracts …………………............. 80

www.3blocks.co Introduction to IFRS 17 – Mar 2019 2

www.3blocks.co Introduction to IFRS 17 – Mar 2019 3

What is wrong with IFRS 4

Insurance Contracts IFRS

Different levels of safety embedded in

Valuation of insurance liabilities does

www.3blocks.co Introduction to IFRS 17 – Mar 2019 4

First Exposure IFRS 17 Transition First IFRS 17

2010 2013 2017 2018 2019 2020 2021 2022 2023

Second Effective date

Drafting the new standard Implementation IFRS 17 reporting

www.3blocks.co Introduction to IFRS 17 – Mar 2019 5

Measurement models overview [1]

General Variable Fee Premium Allocation

Contracts linked to Short term contracts PVCF - Present

Insurance issued Insurance issued (*) measured using

www.3blocks.co Introduction to IFRS 17 – Mar 2019 6

Measurement models overview [2]

IFRS 17 scope: Insurance Risk No insurance Risk

Insurance Direct No Direct Direct No Direct

Investment contracts with Discretionary

www.3blocks.co Introduction to IFRS 17 – Mar 2019 7

Components of insurance liability

Revenue Expenses * Recognition of the loss component

www.3blocks.co Introduction to IFRS 17 – Mar 2019 8

Groups established at initial recognition and their

www.3blocks.co Introduction to IFRS 17 – Mar 2019 9

www.3blocks.co Introduction to IFRS 17 – Mar 2019 10

Insurance The General Model is a default

Fulfilment Cash Flows

Risk “+”, Risk Adj.

Contractual Initial and subsequent

www.3blocks.co Introduction to IFRS 17 – Mar 2019 11

Best estimate cash flows Best estimate of cash flows

Recognition Cashflow boundary

www.3blocks.co Introduction to IFRS 17 – Mar 2019 12

Insurance Insurance cash Top-Down Insurance Yield on the

Time value Duration mismatch adjustment 0.5%

Credit risk premium for unexpected losses (Cost of Downgrade) -0.5%

Risk Top-down IFRS 17 discount rate 4.0%

www.3blocks.co Introduction to IFRS 17 – Mar 2019 13

Insurance Liquid liabilities

www.3blocks.co Introduction to IFRS 17 – Mar 2019 14

Insurance Risk Adjustment calculation method not specified in the

www.3blocks.co Introduction to IFRS 17 – Mar 2019 15

CSM initial measurement [1]

www.3blocks.co Introduction to IFRS 17 – Mar 2019 16

CSM initial measurement [2]

www.3blocks.co Introduction to IFRS 17 – Mar 2019 17

CSM subsequent measurement

Insurance Contractual Service Margin

Opening Additions to Accreted Fulfilment Release to Closing

www.3blocks.co Introduction to IFRS 17 – Mar 2019 18

www.3blocks.co Introduction to IFRS 17 – Mar 2019 19

Confidence level techniques

Easy to communicate to users 15%

Calculated with reference to a „confidence level”

Value at Risk Conditional Tail Expectation

Lack of subadditivity (coherence) Superior mathematical properties (coherence)

www.3blocks.co Introduction to IFRS 17 – Mar 2019 20

Cost of capital method