Miranjit Mukherjee - Actuarial Society of India

TATA AIG GENERAL INSURANCE
COMPANY LTD
IFRS 4 / IND AS 104 – As applicable to
General Insurance Companies
MIRANJIT MUKHERJEE
1 1- 1 -

AGENDA
1. Background of IFRS 4
2. Background of IND AS 104
3. What is IFRS 4 / IND AS 104
4. Recognition and measurement under IND-AS 104
5. Insurance Contracts
6. Examples of Insurance Contracts
7. Liability Adequacy test and examples
8. Disclosures principles and summary
9. Comparison of IND AS 104 vs current requirements
10. Balance Sheet – IND AS 104
11. Additional disclosures under IND AS 104
12. Key issues for implementation
13. Impact of IND AS 104 / IFRS on general insurers
14. Terms Used
2

IFRS 4 – Phase I – BACKGROUND
April 2001
Comprehensive insurance contracts project carried over
from IASC to new IASB
May 2002
Short-term insurance contracts project split off from
comprehensive project
July 2003
Exposure Draft ED 5 Insurance Contracts
31 st Mar 2004
IFRS 4 Insurance Contracts
1 st Jan 2005
Effective date of IFRS 4
3

IND AS 104 – BACKGROUND
2009
IRDA issues exposure draft on IFRS Compliance
2010
Exposure Draft AS 39 on Insurance Contracts
25 Feb 2010
MCA notifies 35 IFRS (IND AS) incl IND AS 104
1 April 2012
Insurance cos prepare opening bal sheet as per IND AS
Date - ?
Preparation of opening bal sheet as per IND AS
4

WHAT IS IFRS 4 – PHASE I – IND AS 104
Interim standard - focused primarily on disclosures and classification of
insurance contracts.
Introduces a definition for an insurance contract based on the contract
containing significant insurance risk.
Required only limited changes to existing accounting practices for insurance
contracts and extensive disclosures.
IFRS 4 does not affect the business fundamentals since there is
‣ No change in the underlying transactions
‣ No change in real cash flow
5

RECOGNITION AND MEASUREMENT UNDER IND AS 104
In most respects, IND AS 104 allows an entity to continue to account for insurance contracts
under its previous accounting policies.
However, the standard makes some limited improvements to accounting for insurance
contracts
Liabilities only on existing contracts : Catastrophe provisions and equalization provisions are
not permitted. They are not liabilities.
Liability Adequacy Test : The adequacy of insurance liabilities must be tested at the end of
each reporting period. The liability adequacy test is based on current estimates of future cash
flows. Any deficiency is recognized in profit or loss.
Impairment testing : Furthermore, reinsurance assets are tested for impairment.
No offsetting : Insurance liabilities are presented without offsetting them against related
reinsurance assets.
No offsetting : Insurance expense or income against related reinsurance income or expense.
6

INSURANCE CONTRACTS
IND AS 104 covers insurance contracts
It applies to insurance contracts where policy holders pass insurance risk to insurance companies
OR where insurers pass insurance risk to re-insurers
What is an insurance contract
In the contract one party accepts significant insurance risk from another party
The party accepting insurance risk agrees to compensate the policy holder
If a specified uncertain future event affects the policyholder
What is an insurance risk
The risk in the contract must be insurance risk, which is any risk except for financial risk
This specified uncertain future event is known as the “insured event” while the uncertain future event
that is covered by an insurance contract creates “insurance risk”.
Uncertainty
Uncertainty is the essence of an insurance contract . At least one of the following is uncertain at the
inception of the contract :
Whether an insured event will happen
When will it occur
How much the insurer needs to pay
7

INSURANCE CONTRACTS
Insurance Contract
Insurer accepts Insurance Risk
Significant Risk
Insurer accepts Significant Risk
No numerical range fixed for what is significant risk
Meaning of significant : Payment of significant additional benefit
Another Party
Insurer must accept risk from another party .
Insurer must be separate from the policy holder .
Accordingly self insurance is not an insurance contract as per IND AS 104
8

SIGNIFICANT INSURANCE RISKS
INSURANCE RISK
The underlying tenet behind insurance transactions.
The purpose of this action is to take a specific risk, which is detailed in the insurance
contract, and pass it from one party who does not wish to have this risk (the insured) to a party
who is willing to take on the risk for a premium (the insurer).
RISK TRANSFER
Underwriting risk
Risk transfer
Conditions
Timing Risk
Amount Risk
9

INSURANCE CONTRACTS
Significant insurance risk
Insurance Contract
Contract
Insignificant insurance risk
Investment Contract
NB : IFRS 4 applies to insurance contracts not to insurance companies
10

EXAMPLES OF INSURANCE CONTRACTS - IND AS 104
Insurance contracts covered
Contracts to be excluded
Theft / Damage to property
Product / Professional Liability
Accident and Health
Marine
Engineering
Product Warranty ( excl issued
by manufacturer / dealer / retailer )
Title Insurance
Travel Insurance
Reinsurance Contracts
Self Insurance
Credit related guarantee
Weather derivative
Catastrophic Bonds
11

LIABILITY ADEQUACY TEST
Must assess at each reporting date whether recognised insurance liabilities are adequate
based on current estimates of future cash flows under insurance contracts.
The assessment must use current assumptions and consider all contractual cash flows.
If existing accounting policies include an assessment that meets
the specified minimum requirements, no further action required.
If not ?
If no sufficient assessment, the carrying amount of the liability must
be tested and, if necessary increased
12

HOW DO YOU CARRY OUT LIABILITY ADEQUACY TEST
If the present value of the expected cash flows arising out of future claims exceeds the
unearned premium liability then the unearned premium liability is deficient . The recognized
deficiency has to be recorded in the income statement .
This should not be an issue in India as insurers are already required to create a
premium deficiency in their accounts in the current accounting principles .
13

EXAMPLES OF LIABILITY ADEQUACY TESTS
Royal Sun Alliance
At each balance sheet date an assessment is made of whether the provisions for unearned premiums are adequate.
A separate provision is made, based on information available at the balance sheet date, for any estimated future
underwriting losses relating to unexpired risks. The provision is calculated after taking into account future investment
income that is expected to be earned from the assets backing the provisions for unearned premiums (net of deferred
acquisition costs). The unexpired risk provision is assessed in aggregate for business classes which, in the opinion
of the directors, are managed together.
Zurich
A provision should be made for unexpired risks where the expected value of claims and expenses attributable to the
unexpired periods of policies in force at the balance sheet date exceeds the unearned premiums provision in relation
to such policies after the deduction of any deferred acquisition costs. The need for an unexpired risk provision has
been considered separately by reference to classes of business that are managed together, after taking into account
the relevant investment returns. An unexpired risk provision was not found necessary for any business classes and
therefore a provision is not raised in the accounts.
SCOR RE
For the Non Life segment the test is performed in the event the ultimate underwriting combined ratio is in excess of
100% to the unearned premium reserve net of deferred acquisition costs . The liability adequacy test is performed on
the level of the actuarial segment and then aggregated at the entity level .
14

PRINCIPLES OF DISCLOSURES UNDER IFRS 4
Disclosure is particularly important for information relating to insurance
contracts, as entities can continue to use local GAAP accounting policies for
measurement.
IFRS 4 has two main principles for disclosure.
‣ Entities should disclose information that identifies and explains the
amounts in its financial statements arising from insurance contracts.
‣ Information that enables users of its financial statements to evaluate the
nature and extent of risks arising from insurance contracts.
15

SUMMARY OF DISCLOSURES REQUIRED UNDER IFRS 4
Information that helps
users understand the
amounts in the financial
statements arising from
Insurance contracts
Accounting policies for insurance contracts
Recognized Assets , Liabilities , Income, Expenses and
Cash Flows arising from these contracts
Assumptions that impact value of Assets , Liabilities , Income
and Expenses
Historic claims development ( loss development triangle )
Nature and extent of risks
arising from Insurance
contracts
Risk management policies and objectives
Information about insurance risk sensitivity and
concentration
Information about credit risk, liquidity risk and market risk
16

EXISTING ACCOUNTING REQUIREMENT VS IND AS 104
ISSUE EXISTING AS PER IND AS / IFRS Ref
1 Financials Revenue A/cs , P/L , B/S , Cash Flow , Notes Income Stat , B/S , SOCE , Cash Flow, Disclosures , Notes
2 Format As laid down by Insurance Act / Regulations No specified format
3 Segments Fire , Marine and Miscellaneous Criteria specified + those reviewed by decision makers 108
4 DAC Not permitted by Regulations IND AS 104 takes reference to DAC 104
5 Investments Debt instruments (HTM ) / Equity (MTM) FVTPL ( MTM ) / HTM / AFS ( MTM )
6 UEPR Minimum as per Sec 64V of Insurance Act As per Liability Adequacy Testing ( LAT ) 104
7 UEPR Fire , Marine and Miscellaneous As per Liability Adequacy Testing ( LAT ) 104
8 LAT Premium Deficiency specified by IRDA circular As per IND AS 104 104
9 Solvency Workings as per Insurance Act / Regulations Not clear .
10 Disclosures Disclosures as laid down by Regulations . Detailed disclosures laid down for Insurance transactions / Risks 104
No disclosures on risks
17

BALANCE SHEET UNDER IND AS 104 / IAS 39
Investments
Deferred Tax Asset
Fixed Assets
Cash and Bank Balances
Advances and Other Assets
Reinsurance share of insurance liab
ASSETS
Reinsurers
recovery have
to be shown
separately
Share Capital
Reserves and Surplus
Fair Value Change Account
Borrowings
Deferred Tax Liability
Insurance Liabilities - gross
Other Liabilities & provisions
LIABILITIES
Insurance
Liabilities have
to be Grossed
up
INVESTMENTS - EXISTING VALUATION INVESTMENTS - IND AS VALUATION
Debt Instruments Amortised cost Fair value through P&L MTM
Equity Shares MTM Held to Maturity Amortised cost
Available for Sale
MTM
18

ADDITIONAL DISCLOSURES UNDER IND AS 104
Section on Risk Management
Insurance Risk ( underwriting risk / concentration risk )
Financial Risk
Market Risk ( Interest rate / Currency / Equity )
Credit Risk
Liquidity Risk
Operational Risk
Capital Management
Liability Adequacy Test
Impairment of Reinsurance Assets
Loss development triangle
19

KEY ISSUES THAT NEEDS TO BE ADDRESSED
Start date
Date for the opening balance sheet needs to be fixed
Amendment
Amendment required to the Insurance Act / Regulations
F. Statements As per IND AS or existing basis or both
Solvency
Based on existing regulations or IND AS
20

IMPACT OF IND AS 104 / IFRS ON INDIAN GEN INSURERS
Ins Contracts
Not very significant
Disclosures
Significant effort during the earlier years of implementation
Investments
Accounting and measurement would have a big impact
LAT
Segment wise LAT would impact solvency
Op Segments
Companies monitor performance on their chosen segments
Solvency
Would be impacted by Investments measurement / LAT
21

TERMS USED
MCA : Ministry of Corporate Affairs
DAC : Deferring of acquisition costs
LAT : Liability Adequacy Test
URR : Unexpired Risk Reserve
HTM : Held to Maturity
MTM : Mark to Market
AFS : Available for Sale
SOCE : Statement of Change in Equity
B/S : Balance Sheet
22