Speaker Name & Country : Francesco Nagari, Global IFRS Insurance

Leader at Deloitte

Topic:
Insurance Accounting Transformation The journey of
Indian insurers towards IFRS 4 Phase I and Phase II
 The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
The lack of comparability and the often poor quality of current accounting
practices in the insurance industry around the world is clearly unacceptable.
Investors know it and the insurance industry itself knows it too and I am
happy to say the industry is very supportive of us creating a new Standard.
Everybody agrees it is urgent that we fix this as soon as possible. That is why
the IASB is determined to publish the Standard as soon as we can.

Hans Hoogervorst, IASB Chairman September 2016

2
 The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
IFRS 4 has been in use around the world since 2005
This has been referred to as the Phase I standard given its
publication kicked off the IASB project (Phase II) on their goal
to produce a comprehensive IFRS for insurance contracts
The Phase II standard is due to be published next year
IFRS 4 Phase II will become IFRS 17
Its mandatory effective date is expected to be chosen this
month
3
 The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
Scope and classification is mainly
IFRS 4 IFRS 17
set in IFRS 4

Classification of three transaction types

Three new categories of insurance
based on a risk transfer test and
contracts: non-par, indirect par and
presence of Discretionary Participation
direct par
Features
Unbundling of investment components
Scope exclusions
more rigorous
Unbundling of deposit components
New unbundling of service components
Bifurcation of embedded derivatives

The key issue to watch for from IFRS 4: substantial proportions of life insurance contracts (from 15% up to 50%) failed
the risk transfer test and moved to deposit accounting under IAS 39

4
 The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
Recognition and measurement
IFRS 4 IFRS 17
comprehensive requirements in IFRS 17 only

Grandfathering of non-IFRS accounting

Single new measurement model for all
policies (old Indian GAAP)
insurance contracts
Five minimum requirements: the
Building blocks approach (BBA)
Liability Adequacy Test (LAT) is the key
depicting a current fulfilment value of
one
the contract
IFRS 4 framework to incentivise change
Highly transparent and data intensive
in accounting policies

The key issue to watch for from IFRS 4: the LAT grandfathers non-IFRS LAT if it is based on current estimates of cash
flows including claims handling expenses and options and guarantees and recognises deficiency immediately in P&L. If
the non-IFRS LAT fails the use of IAS 37 Provisions will be required at portfolio level.
5
 The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
Principles
Total IFRS Insurance Liability
Measurement uses
current estimate
assumptions
Contracts are grouped by
similar profitability and
risk profile
Profit is measured and
reported based on the
entity-specific fulfillment
of obligations
Deferred profit absorbs
assumption changes
Discount rates based on
market interest rates
(currency, duration,
liquidity)
Expected profit from
participating contracts is
revalued based on asset
sharing
Measured at inception as the Measured as the
expected contract profit to be difference between the
Block 4: earned as services are fulfilled. It is risk-adjusted present
Contractual Service Margin adjusted for future assumption value of expected inflows
changes and outflows at
inception.
Fulfilment cash flows
An assessment of the uncertainty
Block 3: about the amount of future cash
Risk Adjustment flows
Probability-weighted
Block 2: An adjustment that converts estimate of cash
Time Value of Money future cash flows into current inflows and outflows
amounts that will arise as the
entity fulfils the
Block 1: contract.
Expected Future Expected (probability-weighted)
Cash Flows
cash flows from premiums and
(unbiased probability
claims and benefits
weighted mean)
6
 The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
Presentation requirements for life insurers
IFRS 4 IFRS 17
are transformed in IFRS 17
Most general insurance contracts can
Presentation requirements mainly follow a shortcut method to the BBA for
grandfather the existing policies the liability before claims are incurred
Prohibition to net reinsurance (Premium Allocation Approach)
purchased with reinsured liabilities and Insurance revenue and expenses are
P&L calculated from balance sheet
Shadow accounting policy choice movements with disaggregation of any
moves interest volatility out of P&L investment component
OCI solution for interest rate volatility
The key issue to watch for from IFRS 4: the major impact on presentation from IFRS 4 adoption was caused by contracts
falling outside IFRS 4 (investment contracts without DPF) for which premiums were no longer reported in P&L and were
moved to deposit accounting under IAS 39 / IAS 18
7
 The journey of Indian insurers towards
IFRS 4 Phase I and Phase II

Source: IASB presentation, October 2015 8

 The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
Disclosure is heavy in IFRS 4 and heavier in
IFRS 4 IFRS 17
IFRS 17
Meticulous identification of IFRS 4
Extensive quantitative disclosures based
assets, liabilities, income and expenses
on roll forward tables and reconciliation
Extensive explanation of accounting
tables between balance sheet, P&L and
policies, assumptions and changes year
cash flow statement
on year
Each building block is disclosed
Sensitivity analyses for insurance and
separately
financial risks, concentration statistics
Risk disclosures in IFRS 4 retained and
for all risks and ten year loss
expanded
development tables (five years on FTA)
The key issue to watch for from IFRS 4: all disclosure requirements must be complied with figures that show the
disclosed amount before and after the effect of reinsurance purchased (e.g. loss development tables should be before
and after the effect of reinsurance)
9
 The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
Transition to a new IFRS for insurance will
IFRS 4 IFRS 17
only take place with IFRS 17

Full restatement approach

Three hierarchically sequenced
Limited impact methods: full restatement, simplified
Some relief on disclosure restatement approach and fair value
approach
Lots of data mining for life insurers

The key issue to watch for from IFRS 4: the real impact on transition is that insurance liabilities do not change under IFRS
4 but all other assets and liabilities change with the adoption of IFRS. The interaction with financial assets accounting is
particularly important.
10
The journey of Indian insurers towards
IFRS 4 Phase I and Phase II

11
 The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
The transition to IFRS 4 will be demanding on all other areas of
the balance sheet and for those contracts falling outside IFRS 4
grandfathering rule
IFRS 17 will cause an expensive
transition
The benefits will be transparency
and consistency globally for the
insurance sector with lower cost
of capital
12
 The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
Francesco Nagari
Deloitte Global IFRS Insurance Leader
+852 2852 1977
fnagari@deloitte.co.uk

@Nagarif

Deloitte Insights into IFRS Insurance (i2ii)

www.deloitte.com/i2ii
Deloitte IFRS Insurance Centre of Excellence
IFRS17@deloitte.com.hk

13
About Deloitte Global
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (DTTL), its network
of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL
(also referred to as Deloitte Global) does not provide services to clients. Please see www.deloitte.com/about for a more detailed
description of DTTL and its member firms.

Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients
spanning multiple industries. Deloitte serves four out of five Fortune Global 500 companies through a globally connected network of
member firms in more than 150 countries bringing world-class capabilities, insights, and high-quality service to address clients most
complex business challenges. To learn more about how Deloittes approximately 225,000 professionals make an impact that matters,
please connect with us on Facebook, LinkedIn, or Twitter.

About Deloitte in Greater China

We are one of the leading professional services providers with 24 offices in Beijing, Hong Kong, Shanghai, Taipei, Changsha, Chengdu,
Chongqing, Dalian, Guangzhou, Hangzhou, Harbin, Hefei, Hsinchu, Jinan, Kaohsiung, Macau, Nanjing, Shenzhen, Suzhou, Taichung,
Tainan, Tianjin, Wuhan and Xiamen in Greater China. We have nearly 13,500 people working on a collaborative basis to serve clients,
subject to local applicable laws.

About Deloitte China

The Deloitte brand first came to China in 1917 when a Deloitte office was opened in Shanghai. Now the Deloitte China network of
firms, backed by the global Deloitte network, deliver a full range of audit, tax, consulting and financial advisory services to local,
multinational and growth enterprise clients in China. We have considerable experience in China and have been a significant
contributor to the development of China's accounting standards, taxation system and local professional accountants. To learn more
about how Deloitte makes an impact that matters in the China marketplace, please connect with our Deloitte China social media
platforms via www2.deloitte.com/cn/en/social-media.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their
related entities (collectively the Deloitte Network) is by means of this communication, rendering professional advice or services.
None of the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this
communication.

2016. For information, contact Deloitte China.