Interaction between ifrs 17 and rbc
- 2. WOODGROVE BANK AGENDA • Background • RBC • IFRS 17 • Objectives of IFRS 17 and RBC • Interaction of IFRS 17 and RBC • Using RBC to implement IFRS 17 • Way Forward 2
- 3. WOODGROVE BANK INTRODUCTION The Good..? • IFRS 17 will represent a significant change to insurance accounting, requiring insurers to revamp financial reporting practices and financial statements. • RBC standard incorporates consistent valuation principles for assets and liabilities, a definition of qualifying capital resources and a risk-based capital requirement. • RBC and IFRS 17 will promote effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability. 3
- 4. WOODGROVE BANK RBC Risk Based Capital Standard • Risk Based Capital (RBC) is the capital that should be held by an insurer considering its size and risk profile • RBC provides a holistic approach to risk management 4 “Regulatory capital requirements at a sufficient level so that, in adversity, an insurer’s obligations to policyholders will continue to be met as they fall due”
- 5. WOODGROVE BANK Liabilities Assets Liabilities Unexpected Losses Expected Losses Total Assets Regulatory regimes aim to have assets sufficient to satisfy projected obligations (expected and unexpected) over a specified time horizon and within a specified confidence level Required Capital Free Assets Total capital and surplus RBC
- 6. WOODGROVE BANK BASIC CONCEPT OF IFRS 17 6
- 7. WOODGROVE BANK BASIC CONCEPT OF IFRS 17 7 • Current Practice • New Method
- 8. WOODGROVE BANK OBJECTIVES OF RBC & IFRS 17 8 Improve global comparability provide more consistent information, allowing users to compare results and trends Relevance Financial information presented by an entity is relevant and faithfully represents the true underlying financial position and performance Transparency Presentation and disclosure requirements will enhance transparency and give users a better understanding of the sources and trends of earnings
- 9. WOODGROVE BANK INTERACTION BETWEEN IFRS 17 & RBC 9 BothRBCandIFRS17 • Probability- weighted estimate of the future cash flows, • The time value of money and • An additional allowance for risk IFRS17 • An additional contract liability known as the contractual service margin (‘CSM’) is included to eliminate any gain on day one RBC • No equivalent concept to the CSM in RBC Measurement Models
- 10. WOODGROVE BANK INTERACTION BETWEEN IFRS 17 & RBC 10 Measurement of Contracts • Depends on their classification as either insurance or investment. The level of insurance risk transferred to the insurer and the definition is broadly unchanged from current IFRS 4 • Non-participating investment contracts(pure unit-linked savings) contracts, are subject to the IFRS financial instruments and revenue standards IFRS 17 • RBC capital charges for insurance risk depend on their classification • The treatment of capital necessary for investment products is different from insurance products RBC
- 11. WOODGROVE BANK INTERACTION BETWEEN IFRS 17 & RBC 11 Discount Rate ‘Top-down’ or ‘bottom-up’ reflecting the characteristics of the liability. IFRS 17 Prescribed based on matching and volatility adjustment RBC The volatility adjustment is not a feature of the liabilities so is unlikely to apply in IFRS Difference
- 12. WOODGROVE BANK HOW DO WE DETERMINE DISCOUNT RATE TO BE USED? 12 IFRS 17 requires the discounting of cash flows to allow for financial risks, where they are not reflected in the cash flows already.
- 13. WOODGROVE BANK INTERACTION BETWEEN IFRS 17 & RBC 13 Allowance for Risk – Risk Margins No prescribed method. Company’s own view of the compensation required for uncertainty arising for non-financial risks (only). IFRS 17 Gross of reinsurance. IFRS 17 Prescribed with defined risks, level of diversification benefit and other components. RBC Net of reinsurance. RBC Risk Adjustment: “The compensation the insurer requires for bearing the uncertainty about the amount and timing of the cash flows that arise as the entity fulfils the insurance contract
- 14. WOODGROVE BANK HOW TO MEASURE RISKADJUSTMENT – IFRS 17 14
- 15. WOODGROVE BANK HOW TO MEASURE RISKADJUSTMENT - RBC 15
- 16. WOODGROVE BANK 16 WHICH WAYFORWARD? Both regimes are based on a probability- weighted estimate of the future cash flows Plus an allowance for the risk Discounted at an appropriate interest rate You make the best use of existing RBC systems and processes to ensure smooth and efficient a transition to IFRS 17 There is therefore significant opportunity to use the same cash flow models for both RBC and IFRS 17, potentially with some changes
- 17. THANK YOU Elias Omondi +254 722 909 664 eomondi@ira.go.ke ; omondieliaso@gmail.com www.ira.go.ke