IFRS 17 – VFA and PAA

15 November 2019
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Disclaimer

The views expressed in this presentation are

those of the presenter(s) and not necessarily
of the Society of Actuaries in Ireland or of
their employers.
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Competency Framework

Resilience

Attributes
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IFRS 17 working groups – current members

Life WG Non-life WG
Aidan Murphy Cecilia Cheuk (chair)
Aileen Murphy Darragh Pelly
Andrew Kay Deirdre O’Brien
Caroline Lynch Joanne Lonergan
Ciara Fitzpatrick
David MacCurtain
Francis Furey
Miriam King
Niall Naughton (chair)
Paraic Byrne
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Previously Covered

Slides and podcasts

• Introduction: https://web.actuaries.ie/events/2018/10/introduction-ifrs17
• GMM: https://web.actuaries.ie/events/2019/02/deeper-dive-ifrs17

Topics
• Scope of IFRS 17
• Contract classification (significant insurance risk transfer)
• Unbundling (distinct components?)
• Aggregation (profitable vs onerous contracts, portfolio groupings)
• Measurement models (Overview of GMM, PAA, VFA)
• GMM (PV of Future Cashflows, Risk Adjustment, Contractual Service Margin, Profit Emergence)
• Reinsurance (inward (“issued”) vs outward (“held”) reinsurance)
• Transition (full retrospective, modified retrospective or fair value approach)
• Presentation and disclosures (amounts, judgements and risks)
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Abbreviations
AoC Analysis of change IASB International Accounting Standards Board
Modified retrospective application (on
BBA Building Block Approach MRA
transition)
BEL Best estimate liability OCI Other comprehensive income
BoP Beginning of period PAA Premium Allocation Approach
CoA Chart of accounts RA Risk Adjustment
CoC Cost of capital RM Risk margin under Solvency II
CSM Contractual Service Margin SII Solvency II
European Financial Reporting Advisory
EFRAG TRG Transition Resource Group
Group
EoP End of period UoA Unit of account
GMM General Measurement Model (GMM) VFA Variable Fee Approach
FCF Fulfilment cash flows YE Year-end
Full retrospective application (on
FRA
transition)
FVA Fair value approach (on transition)
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Agenda

• Introduction
– Timeline
– Previously covered
– Recap of Which Measurement Model When
– Recap of GMM (including concepts not modified for VFA)
• IFRS 17 Variable Fee Approach
• IFRS 17 Premium Allocation Approach
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Expected timeline to go-live for IFRS 17

2017 2019 2020 2021 2022 / 2023?

Q2
Standard
issued IASB
18 May re-
2017 deliberation

ED
published

Final
Consultation and standard
re-deliberation mid 2020?
Future Transition Resource Group
(TRG) meetings to be confirmed
(if any)
EFRAG Proposed
1st QE
endorsement EU process Effective
results: 31
advice date: 1 Jan
March 2022
2022 /
Standard endorsed? / 2023?
2023?

Key: IASB process EU endorsement process

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Which Measurement Model When?

IFRS 17 Measurement Models

Modifications to the General Measurement Model

General Measurement
Model Variable Fee Approach Premium Allocation Approach
(mandatory) (optional)
(Ins. Contracts with Direct Participation Features) (Liability for remaining coverage)

• Default approach MUST be used, if at inception* of

contract : MAY be used, if at inception of
group:
• Used at transition (i) Policyholder contractually
& live/production participates in clearly identified (i) not differ materially to GMM
pool of underlying items;
or
• Both life & &
general insurance (ii) Policyholder receives (ii) coverage period of group is
substantial share of the returns max one year. (Many GI
• (aka “BBA”, on the underlying items; contracts; possibly annual
& renewable life contracts.)
Building Blocks
Approach) (iii) Changes in policyholder (Note other preferences may also
benefits substantially vary with impact on decision here.)
the change in underlying items.
* For transition business this varies
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Which Model When – Likely Product Types

IFRS 17 Measurement Models

Modifications to the General Measurement Model

General Measurement
Model Variable Fee Approach Premium Allocation
(mandatory) Approach (optional)
(Ins. Contracts with Direct Participation Features) (Liability for remaining coverage)
Long term business
“Life” examples • Unit linked (UL) • Short term general insurance
• Variable annuity (VA) & equity business
• Whole of life
index-linked contracts • Short term life and certain
• Term assurance
• Continental European 90/10 group contracts
• Protection
contracts
• Annuities
• UK with profits contracts
• Reinsurance written
• Unitised with profits
“Non-Life” examples
• Multi-year motor Judgements re possible breaches of VFA Judgements re possible breaches of PAA
requirements: requirements:
• Warranty cover • For VA, guarantee aspects. • For annual renewable business,
• Certain types of Loss whether guarantee at renewal date
• For UL, if death benefit sufficient to
Portfolio Transfers / justify insurance contract treatment.
Adverse Development
Cover • European “formulaic with profits”
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Recap - General Measurement Model

• General Measurement Model (GMM) determines the insurance contract liability via
component building blocks.
Insurance Contract
Liability
• Expected PV of Fulfilment Cash
cashflows: premiums,
Flows (FCF)
claims, benefits,
expenses etc Present value of
future cash flows
(PVCF)

• Expected profit,
Risk adjustment (RA) earned as services
provided.
• Adjusted for changes
in non-financial
• Entity specific variables
assessment of • Locked-in discount
uncertainty re amount rate
and timing • If negative, “Loss
Component”

Contractual Service
Margin (CSM)
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Present Value of Future Cashflows - Overview

Insurance Contract
Liability Expected Future Cashflows:
• Based on current estimates
Fulfilment Cash • Probability weighted
Flows (FCF)
• Unbiased
Present value of • Stochastic modelling where required for
future cash flows
(PVCF) financial options and guarantees

Risk adjustment (RA) Time Value of Money

• Adjustment to convert the expected future
cashflows into current values

Expected Future Cashflows should:

Be within the boundary of the contract
Relate directly to the fulfilment of the contract
Contractual Service
Margin (CSM) Include cashflows over which the entity has
discretion
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Which Cashflows?
Examples of cashflows to include:
• Claims and benefits paid to policyholders, plus associated costs
• Surrender and participating benefits
• Cashflows resulting from options and guarantees
• Costs of selling, underwriting and initiating that can be directly attributable to a
portfolio level
• Transaction-based taxes and levies
• Policy administration and maintenance costs
• Some overhead-type costs such as claims software, etc.
• Costs incur in providing an investment-return service or investment-related service
• Adjustment to convert the expected future cashflows into current values

Cashflows excluded:
• Investment returns
• Payments to and from reinsurers
• Cashflows that may arise from future contracts
• Acquisition costs not directly related to obtaining the portfolio of contracts
• Cashflows arising from abnormal amounts of wasted labour
• Other general overhead
• Income tax payments and receipts
• Cashflows from unbundled components
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Attributable Acquisition Expenses

• All directly attributable acquisition expenses that can be allocated to the individual insurance
contracts (or group) are included in the CSM calculations.
• Includes also costs that cannot be attributed directly to individual insurance contracts (or group) but
are in the portfolio – should be allocated on a rational and consistent basis
• Asset / liability set up for costs paid/received before group’s coverage period begins

EXAMPLES
• Examples: External Commissions, Sales bonuses, Salary of sales team, Overhead of sales department
• Acquisition costs that are not considered directly attributable to a portfolio of contracts would be
expensed when they are incurred in profit or loss.

WHEN RECOVERABILITY TESTING DOES NOT APPLY

• Generally no recoverability testing before initial recognition of group
• Implicit recovery testing through CSM calculation, if CSM < 0 then loss is recognised in P&L.

WHEN RECOVERABILITY TESTING DOES APPLY

• Development from January 2019 IASB – if acquisition costs incurred relate to cash flows outside
contract boundary (e.g. future renewals), maintain asset for costs related to future renewals.
• Need to assess recoverability of asset each period until associated renewals recognised.
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Contract Boundaries
Is the cash flow in the boundary of an insurance contract?

No Policyholder obliged to pay related premiums? Yes

OR

Practical ability to reprice risks of the particular policyholder to

Yes
reflect the risks?
OUT

No

IN
Practical ability to reprice portfolio of contracts to reflect the risks? No

Yes

No Premiums reflect risks beyond the coverage period? Yes

Criteria differs to Solvency II and hence contract boundary could differ particular instances:
“Even though Solvency II uses slightly different wording than IFRS 17 to express the objective,
one cannot expect material differences to the resulting contract boundaries, other than in
circumstances where the insurer has the legal right to reprice the premium for the re-assessed
risk, but can reasonably justify the insurer does not have the practical ability to reprice.”
EIOPA’s analysis of IFRS 17 Insurance Contracts, October 2018
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Discounting

Market Consistency:
• IFRS 17 requires insurers to use fair value and market-consistent approaches to
liability valuations as the basis for reporting their accounts.
• Stochastic modelling approaches may be applicable for certain types of
contracts
• Careful consideration required in constructing the discount rates.
• Two approaches:
– “Top-Down”
– “Bottom-Up”
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Risk Adjustment – Concept

Insurance Contract
Liability

Fulfilment Cash
Flows (FCF)
The risk adjustment is the compensation that the
entity requires for bearing the uncertainty about
Present value of
future cash flows the amount and timing of the cash flows that arises
(PVCF) from non-financial risk.

Risk adjustment (RA) • Range of possible outcomes versus a fixed

cashflow with same NPV are equal

• Entity’s internal view of non-financial risk

Contractual Service
Margin (CSM)
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Risk Margin vs. Risk Adjustment

Solvency II Risk Margin IFRS 17 Risk Adjustment

Market plus regulatory Entity plus financial statements

Prescribed calibration at 99.5% confidence

No prescribed calibration but must be disclosed
interval

Based on the Solvency II cost of capital method No prescribed method

The cost of capital rate used is prescribed by

The cost of capital rate used is not prescribed
EIOPA

Group diversification may be permitted for solo

No group diversification for solo entity
entity

Separately for primary insurance and reinsurance

Net of reinsurance basis
contracts held

Only insurance risks, lapse risk and expense

All the NH risks
risks
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Risk Adjustment Approaches

• The Risk Adjustment is calculated as the discounted value of future capital for
Cost of
non-financial risk at required confidence interval multiplied by the company’s
Capital
internal cost of capital.

• Value at Risk (VAR) calculates the expected loss on a portfolio at a specified

Value at
confidence level. This value less the discounted value of best estimate
Risk
cashflows gives the Risk Adjustment.

• Tail VaR (TVaR) calculates the average expected loss on a portfolio given the
Tail Value at
loss has occurred above a specified confidence interval. This value less the
Risk
discounted value of best estimate cashflows gives the Risk Adjustment.

Provision • Cashflows revalued using padded non-financial assumptions calibrated to

for Adverse reflect the company’s risks and chosen confidence level. The risk adjustment
Deviation is the difference between this and the best estimate.
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Contractual Service Margin – Concept

Insurance Contract
Liability New concept under IFRS 17 – profit deferral
mechanism measured at a “group” level
Fulfilment Cash
Flows (FCF)
• Requirements of the GMM and the VFA are the
Present value of
future cash flows
same on initial recognition
(PVCF)
• Offsets initial risk adjusted profits (excluding
Risk adjustment (RA) non-attributable expenses)

• Reduced over time to provide steady release of

profits into P&L in line with service provided

• Absorbs changes for group profitability related

Contractual Service
to future service (e.g. basis changes)
Margin (CSM)
• Cannot offset losses*, those hit P&L but
recorded and tracked by a Loss Component
*Except for Reinsurance Held
Loss Component
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CSM – Not a seriatim calculation

• CSM calculated for a “Group”
Group of Insurance Contracts
Portfolio Annual
(Similar risk & Profitability
managed (3 types) cohorts
together) (or shorter)

• Cash flows and risk adjustment measured for contracts in a group

and combined to give risk adjusted profit for group

CSM generated for group

Total profit for group
• CSM generated for the group to offset
risk adjusted profit
• Added complexity where products
contain guarantees that apply at a
multiple group level

Contract 2
Key point: CSM is not a policy level
Contract 1

concept. Calculated and measured for

a group of contracts, not for a single

Contract 3
contract.
 Systems development implications
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Agenda

• Introduction
• IFRS 17 Variable Fee Approach
– Eligibility Criteria
– Contractual Service Margin
– Profit Emergence & Illustrative Example
– Risk Mitigation Exception
• IFRS 17 Premium Allocation Approach
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Variable Fee Approach – Eligibility Criteria

• Developed to address concerns of artificial volatility in the P&L under the GMM approach for
insurance (ie contain significant insurance risk) contracts with payments that vary with return
on underlying items.
• Application is not optional, the requirements to classify an insurance contract as one with
direct participation features are prescribed (more on next slide).
The conditions for VFA eligibility ensure that:
Entity’s obligation to the policyholder is the net of:
(a) Obligation to pay an amount equal to the fair value of the underlying items; &
(b) A variable fee the entity will deduct from (a) in exchange for future service provided comprising:
(i) amount of entity’s share of fair value of he underlying items; less
(ii) fulfilment cash flows that do not vary based on returns on underlying items
• Reinsurance contracts issued or held cannot be insurance contracts with direct participation
features
• Risk mitigation provides option to report changes in embedded guarantees in P&L if certain
criteria and documentation requirements are met.
• Some accounting policy choices for the presentation of financial statements under VFA and
specific disclosure requirements including for example fair value of underlying, impact of risk
mitigation.
• Note on IFRS 17 Scope:
– IFRS 17 applies to investment contracts with discretionary participation features, provided the entity
also issues insurance contracts. While assessment of VFA criteria would then be required, may generally
expect the nature of such contracts would meet the VFA criteria.
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Variable Fee Approach – Eligibility Criteria

Insurance contracts that are Underlying items may comprise a portfolio of assets, net assets of the
substantially entity or a subset of assets of the entity
investment-related service
Not necessary for insurer to hold the identified pool of underlying items,
contracts. Hence, for which:
so long as clearly identified by the contract
Does not preclude entity’s discretion to vary amounts paid to
(i) Policyholder contractually
policyholder, but link must be enforceable
participates in clearly
identified pool of underlying Entity compensated by a fee determined by reference to underlying items.
items;
Not a contract with direct participation features if the entity can change
the items with retrospective effect or no underlying items are identified

For (ii) and (iii) interpret ‘substantial’ in context of objective that an entity
(ii) Policyholder receives provides investment-related services and is compensated by a fee
substantial share of the determined with reference to underlying items
returns on the underlying
items; For (ii) and (iii) assess variability over duration of a contract and on a
and present value probability-weighed average basis
Under (ii) consideration of policyholder share may include fixed charges
(iii) Changes in policyholder an entity may deduct from the share in return for providing benefits
benefits substantially vary with
Under (iii) consideration of policyholder benefits may be scenarios where
the change in underlying
payment would vary and others where it would not (example a minimum
items.
return guarantee)

Reinsurance contracts issued or held cannot be insurance contracts with direct participation features
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Variable Fee Approach – Overview
• Variable Fee Approach (VFA) determines the insurance contract liability via
component building blocks.
Insurance Contract
Liability
• Expected PV of Fulfilment Cash
cashflows: premiums,
Flows (FCF)
claims, benefits,
expenses etc Present value of
future cash flows
(PVCF) • Expected profit,
earned as services
provided.
Risk adjustment (RA) • Adjusted for change in
amount of entity’s
share of underlying
• Entity specific • Adjusted for changes
assessment of in financial and non-
uncertainty re amount financial variables
and timing • If negative, “Loss
Component”

Contractual Service
Margin (CSM)

Loss Component
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CSM – Initial Recognition

• CSM on initial recognition offsets risk-adjusted profits for the group.

+€100
• Expected cashflows @ best estimate assumptions.
 Total inflows of 100 including entity’s expected
Claims / Other Cash Flows Out

share of the underlying, outflows of 50.

+€30  Excluding time value of money.
Adjustment
• Time value calculated @ current discount rates.
Discounting

Risk
Premiums / Other Cash Flows In

 The impact overall was positive 30.

Fulfilment Cash Flows

 Could be positive / negative depending on the

Pre-Recognition

-€20
cashflow pattern.
Cash Flows

-€50
• Risk adjustment calculated using one of the methods
described previously.
-€30
 The impact was negative 20.
CSM = €30

• Other cashflows not included in the FCFs included such

as pre-recognition cashflows:
 Attributable acquisition cash flows
 Other day 1 cash flows
Expected Future Time Value • Risk adjusted profit for group = 30, so a CSM of 30 is
Cash Flows of Money
generated to offset this.
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CSM – Subsequent Measurement GMM

€20
General

Accretion

Future Service
Interest

Changes for
Measurement €30
Model

New Business

Changes
-€30

Fx
€60

Provided
Service
-€20
Opening CSM

Closing CSM = €40

-€20

Graphical illustration of subsequent measurement of CSM over a period under GMM:

• New Business - only occurs when group is still forming an annual cohort
• Interest accretion on the CSM balance based on a “locked-in” rate.
• Changes for future services:
• Do not include changes due to financial risk or changes for past/current service
• Are measured at “locked-in” rate
• Closing CSM represents the remaining risk-adjusted profits on the group which relates to future
service
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Variable Fee Approach – Subsequent Measurement

• Comparison of subsequent measurement of CSM under GMM vs VFA

General Measurement Model Variable Fee Approach Comments

Both models adjust the CSM for new

New Business New Business business added in the period
Subsequent measurement of CSM

Both models adjust the CSM for the

impact of changes in exchange rates
Exchange Rate Movements Exchange Rate Movements
The CSM cannot go negative for GMM
or VFA. Movements in excess of the
CSM impact the P&L and are tracked as
Cannot go negative Cannot go negative a loss component
Both amortise for insurance services.
VFA includes “investment-related” vs.
Amortisation of CSM into Amortisation of CSM into GMM “investment return” services. Not
P&L P&L clear if these achieve the same result.
CSM in GMM is increased for interest at
rates locked in from initial recognition.
Interest accretion at locked CSM in VFA is adjusted for changes in
No explicit interest accretion
in inception rates the effect of discounting on FCFs.
For VFA, changes in FCFs due to
discount rates and financial risks relate
Changes in FCFs for future Changes in FCFs for future
to future service and adjust the CSM.
service exclude financial service include financial
The GMM does not include these.
Under the GMM, each component of the
Component movements of Some/all of component subsequent measurement of the CSM
CSM reported separately movements can be combined must be reported separately. Under the
VFA some/all of them can be combined.
No further exceptions for Some exception permitted Under the VFA, an exception is
adjustment of CSM for future where risk mitigation in place permitted to not allocate a change in
service which affects the P&L future service to the CSM where risk
mitigation is in place which impacts P&L
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CSM – Subsequent Measurement VFA

of underlying
entity's share

future service
Changes in

Changes for
New Business

Changes
Fx

Provided
Service
Opening CSM

Closing CSM
• Graphical illustration of subsequent measurement of CSM over a period under VFA.
• Note that an entity is not required to identify the adjustments separately when applying VFA, so
may determine a combined amount for some or all adjustments.
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CSM – Subsequent Measurement Example

€60
Opening CSM

• The opening CSM balance is the closing CSM balance from the previous reporting period.
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CSM – Subsequent Measurement Example

€30

New Business
€60
Opening CSM

• The CSM for new business recognised during the period is added.
• This is measured as described previously.
• Only occurs when group is still forming an annual cohort.
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CSM – Subsequent Measurement Example

€20

entity's share
of underlying
Changes in
€30

New Business
€60
Opening CSM

• The change in the amount of the entity’s share of the fair value of the underlying adjusts the CSM
(subject to CSM being floored at a minimum of nil).
• The change in the obligation to pay policyholder an amount equal to the fair value of the
underlying items does not relate to future service and does not adjust the CSM.
 33

CSM – Subsequent Measurement Example

€20
Changes in fulfilment cash flows that do not

entity's share
of underlying
vary based on the returns on underlying

Changes in

Future Service
Changes for
items and which include:
€30 - Change in effect of time value of money
- Experience Variance for future service

New Business
- Basis changes
-€30

€60
Opening CSM

• The CSM is adjusted for changes in the fulfilment cash flows that relate to future service that don’t
vary based on the returns on the underlying items.
• This includes changes in effect of time value of money and financial risks (not arising from
underlying) as these relate to future service.
• Other changes in the FCFs are assessed similar to the GMM to determine if they relate to future
service, but the impact of those changes is measured at current rates.
• This is to reflect the nature of the entity’s compensation for these products which is inherently
variable.
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CSM – Subsequent Measurement Example

€20

entity's share
of underlying
Changes in

Future Service
Changes for
€30

New Business

Changes
-€30

Fx
€60

-€20
Opening CSM

• Update for the effect of any currency exchange differences on the CSM
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CSM – Subsequent Measurement Example

€20
CSM after all changes = 60

entity's share
of underlying
Service in period = 1 unit

Changes in

Future Service
Changes for
PV expected future service = 3 units
€30
Amortisation = 60 * (1/3) = 20

New Business

Changes
-€30

Fx
€60

Provided
Service
-€20
Opening CSM

-€20

• The total CSM after all changes is aggregated. This balance is then amortised for insurance and
investment-related services provided in the period. The amount amortised is released into the P&L
as profits recognised.
• Different methods can be used to recognised service provided, e.g.:
• Reflect policyholder benefits e.g. could be max of account value and sum insured now vs
future (investment-related services)
• Policy count in period vs. all future expected policy counts
• Can be discounted or undiscounted
 36

CSM – Subsequent Measurement Example

€20

entity's share
of underlying
Changes in

Future Service
Changes for
€30

New Business

Changes
-€30

Fx
€60

Provided
Service
-€20
Opening CSM

-€20

Closing CSM = €40

• Closing CSM balance combines all of the component movements.
• This represents the remaining risk-adjusted profits on the group which relates to future service
• This will be released as profit in the future as the service is provided.
 37

CSM – Subsequent Measurement Summary

Variable Fee Approach Comments

Per Paragraph 44 of the IFRS 17 standard, the starting point for the re-measuring the
Opening CSM Balance
CSM is to take the closing CSM balance from the previous period.
Subsequent measurement of CSM

New Business The CSM is adjusted for the impact of new business added to the group in the
period, measured using the initial recognition approach detailed previously.

Change in entity’s share of CSM is adjusted for change in the amount of the entity’s share in the underlying
the fair value of underlying items (Paragraphs 45 & B112).

CSM is adjusted for changes in fulfilment cash flows related to future service that do
Change in FCFs that do not not vary based on the return of the underlying items, including change in effect of
vary based on returns on time value of money and financial risks not arising from underlying items as well as
underlying items changes arising from non financial risk. (Paragraphs 45 & B113).

Exchange Rate Movements The CSM is updated for the effect of any currency exchange differences.

The CSM is floored to zero, it cannot be an asset to offset future loses (except for
Apply Zero Floor Reinsurance Contracts Held).

Amortisation of CSM into The CSM is amortised to reflect the services provided in the period. This is for
P&L insurance services and investment related-services provided.

Under VFA - some or all of the component movements of the CSM can be
Closing CSM Balance
presented as a single amount rather than disclosed separately.
 38

Loss Component
• CSM only for deferral of future risk adjusted profits.
• If losses identified, they are immediately recognised in P&L.
• These losses are tracked as a “loss component”. Group can only have a CSM or a Loss
Component at any one point in time, but can move between both regularly.

• On initial recognition: Group FCFs + pre-recognition cashflows

When is are negative. This would likely form an “onerous group”
Loss • On subsequent measurement: Group had CSM, but due to
Component adjustments, e.g. a significant negative basis change, now
generated? viewed as loss making. This could be for an “onerous” or “non-
onerous” group.

Note: Loss component not necessarily negative equity impact. The risk adjustment also
represents unearned profit (compensation for risk) and when released without any
adverse experience, may exceed the loss component.
 39

Loss Component - Examples

Loss Component on Initial Recognition Loss Component on Subsequent Measurement
€20
+€70

∆ in entity's

underlying
Claims / Other Cash Flows Out

share of
€60
Premiums / Other Cash Flows In

+€30

Changes for Future Service

Adjustment
Discounting

Risk

Opening CSM
-€20
Pre-Recognition Cash Flows

-€50

Component
Component

= €30
Loss
Loss

-€110
-€50

Subsequent measurement: A group here had expected future

Initial recognition: Present value of cash outflows and risk profits at the start of the period. However a change related to
adjustment exceed inflows – the loss amount is recognised in future service had a large negative impact (e.g. basis update)
P&L and loss component established and tracked. and eliminated the CSM. The excess hits the P&L and is tracked
as a loss component
 40

Tracking the Loss Component

• Once recognised, the loss component is tracked over time:
• To monitor potential subsequent positive developments and know if/when to (re-)establish a CSM
• Presentation of revenue and expenses in the P&L needs to be adjusted for any losses already recognised
• Loss component needs to be allocated in each period for presentation of revenue and expenses in the
financial statements.
• This can follow a similar method to CSM, or use other methods

In the next 2 time periods there are no changes. Claims

emerge, but these are partially reduced because a

generates a
Remainder
component of those claims has already been recognised in

= €40

CSM.
CSM
the loss component of 60. The write down of 10 in the loss

Positive Basis Change

component in each period reduces claims.

= +€80
Loss Component
Loss Component

Component.
Elimination
Loss Component

= €40

of Loss
When Loss
= €50

component first
= €60

recognised –
negative 60 hits
the P&L.

In period 3 there is a positive basis change.

This is used to eliminate any remaining loss
component first, and then generates a CSM.
 41

Profit Emergence under IFRS 17

• Profit emergence for a group of contracts under IFRS 17 comes from several sources
including
• Release of risk adjustment – the “entity’s compensation for accepting non financial
risk”
• Release of CSM – the remaining risk-adjusted profit on the portfolio
• Experience variance “noise”

• An illustrative example of VFA compared to GMM follows.

• The following slides provide a summary of impact of level of aggregation and coverage
units. More detailed examples of impact of level aggregation and choice of coverage
units were provided in the Deeper Dive IFRS 17 at April 2019.
 42

CSM – Level of Aggregation impact

• The CSM is measured for a group of
insurance contracts. Group of Insurance Contracts
Portfolio Annual
• Once recognised the risk-adjusted (Similar risk & Profitability
managed cohorts (3 types)
profitability (excluding non-attributable (or shorter)
together)
expenses) in that group establishes a CSM
and is released into the P&L over the
period services are provided for the
group collectively.

• Different products in a group may have significantly different profitability per coverage unit
 The profit release profile may not look sensible.

• IFRS 17 permits an entity to create groups more granular than specified above (criteria in
Paragraph 21)
 Forming more groups may improve profit emergence, but it will also have systems and data
storage impacts as well.
 43

CU – Identification & Quantification

“Coverage units” establish the amount of the CSM recognised in P&L in the period for a group.

• “Service” is the insurer standing ready to pay claims.

• Challenge is the variety of benefit types, benefit amounts, remaining
Measure term, claim likelihood, profitability … etc within a group of contracts.
Key Aim? “service” • Judgement and estimates, applied systematically and rationally.
• CSM amount is allocated equally to each coverage unit
• Not expected average claims cost or claim likelihood!
Quantity of Benefits e.g.
• Amount that can be claimed 150
Max of (Sum Insured, Unit
by a policyholder €100 Fund)
Quantity of
Benefit • Variability across periods 100 S = €550
e.g. if max benefit decreases
How? over time.
50

Expected • Term of remaining coverage, €10

coverage adjusted for expected 0
duration decrements. 1 2 3 4 5 6 7 8 9 10
Year
 44

CU – Other Considerations

• Cashflows – unless demonstrate that reflective of service rather

than expected claims.
• Premiums – not allowed unless reasonable proxy for service in
Some period.
notable (For example not ok if: timing difference premium versus service;
Not Valid aspects premiums more reflect different probability of claims; premiums more
likely not reflect different profitability.)
appropriate • Entity’s asset performance influence (if no investment
component).
• Any approach where no allocation of CSM to a period where
entity is standing ready to meet claims.
 45

CU – Recognition of CSM in P&L

• At end each period (before any CSM allocation for the period),
Re- reassess the expected coverage units and duration.
Ongoing
assessment • Re-allocate CSM equally to each coverage unit (in current period
and future periods).

Recognise • For each period, recognise the amount of CSM (for the group) for
P&L CSM coverage units allocated to that period.

• Explanation of when entity expects to recognise the CSM in the

future (either via time bands, or qualitative info)
Coverage
Disclosure • General requirement to disclose significant judgements, proposed
units relevant
amendment to ED includes approach to relative weighting of
insurance and investment-related service.
 46

Illustrative Example – GMM vs VFA

• Illustrative example showing explicit interest accretion under GMM vs. implicit interest accretion
under VFA and the impact of a financial market variance on CSM. Assumes entity accounting fair
value through P&L.
• To simplify illustration and does not include all elements required for VFA eligibility criteria.
– 10 year wealth management product investing €105,000, GMDB 105% of premium.
– Policy will mature at end of 10 years and be paid fund value.
– Allocation to fund €100,000, fund grows at expected rate of 5%.
– Market consistent valuation and all cash flows are fund related (or vary with markets), so
discounted at 5% (MC stochastic valuation for GMBD).
– Charge of 2% per annum in arrears, expected deaths 1% per annum in arrears.
– Coverage units assume equal service each period.
– CSM = €14,020.
Initial Recognition
Premium € 105,000
Allocation to Fund -€ 100,000
Acquisition Expense -€ 1,000
NPV Charges € 17,520
Unit Fund at initial recognition
GMDB liability -€ 5,000 Unit Liability -€ 100,000
Establish Risk Adjustment -€ 2,500 Asset Value € 100,000
CSM € 14,020
 47

Illustrative Example – GMM vs VFA

Projected CSM profile expected to be similar if experience emerges as expected

€16,000
CSM Balance
€14,000
Aggregate earnings of the life of the
€12,000 contracts must be equal.
€10,000
Broadly similar recognition profile over the
€8,000 GMM
10 years.
VFA
€6,000
Expected earnings include a risk adjustment
€4,000
release which is equal under both models.
€2,000

€0
1 2 3 4 5 6 7 8 9 10

CSM balance run off differs slightly due to €2,500

Earnings Profile
assumptions as: €2,000

Interest accretion applied to opening €1,500

GMM
CSM balance under GMM, vs €1,000 VFA
Impact of change in entity’s share (PV €500
charges) and time value of money on €0
FCFs on VFA. 1 2 3 4 5 6 7 8 9 10
 48

Illustrative Example – GMM vs VFA

• In year 3, the return on the underlying items is -10%, whereas we expected +5%.
• Assume that the entity does not hedge/reinsure financial risk.
€16,000
CSM Balance GMM approach:
€14,000

€12,000
1) CSM run off is not affected by
financial risk (same run off profile as
€10,000
base scenario).
€8,000 GMM
2) Year 3 earnings loss driven by impact
VFA
€6,000 of market risk on liabilities.
€4,000

€2,000
€3,000
€0 Earnings
1 2 3 4 5 6 7 8 9 10
€2,000

VFA approach: €1,000

1) CSM balance drops as it absorbs GMM
€0
impact of market risk on liabilities. 1 2 3 4 5 6 7 8 9 10 VFA
2) Earnings drop reflecting lower CSM (€1,000)
balance to be amortised, but
(€2,000)
remain relatively stable over the
remaining term. (€3,000)

…but what if the entity has hedged/reinsured financial risk?

 49
Variable Fee Approach – Risk Mitigation Exception
• Risk Mitigation Exception: In general, as we have seen changes related to future
service adjust the CSM including changes in financial risk and the effect of time value
of money.
• If an entity is hedging or reinsuring some of those risks, an accounting mismatch may
be introduced.
– Reinsurance cannot be measured using the VFA. Its CSM is not adjusted for changes in time
value of money or financial risk – these changes hit P&L
– Derivatives shown as fair value through P&L will hit P&L
– Corresponding movements in underlying liability will affect CSM if VFA and do not hit P&L.
• VFA permits an entity to not adjust the CSM for some changes in future service under
certain conditions
– Risk mitigation must be a derivative or reinsurance held contract (proposed June 2019)
– Previously documented risk management objective & strategy for products
– Needs to be an economic offset
– Credit risk isn’t the main risk mitigated.
• In addition to proposed extension to reinsurance held, the June 2019 ED proposes:
– Risk mitigation may be applied prospectively on or after transition date (if eligible)
– Allows entity to apply fair value transition approach to VFA groups if entity chooses to apply
risk mitigation option at transition date and meets risk mitigation eligibility criteria by
transition date.
 50
Variable Fee Approach – Risk Mitigation Exception

• Risk Mitigation Exception: In general, under VFA model changes related to future service adjust
the CSM including changes in financial risk / time value of money.

Standard VFA P&L

CSM adjusted for changes

in time value of money /
financial risks and effect of
same.
Meet RME
criteria?

VFA P&L P&L for Risk Mitigation

Risk Mitigation Exception Instrument

Reinsurance = change in
Changes which relate to
financial risk to P&L.
risks that are mitigated no
Derivative = Fair Value in
longer adjust CSM.
P&L
 51

Illustrative Example – VFA – Hedged Risk?

• Now assume that the entity has hedged financial risk of GMBD.
• In year 3, the return on the underlying items is -10%, whereas we expected +5%.
€16,000
CSM Balance
€14,000
VFA without risk mitigation exception:
€12,000
1) CSM balance falls as it absorbs
€10,000
full impact of market risk on
€8,000 VFA (No RME) liabilities.
VFA (with RME)
€6,000 2) Earnings less stable (gain on
€4,000 hedge instrument in year 3)
€2,000

€0
1 2 3 4 5 6 7 8 9 10
€3,500
€3,000
Earnings
VFA with risk mitigation exception: €2,500
1) CSM balance falls to a lesser extent €2,000
VFA (No RME)
€1,500
as impact of on market risks that are VFA (with RME)
€1,000
mitigated no longer adjusts CSM. €500
2) Earnings appear more stable. €0
1 2 3 4 5 6 7 8 9 10
 52

Agenda

• Introduction
• IFRS 17 Variable Fee Approach
• IFRS 17 Premium Allocation Approach
 53

Introduction to the PAA

PAA vs BBA – What are the differences between the two models?

The general model:

Building blocks approach (BBA) Simplified approach:
Premium allocation approach (PAA)
Measurement objective is to quantify the notion of the Simplified approach to measuring the value of insurance contracts if eligibility criteria
insurer’s “fulfilment of obligations under the contract” is met.

Total IFRS Insurance Liability

Total IFRS Insurance Liability

Obligation to provide service, Pre-claims

measured at inception as the
Block 4: expected contract profit Premiums receivable Akin to UPR approach
Contractual Service
Margin
Less acquisition costs
Quantifies the amount to
compensate for uncertain vs.
‘Fulfilment cash flows’ certain liability cash flows Post-claims
(similar to a Solvency II risk
margin)
‘Fulfilment cash flows’
Block 3:
Risk Adjustment Use a discount rate to adjust the
cash flows for the time value of Block 3: Building blocks approach (BBA)
money Risk Adjustment still applied for post-claims
Block 2: Discounting reserves.
Probability-weighted estimate of
cash inflows and outflows that Block 2: Discounting
will arise as the entity fulfils the
Block 1: contract.
Best estimate cash flows Block 1:
Best estimate cash flows
 54

Introduction to the PAA

PAA vs BBA – What are the differences between the two models?

AC CSM
PAA BBA PAA and BBA
AC CSM measurement are the same
RA Liability for
RA in the post coverage period

UPR
≈ Discount
remaining
coverage
Discount PAA BBA
Future CFs
RA RA
UPR RA RA
Discount Discount
Discount Discount Liability for
Future CFs
= incurred
Future CFs Future CFs claims Future CFs Future CFs

Day 0 Coverage Period Post Coverage (settlement

period)

Coverage Period Premium Allocation Approach Building Block Approach

Day 0 Includes concept similar to UPR and DAC (however new Consists of discounted present value of future
definition of directly attributable expenses). cashflows (including premium, claims and expenses),
Risk Adjustment and Contractual Service Margin
(CSM).
During the coverage Unexpired risk: consists of UPR and unamortised cost of Unexpired Risk: CSM is only applicable for unexpired
period (e.g.: 6 months from acquisition cost. risk and other elements are same as expired risk.
inception) Expired Risk: modelled using Building Block Approach Expired risk: modelled using BBA approach
End of coverage period No unexpired risk and only future cashflows are modelled No difference as compared to PAA.
using BBA. At this point the technical provisions are
equal between PAA and BBA.
 55

Introduction to the PAA

PAA vs BBA – What are the differences between the two models?

Discounting
• If the coverage period is one year or less then the LfRC does not need to be
discounted
• Total
LfRC - Locked in yield curves
IFRS Insurance Liability

• If the time between the claim being incurred and the claim being settled is less
than a year, then the LfIC does not need to be discounted
• Materiality?

Insurance Acquisition Cashflows

• Paragraph 59 (a): if coverage period of the contract is no more than a year then
insurance acquisition costs can be recognised as they are incurred
• BBA: amortised in line with the CSM

Onerous Contracts
• No requirement for explicit onerous test at initial recognition
• Facts and circumstances
• Onerous Liability: LfRC under the PAA – LfRC under the BBA
 56

Introduction to the PAA

PAA vs BBA – How is the LfRC under the PAA calculated?

PAA Insurance Liability

Liability at + Premium received at initial recognition

initial - Insurance
Total IFRS Insurance Liability acquisition cash flows
Recognition + Any onerous contract liability recognised

+ Previous Liability
+ Premiums received in the period
Liability at - Insurance acquisition cash flows
each
+ Any onerous contract liability recognised
subsequent
- Amount recognised as insurance revenue for the coverage provided in that
reporting
period period
+ Amount recognised as the amortisation of acquisition cash flows
+ Any adjustment to reflect the time value of money (if applicable)
 57

Introduction to the PAA

What are the criteria for using the PAA model?
 58

PAA Eligibility Testing

1. Determine 2. Perform 3. Decision
4. Review
materiality Eligibility between PAA
Eligibility
threshold Scoring and BBA

Consideration of several factors:

• Nature and size of business
• Length of cohort lifetime and volatility of claims experience
• Discussion with auditors
• Risk appetite of insurer
• Market trends

1. Determine 2. Perform 3. Decision

4. Review
materiality Eligibility between PAA
Eligibility
threshold Scoring and BBA

• Eligibility scoring is based on PAA/BBA differences of Gross Liability for Remaining Coverage (LfRC) at
initial recognition from base and various sensitivity scenarios:
• Insurer will have to decide the ‘passing’ mark of scoring and weightage of each sensitivity scenario in
scoring
 59

PAA Eligibility Testing

1. Determine 2. Perform 3. Decision
4. Review
materiality Eligibility between PAA
Eligibility
threshold Scoring and BBA

• Determine whether a cohort is eligible for PAA by referring to eligibility score and pre-determined
‘passing’ score
• What if the cohort is onerous at initial recognition?

1. Determine 2. Perform 3. Decision

4. Review
materiality Eligibility between PAA
Eligibility
threshold Scoring and BBA

• Does eligibility testing need to be carried out for new underwriting cohorts of the same product?
 Use of sensitivity parameters
 60

PAA Eligibility Testing

Eligibility Scoring

Onerous Contracts

Financial Impact

Explanation of Movements

Process

Retrocession

Architecture
 61

PAA vs BBA

Implication:
• New process required to be set up for eligibility testing.
• Eligibility testing requires a projection of the LfRC under both the PAA and
the BBA
• Materiality thresholds need to be set to quantify the % deviation allowed
Eligibility Would be required to do on an ongoing basis, potentially annually.
Testing
Comparison with BBA:
• No eligibility testing required.
• Do not need to provide the auditors with the rationale for using the BBA
rather than the PAA.

Discussion
Financial • Not expected to be any financial impact in applying the PAA versus the BBA.
Impact
 62

PAA vs BBA

Requirement:
• Can assume that contracts in a group are profitable unless facts and
circumstances indicate otherwise.
• If a group of contracts becomes onerous during the coverage period =>
a loss component is required to be set up
• FCF’s => risk adjustment for unearned exposure and cashflow
functionality.
• Loss component
Onerous
Contracts Implication:
• BBA mechanism required in the case where a group of contracts is
onerous.
• Facts and circumstances to be defined.
• Ability of the selected architecture to store and apply the facts and
circumstances?
• Two sets of data
• Requirement to track and unwind the loss component still applicable
 63

PAA vs BBA

Discussion:
• From a process perspective, the PAA may be easier to implement. However,
this is assuming that the PAA can be applied to all of the non life business.
• What if one portion of the book is eligible for the PAA but not another
portion?
Process • Does a significant portion of the book require eligibility testing?
• A process for calculating the LfRC under the BBA will be required for both
eligibility testing and onerous loss component, even if the PAA model is
selected.
• Is data/functionality required to produce the BBA already present?

Liability for Incurred Claims:

1. Same under both the BBA and the PAA, i.e. cashflows plus RA
2. Discounting – simplification met?

Data Req’s Liability for Remaining Coverage:

1. Additional BBA data elements : coverage units plus AoC for CSM
2. Simplification: Discounting
3. Eligibility Testing: in this case two sets of data are required
4. Onerous Testing: as per eligibility testing above.
 64

PAA vs BBA

Requirement
• CSM is required to be rolled forward at each valuation date according to a
prescribed formula.
• Disclosures for business using the BBA or the PAA discussed later.
• Disclosures relating to the CSM are not required for the PAA .
• The reconciliation between the opening and closing balance of the LfRC is
required under both the BBA and the PAA.
• There are three additional disclosures required for the PAA.
Understanding
and Discussion
explanation of • Easier to explain the movements in the LfRC under the PAA
movements • However, IFRS 17 in general does require an education of all of your
stakeholders. Consistency of logic.
• Can you leverage your engine to set up your AoC, reconciliations etc?
 65

PAA vs BBA

Requirements:
• Eligibility testing required to be performed separately for the reinsurance
contracts.

Discussion:
Reinsurance • Do not want to end up in a scenario where the assumed business is applying
one measurement model and the reinsurance business is applying another.
What % of your reinsurance contracts have a coverage period of one year or
less?
• What basis are your reinsurance contracts written on? How are they
structured?

Discussion
• Different feeds of data required to feed the IAS engine depending on whether
it is the PAA or the BBA.
Architecture
• Eligibility Testing/Onerous Loss Component: in these case two sets of data are
required => change from usual quarter to quarter process

• Leveraging the SII process

 66

PAA vs BBA

Factors impacting eligibility testing:

• Claims experience
• Duration and pattern of run off of liabilities
• Level of discount rate
• Amortisation pattern of CSM
• Risk adjustment

Which model are we seeing insurers choose, when they have the option?
• Non Life insurers
• Life insurers
• Composite insurers
• Reinsurers
 67

PAA vs BBA
What are the issues that the PAA does not negate?
• Unit of account
• Contract boundaries
• Risk adjustment
• Reinsurance contracts – allowing for contracts that have not yet been
written
• Offsetting of loss component
• Identification of directly attributable expenses
• Approach to discounting – unless simplification is met (future proofing?)

What are the issues that the PAA negates?

• CSM
• Coverage Units
• Risk adjustment for unearned exposure
• Explanation of movements between one reporting period and the next is
easier
 68

Disclosure Requirements – PAA vs BBA

What are the additional disclosure requirements required by the BBA versus the
PAA?

An entity must disclose qualitative and quantitative information

about:

1. Explanation of The amounts recognised in F/S that arise from

New IFRS 17 requirements
recognised amounts insurance contracts

2. Significant Some requirements brought

judgements
The significant judgements, and their changes
forward from IFRS 4

The nature and extent of risks that arise from insurance Most requirements brought
3. Risks
contracts forward from IFRS 4
 69

Disclosure Requirements – PAA vs BBA

What are the additional disclosure requirements required by the
BBA versus the PAA?

Paragraph Number Overview of Dislosure Applicable to PAA?

97 Three additional disclosures for PAA  Yes Key Points:

98 Change in net carrying amount of contracts  Yes
due to cashflows and income/expenses • The disclosures not applicable to the
recognised PAA mainly relate to the CSM.
99 Structure requirements  Yes
• However the structure for producing
100 AoC for LfRC, Loss component and LIC  Yes
these disclosures will already be set
101 AoC for PVFCF, RA and CSM  No up in the CSM calculation engine
102 Objective  Yes
• Three additional disclosure required
103 Insurance Revenue and Insurance Service  Yes for the PAA that are not required for
Expenses
the BBA.
104 Split of change in future vs current vs past  Yes 1. Criteria satisfied
service
2. Adjustment for time value of
105 Cashflows in the period, change in non  Yes money and effect of
performance risk, IFE
financial risk
106 Breakdown of LfRC into ISE/risk  No 3. Insurance acquisition cash
adjustment/CSM
flows
107 PvFCF, RA and CSM  No

108 Contracts acquired and onerous contracts  No

109 Recognition of CSM  No

 70

Disclosure Requirements – PAA vs BBA

What are the additional disclosure requirements required by the
BBA versus the PAA?
Para 100
Source IASB Effects Analysis

Para 103

Para 105
 71

PAA Example

Non-Life Financial Presentation

Motor Construction
IFRS17 Groupings

1 - year 3 - year

Reinsured Reinsured Financial

Data
 72

PAA Example

Financial Presentation
Financial Statements

Primary Statements Disclosure Notes

IFRS17 Groupings

Financial
Data
Insurance Business Portfolios

IFRS17 Cohorts (Annual | Semi-Ann | Quarterly)

Reinsurance Treaties Policies Products Sales Channels

Cashflows

Actual Calculated

Reinsurance
Premiums Claims Expenses Investments Taxes
Payments

Future Risk Loss

CSM LIC LRC
Cashflows Adjustment Component

FX Credit Sensitivity
Rates Ratings Analysis
 73

PAA Example

STEP 1:
Financial Presentation
Identify “Portfolios”…
insurance contracts subject to similar risks and managed together:
IFRS17 Groupings
• P1 - Motor
• P2 - Construction
Financial
Data

STEP 2:
Aggregate policies into “Cohorts”… based on profitability and issuance date:

Onerous If facts and circumstances indicate so, then policies are marked
Contracts as onerous.

Contracts that at inception have no significant possibility of

becoming onerous.
Non-Onerous
Contracts
Other profitable contracts.

STEP 3:
If Reinsurance is used by the company then Cohorts must
be created for reinsurance treaties too.
 74

PAA Example - Cohorts

Non-Life
Motor Construction Financial Presentation

1 - year 3 - year

Reinsured Reinsured IFRS17 Groupings

Financial
Data
Motor Construction

Insurance Reinsurance Insurance Reinsurance

[c1] M/i | Non-Onerous | 2019 [c3] M/r | Net Gain | 2019 [c5] C/i | Non-Onerous | 2019 [c7] C/r | Net Gain | 2019

[c2] M/i | Onerous | 2019 [c4] M/r | Net Cost | 2019 [c6] C/i | Onerous | 2019 [c8] C/r | Net Cost | 2019

[c1] M/i | DSF | 2019 [c3] M/r | Net Gain | 2019 [c4] C/i | DSF | 2019 [c6] C/r | Net Gain | 2019

[c2] M/i | BRK | 2019 [c5] C/i | BRK | 2019

Unbundling? Recognition Point? Contract Boundary? RI Cancellation?

 75

PAA Example – LRC & LIC

1. By default, PAA uses the ‘Passage of Time’ as

coverage units
Financial Presentation
2. Unless release of risk during the coverage period
differs significantly from the passage of time…
IFRS17 Groupings
…use the expected timing of incurred insurance
service expenses.
Financial
Data

Non-Life Insurer, sells 1-yr Motor

If Disc. Rates = 0% then the PAA and

GMM give the same result for LRC
 76

PAA Example – LRC & LIC

Non-Life Insurer, sells 3-yr Construction

Financial Presentation

IFRS17 Groupings

Financial
Data
 77

PAA Example – Accounting

P&L

Insurance Revenue
Financial Presentation
Incurred Service Expense

Insurance Service Result

IFRS17 Groupings

Investment Income
Financial
*Insurance Finance Expense Data
Profit / Loss

*Insurance Finance Expense

Total Comprehensive Income

B/S

Reinsurance contract assets

Insurance Contract Assets

ASSETS

Insurance contract liabilities

Reinsurance contract liabilities

LIABILITIES
 78

PAA Example – LRC & LIC

Primary Statements & Disclosures Financial Statements
 Statement of Profit or Loss
Primary Statements Disclosure Notes
 Statement of Comprehensive Income Financial Presentation
 Insurance service result
 Investment Income & Insurance Finance Expenses
IFRS17 Groupings
 Statement of Financial Position Motor Construction
 Statement of Changes in Equity
Financial
 Reconciliation of the LRC and LIC for insurance contracts Insurance Cohorts Insurance Cohorts Data
 Reconciliation of the LRC and LIC for reinsurance contracts
Reinsurance Cohorts Reinsurance Cohorts

Other Actual & Calculated Cashflows

 Impact of contracts recognised in the period

 Claim development
 Financial Assets & Liabilities
 Credit Risk for financial instruments
 Expenses by nature
 Maturity Analysis Minimum
You need to be able to produce statements at least at portfolio level.

Preferable
Accounting records should be tagged at a cohort level in order to
facilitate investigations and reconciliations to primary data sources.
MI Info

• Many Management Information reports (New Business, Claims, etc) are produced for existing accounts using {AccountCode} – provides subdivision.
• Need to ensure your new IFRS17 Accounting Ledger maintains at least the current level of granularity.
• Additional granularity may be required – especially for expenses (need to be assigned to Cohorts).
 Summary
Recent developments
• Final standard mid 2020? Further delay to 1/1/2023?

VFA
• Modified version of the GMM – not optional (must apply VFA if the eligibility criteria met)
• Aim: To reduce accounting mismatch that would arise for certain types of contracts under
the GMM
• Key difference to GMM: CSM Subsequent Measurement treatment of financial risk
• Option to combine some or all of the components in subsequent measurement of CSM.
• Risk mitigation exception – optional if criteria are met

PAA
• Simplified version of the BBA – optional
• BBA Comparison: LfRC calculation different, LfIC calculation is the same.
• Simplifications: Discounting, Acquisition Expenses, Onerous Contracts
• Main benefits: CSM is avoided and reconciliations between one reporting period and the
next are more straightforward
• Can be used when certain eligibility criteria are met
• Factors to consider when deciding whether or not to use the PAA: Eligibility testing,
Onerous contracts, Financial impact, Explanation of movements, Data, Process,
Retrocession, Architecture
• Disclosures relating to the CSM are not applicable
Questions?