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Speaker Name & Country : Francesco Nagari, Global IFRS Insurance

Leader at Deloitte

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

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
The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
Scope and classification is mainly
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
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

The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
Recognition and measurement
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
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.
The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
Total IFRS Insurance Liability
Measurement uses Measured at inception as the Measured as the
current estimate expected contract profit to be difference between the
assumptions Block 4: earned as services are fulfilled. It is risk-adjusted present
Contracts are grouped by Contractual Service Margin adjusted for future assumption value of expected inflows
similar profitability and changes and outflows at
risk profile inception.
Profit is measured and Fulfilment cash flows
An assessment of the uncertainty
reported based on the Block 3: about the amount of future cash
entity-specific fulfillment Risk Adjustment flows
of obligations
Deferred profit absorbs Block 2: An adjustment that converts estimate of cash
assumption changes Time Value of Money future cash flows into current inflows and outflows
Discount rates based on amounts that will arise as the
market interest rates entity fulfils the
(currency, duration, Block 1: contract.
liquidity) Expected Future Expected (probability-weighted)
Cash Flows
Expected profit from cash flows from premiums and
(unbiased probability
participating contracts is claims and benefits
weighted mean)
revalued based on asset
The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
Presentation requirements for life insurers
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
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
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
financial risks, concentration statistics
Risk disclosures in IFRS 4 retained and
for all risks and ten year loss
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)
The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
Transition to a new IFRS for insurance will
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
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.
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 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
The benefits will be transparency
and consistency globally for the
insurance sector with lower cost
of capital
The journey of Indian insurers towards
IFRS 4 Phase I and Phase II
Francesco Nagari
Deloitte Global IFRS Insurance Leader
+852 2852 1977


Deloitte Insights into IFRS Insurance (i2ii)
Deloitte IFRS Insurance Centre of Excellence

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