1st Capacity Building Seminar

on IFRS 17
The Westin, Mumbai
25 August 2018

Demystifying Ind AS 117

Phil Jackson
Consulting Actuary, Milliman
Disclaimer
The views expressed here are the personal views of the presenter and
not that of Milliman.

This presentation is intended solely for educational purposes and

presents information of a general nature. It is not intended to guide or
determine any specific individual situation and persons should consult
qualified professionals before taking specific actions. Neither the
presenter, nor the presenter’s employer, shall have any responsibility or
liability to any person or entity with respect to damages alleged to have
been caused directly or indirectly by the content of this presentation.

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Introduction
Demystifying Ind AS 117 – bridges to other
1 frameworks

2 Selection of measurement models

3 Cash flow impacts

4 Interesting impacts of onerous contracts

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Building block approach to
valuation
• RBC regimes, IFRS 17 and MCEV assess the insurance liabilities based on
an economic balance sheet framework.
MCEV© RBC IFRS
IFRS
ANAV Free surplus
Equity
MCEV© Required
MC VIF CSM
capital
Fair Value of
FCRC / Risk
Risk Margin assets or
CRNHR Market Adjustment
Market value Amortized
Value of cost
of Assets
assets
Best Best
Best Estimate
Estimate of Estimate of
of Liabilities
Liabilities Liabilities
Other

Stochastic framework Stochastic framework for Stochastic framework

Solvency II. Deterministic for
most of the RBC regimes in
Asia

• Differences in methodology and parameters need to be identified and

explained. For companies reporting under a Traditional Embedded Value
(TEV) basis, it is also key to explain the differences between TEV and
IFRS 17 frameworks to the management.

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The balance sheet

Equity

Contractual
Service
Assets – Margin
Market
value Risk adjustment
Insurance
contract
liabilities
Best
estimate
liabilities

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 Balance sheet view of MCEV –
and the links to Ind AS 117
MCEV ‘balance sheet’ Ind AS balance sheet

ANW IFRS equity

VIF CSM

FC / CRNHR Risk adjustment

Market value Market value
assets TVFOG assets BEL (guarantees)

Best estimate Best estimate

liabilities liabilities

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The income statement for non-
participating contracts

• Release of CSM and RA

Insurance service result • Actual vs. Expected

• Book value Investment return

Net investment result • vs. locked in investment return

• Asset-liability management
Other Comprehensive (market value basis)
Income

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 Mapping the AOM

VNB

Assump’n

Operating

variance
changes

variance

Econ
Unwind

Closing EV
Opening EV

Net
CSM investment
result

Insurance service result OCI

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Selection of measurement
model
 Building Block Approach to
valuation

GENERAL VARIABLE FEE PREMIUM

MODEL APPROACH ALLOCATION
(aka Building Block (VFA) APPROACH
Approach or BBA) (PAA)
Approach for contracts with
Default valuation approach direct participation features Simplified approach for
(e.g. unit-linked, with-profit short duration contracts
contracts) (coverage period up to one
year)
Non-par VIP ULIPs
savings Short term – life
health and P&C
Protection – Participating Group OYRT
life, health and
P&C

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Direct participation contracts

– Contract terms must specify PH to share in returns of

clearly defined pool of underlying items
– Entity expects to pay PH a substantial share of FV
returns on underlying items
– Entity expects a substantial portion of any change in
the amounts to be paid to the PH to vary with the
change in FV of the underlying items.

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 Variable fee approach (VFA)

Premiums The variable fee

Policy- Underlying Share-
holder fund holder
Benefits Other
benefits

For products with discretionary participation

features, the policyholder’s return is substantially
linked to a pool of underlying items. The
insurer’s role in this product is often much more
like that of a ‘manager’ of a fund, with the
insurer taking a fee for providing services

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 Mapping the AOM - VFA

VNB

Assump’n

Operating

variance
changes

variance

Econ
Unwind

Closing EV
Opening EV

Net
CSM investment
result

Insurance service result OCI

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Cash flow impacts
Initial calibration

 Contractual Service
CSM
Margin

RA  Risk Adjustment
PV of
Premium
 Present Value of Best
PV of Benefit
Estimate of fulfilment
and
Expense CFs cash flows

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Profit profile

1 4 7 10 13 16 19

Indian GAAP

Ind AS 117 -
number of policies
coverage units

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 Actual <> Expected mortality:
Impact on income statement
PROJECTION YEAR 1 2 3 4 5 6 7 8 9 10 BASE CASE
SCENARIO
Insurance service result 1,322 1,140 1,081 957 941 925 908 892 876 858
Net Investment result - - - - - - - - - - Actual
IFRS net income 1,322 1,140 1,081 957 941 925 908 892 876 858 mortality =
expected
OCI - - - - - - - - - - mortality

PROJECTION YEAR 1 2 3 4 5 6 7 8 9 10
Actual mortality
Insurance service result 1,322 884 1,080 957 941 925 908 892 876 858 in year 2 =
Net Investment result - - - - - - - - - -
500% expected
 Mortality profit is worse than expected in year 2 mortality
IFRS net income 1,322 884 1,080 957 941a lower
leading to 925 908 service
Insurance 892result.876 858 No change in
OCI - - -  Insurance
- - service -result is -slightly reduced
- in
- year 3- mortality
assumption
as actual reserve as at end of year 2 is lower than in
base case scenario.
PROJECTION YEAR 1 2 3 4 5 6 7 8 9 10
Actual mortality
Insurance service result 1,322 884 971 837 816 796 774 753 731 707 in year 2+ =
Net Investment result - - - - - - - - - - 500% expected
 No impact in year 2 in comparison with sensitivity 1 as mortality
1,322 884 971
IFRS net income
change 837 816
in mortality 796
assumption is774 753
absorbed by the731
CSM. 707
OCI - -  Insurance
- - service- result is- reduced- from year
- 3 onwards
- -
as the Mortality
assumption is
release in CSM is lower than in Sensitivity 2 due to lower
updated
CSM at the end of year 2 (see next slide).
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 Actual <> Expected mortality:
Impact on balance sheet
SENSITIVITY 1
No change in mortality assumption The CSM
CSM = absorbs the
CSM = 6,182 increase in both
6,903 RA = 228 BEL and RA
RA = 379 and reduces by
BEL =
BEL (*) = 148,027 1,011
64,522

End of year 1 End of year 2 As the future

(Base case mortality) (actual <> expected mortality
mortality
No change in assumption) assumption is
SENSITIVITY 2 increased from
Change in mortality assumption
100% to 500% of
CSM =
5,181 base case
CSM =
6,903 RA = 338 mortality, both
RA = 379 BEL and RA
BEL = increase (total
BEL (*) = 148,919
64,522 increase is equal
End of year 2 to 1,011)
End of year 1 (actual <> expected
(Base case mortality) mortality
change in assumption) www.actuariesindia.org
Actual <> Expected investment
income
BASE CASE SCENARIO
YEAR 1 2 3 4+
Actual IR 4% 4% 4% 4%
Exp. IR / DR 4% 4% 4% 4%

SENSITIVITY 1

YEAR 1 2 3 4+
Actual IR 4% 3% 3% 4%
Exp. IR / DR 4% 4% 4% 4%

SENSITIVITY 2

YEAR 1 2 3 4+

Actual IR 4% 3% 3% 3%
Exp. IR / DR 4% 4% 3% 3%

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 Actual <> Expected investment
income
PROJECTION YEAR 1 2 3 4 5 6 7 8 9 10
Insurance service result 1,322 1,140 1,081 957 941 925 908 892 876 858
Net Investment result - - - - - - - - - -
IFRS net income 1,322 1,140 1,081 957 941 925 908 892 876 858
OCI - - - - - - - - - -
 Since the actual investment
return is lower than the expected
PROJECTION YEAR 1 2 3 4 5 6
in7 years 28 and 3,9 the Net
10
Insurance service result 1,322 1,140 1,081 957 941 925 Investment
908 892 result
876 becomes
858

Net Investment result - (1,504) (2,315) - - - negative.

- - - -

IFRS net income 1,322 (363) (1,234) 957 941 925 908 892 876 858
OCI - - - - - - - - - -
 Investment return and discount rate
are updated in year 3, leading to a
PROJECTION YEAR 1 2 3 4 5 6 material
7 8negative
9 impact
10 on OCI in
Insurance service result 1,322 1,140 1,081 957 941 925 year
908 3. 892 876 858
Net Investment result 0 (1,504) (2,315) (2,442) (2,432) (2,423) (2,413) (2,403) (2,393) (2,383)
IFRS net income 1,322 (363) (1,234) (1,452) (1,463) (1,474) (1,486)
In practice,
(1,498) this negative
(1,510) (1,522)impact
OCI 0 0 (14,698) 2,392 2,390 2,388 would be
2,385 compensated
2,383 2,381 by an increase
2,379
in asset value
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 Actual <> Expected mortality:
Impact on balance sheet
BASE SCENARIO CSM remains
unchanged as based
CSM = CSM =
on the locked-in
CSM = 5,454 4,720 discount rate at
6,182 RA = 111 RA = 94 inception.
RA = 228
BEL = BEL =
BEL (*) = 234,118 235,733 In other words, the
148,476 short term volatility
caused by changes
End of year 2 End of year 3 End of year 4
(DR = 4%) (DR = 4%) (DR = 4%)
in discount rate is
presented in the
SENSITIVITY 2 OCI.
Change in discount rate from 4% in
year 2 to 3% in year 3
CSM = CSM =
CSM = 5,454 4,720
6,182 RA = 234 RA = 186 BEL and RA
RA = 228
increase due
BEL = BEL = to decrease
BEL (*) = 248,692 248,457
148,476 in discount
rate
End of year 2 End of year 3 End of year 4
(DR = 4%) (DR = 3%) (DR = 3%) www.actuariesindia.org
Interesting impacts of
onerous contracts
Level of aggregation

Contracts that are subject to

similar risks and managed
together

PORTFOLIO

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Level of aggregation – yearly
cohorts

Contracts issued more than 1

year apart cannot be in same
group

ISSUE YEAR

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Level of aggregation – minimum
grouping
Exception
1. Onerous If there is a legal or
regulatory restriction on
entity’s ability to reprice the
product, then you can include
2. Profitable
in same group – for example
PMJJBY?
3. Might
become
onerous

Groups of contracts are the unit of measurement used in Ind AS 117

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 Impact of onerous contracts –
simple example
First year
NB First year
VNB margin VNB CSM CSM
Premium P&L
recognition
Total 1000 9.0% 90 90 10% 9

ULIP 500 -5% -25 0 N/A -25

Par 300 5% 15 15 10% 1.5

Non-par 200 50% 100 100 10% 10

Revised total 1000 9.0% 90 115 -13.5

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