September 2018

IFRS 17 and ReinsurancePeter Nowell
SCOR Global Life

AgendaPages

Content3Introduction
IFRS 174-9

Recap of Building Blocks Approach

10 - 12

Onerous Contracts

13 - 16

Transition and Presentation
Reinsurance

17 - 19

Recap of Reinsurance under IFRS 17

22 - 26

Examples27 - 29

Presentation and Disclosure

30 - 33

Capital Management and Further Issues

2Introduction
 WHAT− IFRS 17 is the new international accounting standard for insurance contracts, issued in May
2017− This will replaced the current IFRS 4 Insurance Contracts− It will be implemented in an estimated 116 countries, including Hong Kong, Korea, Taiwan
 WHY− IFRS 4 was introduced in 2004 as a temporary measure, and permits a wide variety oftreatments− The new standard will replace these with a single consistent approach to measuring
profitability− Increased disclosure requirements will also allow investors to look into the drivers of riskand return WHEN− Apply for annual accounting periods beginning on or after 1 January 2021
− Later implementation in certain countries

3Options for accounting for insurance contractsOption
 Building Blocks Approach (BBA)− Default approach for valuing insurance
contracts− No “day 1” profits

 Variable Fee Approach− For insurance contracts linked to thereturns of identified underlying assets

 Premium Allocation Approach− Simplified model for short term (<1 year)
contracts

Products
Multi-year contracts
With profits life policies
Whole Life, Term Life policies
Long Term Care or health policies

Unit Linked policies
Variable Annuities
UK with profits contracts
Not applicable to reinsurance contracts

Short term general insurance
Short term life4

Building Blocks Approach (BBA)
Time value ofTime
value ofmoney
Timevaluemoneyof money

Fulfilment
cash flows

Risk
adjustment
Contractual
servicemargin Future cash flows
within theboundary of an
insurance contract

 Discounting topresent value The risk
adjustment is toreflect theuncertainty of
future cash flows

 The
expected
profit overthe life of thetransaction

 Best Estimate Liability

5Choices in applying Building Blocks Approach Discount rates− Discounting should be done using an interest rate curve, which should be disclosed in theaccounts− Top-down – taking the investment yield of the asset portfolio backing the liabilities, andadjusting this− Bottom-up – taking the risk free rate of return from market sources and adjusting this Contract boundaries− Future cash flows are measured “within the boundary of an insurance contract” which is thematurity of providing services or coverage or receiving premiums− The boundary is limited to the period until the insurer can increase the price or reduce thecoverage to fully reflect the risk e.g. reprice at market rates

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Risk Adjustment
 The risk adjustment is to reflect the “uncertainty in the cash flows that arise from theinsurance contract”.
 Choices on how to calculate this:− Confidence interval measure (i.e. VaR)
− Conditional tail expectation (tail loss VaR)
− Present Value of the Cost of Capital In Europe, Solvency 2 requires insurers to hold a Risk Margin equal to a cost of capital of 6%
on their future capital requirements.

7

Aggregation - 1
 IFRS 17 aims to apply to groups of contracts called portfolios, and defined as:− Contracts subject to similar risks and managed together.
− Not issued more than one year apart Highlights the performance of different classes of insurance contract within an entity
 Not allow profits from some contracts to hide losses on other contracts
This could place a significant burden on insurance companies and make IFRS accounts verylong.

8Aggregation - 2
Aggregation
 Here, policies written in 2010 were priced ata lower annual premium, which has now
proved to be inadequate to cover claims. As
a result it is loss making for this year.
 Policies written in 2011 were priced at ahigher annual premium, and are still
profitable.
 On an aggregated basis – as they arereported under IFRS 4 – the business isprofitable.

ExampleOriginated

2010

2011

TotalPremium

50

200

250

Claims-70-140-210

Net result-206040

 However, the reporting of separate cohortsrequired under IFRS 17 will show theunprofitable blocks.

9Onerous Contracts - 1
 IFRS 17 has a specific treatment for insurance contracts where cash outflows are expected toexceed cash inflows.
 These loss making contracts are termed onerous contracts
 The expected future losses on onerous contracts are taken as a loss through the P&L
immediately This contrasts with expected future profits, which are spread out over the expected lifetime ofthe contracts
 Examples of onerous contracts include those with high initial expenses (commissions,advertising) where insurers recoup costs through renewals in future years, or those long term
contracts with a guaranteed premium rate and high loss ratios, such as cancer care products
from previous years− Contracts with high guaranteed investment rates may be subject to IFRS 9, where theinsurance contract is split from the investment component and valued separately

10Onerous Contracts - 2
Loss to P&L

Fulfilment
cash flows
Time valueof money

 Expected future claims and expenses exceed the expected future income from premiums.
The expected future loss on the contract is immediately taken as an expense through theP&L account. As there is no expected future profit, there is no Contractual Service Margin.
 The small annual changes in the time value of money would pass through the P&L as aninvestment expense.
 Potentially a blockof onerous
contracts

Originated20102011

TotalPremium

50200250Claims-70-140-210

Net result-20604011

Onerous Contracts - 3
Onerous contracts

The future cash flows show more cash
outflows than cash inflows, due to highclaims (a Loss Ratio of 140%) for thisparticular block of business.

15010050-50

The future losses are discounted and thentaken as an expense through the P&L.

2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031

-100-150-200
Premium

Fulfilment
cash flows

Time valueof money

Risk
adjustment

Contractual
servicemarginClaims

Transferto Profitor Loss-624-6947012Transition IFRS 17 will be applied with retrospective effect.
 Opening balances and prior year amounts will need to be restated.
 However, the IASB also recognizes
this may cause practical issues.
 Potential short cuts include− Simplified approach(that is the modified retrospectiveapproach)− Fair Value approach What will auditors allow as shortcuts?

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Sources of income
Realised cash flows

Profit or loss: Insurance service

Change in discount rate

Other Comprehensive Income orP&L

Fulfilment
cashflows

Time valueof money

Passage of time

Profit or loss: Net financeRiskadjustment

Change inestimate

Amortisation

Contractualservice
marginProfit or loss: Insurance service

Amortisation

Profit or loss: Insurance service

14

Presentation - income
 The major change is that no Gross Written Premium (GWP) is reported on the front of theP&L.
 Instead, the change in contract liabilities is reported, split between different lines.
 Insurance service result continues to report most, but not all, of the revenue.

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Selected issues
 Regulatory capital / Solvency− Retained earnings will be restated− Impact on capital for solvency purposes?
 Presentation− New presentation for both profit and loss and balance sheet
 Transition− Which approach to adopting new standard Taxation− Will tax treatment follow accounting treatment?

16

Reinsurance - BBA
Time valueof money
Fulfilment
cash
flows

Risk
adjustment
Risk

adjustment

Contractual
service margin

Contractual
servicemargin

 Reinsurance contracts held are treated in line with insurance contracts
 The cost of reinsurance is spread over the life of the reinsurance contract.
 Ceding commissions are treated as a reduction in premiums to be paid.
 Contingent ceding commissions (linked to the claims performance) are treated as part ofthe claims to be paid by the reinsurer.
 Both Profit & Loss and Balance Sheet statements will disclose the financial position ofreinsurance contracts separately from insurance contracts.

17Reinsurance – choices in applying the BBA
 Discount Rates− Use the same discount rates as for the underlying insurance contracts:
 Contract Boundaries− May be different to the underlying insurance contracts, depending on the terms of thereinsurance treaty.
 Risk adjustment− This should reflect the degree of risk transfer:− If this is calculated on a Cost of Capital basis, then capital can be allocated to the risks
being− Separately the value of reinsurance should reflect the credit quality of the reinsurer

18Reinsurance - presentation
 Insurance results and balances must always be shown gross (before reinsurance) Reinsurance results and balances shown separately, before coming to the total of results andbalances.
 No set-off between income or expense from reinsurance contracts against the expense or
income from insurance contracts.
 As a result, the total cost of reinsurance will be a separate column on the statement of profitor loss.
 An entity may choose to provide additional disclosure of reinsurance cost relating to thedisclosure of portfolio level information.

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Reinsurance – example 1
 Under a Quota Share Yearly Renewable Term (QS YRT) treaty:− 50% Quota Share => Reinsurer pays 50% of any claims− Reinsurance premium on a specified schedule depending on the year
− Reinsurance profit commission of 50% of profits after expense charge of 10% of premium

InsurancePremiumClaimsNet result-200.090.0
110.0

 Overall result of110 – 2.5 = 107.5

Insurance premium
ClaimsYRT reinsurance
Premium
Profit commission
Net Premium
50% claims
Net result-70.0
22.5
47.5
45.0
2.5

Reinsurance premium

CedentClaimsReinsurer

Profit commission

20

Reinsurance – example 1 continued
 Under IFRS 17 the pool of insurance contracts and the reinsurance contract are valued as
two items under the Building Blocks Approach – here assuming cash flows for 20 years:
Insurance cash flows
500.0

Insurance

387.9
3,819.1

300.0
100.0

168.4-100.0

3,262.8-300.0Premium

Reinsurance

Fulfilment
cash flows

Time valueof money

Risk
Contractualadjustment
servicemargin8.8
86.8

ClaimsYRT Reinsurance cash flows
500.0
300.0
100.0

84.2

-100.06.2-300.0
Net Premium

50% claims

21

Reinsurance – example 1 continued

 Under IFRS 17, the results are presented in a different manner, but over a 1 year horizon withno changes in interest rates or other assumptions, this should be in line with IFRS 4.
 The major change is the split between underwriting result and investment income.
 This level of detail would be presented in the notes to the accounts, with the totals presented
in the overall statement of profit or loss.
 The contract boundary of the reinsurance treaty is based on the expected lifetime

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Reinsurance – example 2
 Under an Excess Of Loss (XOL) catastrophe cover treaty:− The treaty lasts for only 1 year
− No ceding commission− Reinsurance pays for claims for a single event with a loss over 30 million A claim of 40 mio

 No claims

Insurance premium
ClaimsPremium
ClaimsNet result

0.500.5PremiumClaims
Net result

0.5
-10.0
-9.5

Probability

99%Probability

1%

Reinsurance premium

CedentClaim if XOL threshold reached

Reinsurer

23

Reinsurance – example 2 continued
 Under an Excess Of Loss (XOL) treaty, we look at the probability weighted cash flows of thecontract:
Premium

0.5

Claims-0.1

Net cost

0.4

 As the treaty is only for 1 year, there is no issue of contract boundaries.
 As the premium is so low, any Risk Adjustment and Contractual Service Margin will be verylow.

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Reinsurance – example 3
 A cedent writes annual medical insurance, and the policies have a high upfront salescommission. However, the policies also have a high annual renewal rate so the cedent
expects to make profits in future years.
 To reduce the cash strain, it enters into a multi-year quota share treaty with a reinsurer, andreceives an initial ceding commission.
Forecast
Premium
ClaimsExpenses
Net result2021
100-70-40-102022
100-70-10202023
100-70-525

Insurance premium
ClaimsReinsurance
Premium
ClaimsCommission
Net result

2021-857025102022-85700-152023-85700-15

Reinsurance premium

CedentClaims

Reinsurer

Initial ceding commission

25Reinsurance – example 3 continued
 There is a difference in contract boundaries between the underlying insurance policies(1 year) and the reinsurance contract (3 years).

Insurance Furthermore, in 2021 the underlying insurance policies will be onerous policies.

-9.5

-10

0.5

Reinsurance

Fulfilment
cash flows

Time valueof money

Risk
adjustment

Contractualservice
margin

1.5
20

3.5

Transfer toProfit &Loss The cost ofreinsurance isspread over the 3year term of thecontract, including
the cash flow fromthe initialcommission
payment. There is
no upfront profit
recognised under
IFRS 17.

1526

Reinsurance of onerous contracts

Insurance The reinsurance of onerous contracts may be subject to different presentation ontransition to IFRS 17, depending on whether the contracts were onerous at inception.

-9.5

-10

0.5
Fulfilment
cash flows

Time valueof money

Risk
adjustment

Contractual
servicemarginTransfer toProfit &Loss If the contracts were not onerous when written, but later become onerous due to poor
performance, then reinsurance gains should offset insurance losses on transition to thenew accounting standard If the contracts were onerous, then the treatment is not clear – need clarification fromaudit firms on this topic
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Reinsurance shown
as a separate column

Reinsurance and Presentation - Income
Statement of profit & loss
Notes

31.12.2021

31.12.2021

31.12.2021

Insurance
contracts

Reinsurance
cededTotal

Insurance contract revenue / reinsurance expense

14,210-717

13,493Claims incurred / reinsurer’s share of claims incurred-11,105

569-10,536

Fulfilment expenses incurred-793-793

Other expenses incurred

-303

-303

-1,324-1,324

Amortisation of acquisition costs
Changes in estimates

-53

-3

-56

Adjustments to expected claims and expenses

114

4118

Losses on initial recognition of insurance contracts
Net gains on modification and derecognition of contracts
Insurance service result

-7

-7481

-20

461

1,220-167

1,053

Investment income
Insurance finance expense

4,759-4,540182-4,358Finance costs-50

Profit before tax

1,404

Tax expense-393

Profit after tax

1,011

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Additional disclosure for reinsurance Inbound and outbound reinsurance should be disclosed separately: The expense of reinsurance is spread over the term of the reinsurance contract
 The credit risk in reinsurance contracts should be disclosed:− For credit risk that arises from contracts within the scope of IFRS 17, an entity shall disclose:a) The amount that best represents its maximum exposure to credit risk at the end of the reporting
period, separately for insurance contracts issued and reinsurance contracts held; andb) Information about the credit quality of reinsurance contracts held that are assets.

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Reinsurance and Capital Management - 1

Sell more capital
light products
e.g. UL policies

Structured
Reinsurance

Expand into
emerging
markets

Sell portfoliosthat consume
capital – M&A

Purchase more
traditional
reinsurance

Change strategic
asset allocation

Decrease
policyholder andshareholder
dividends

Reduce costs –automation,
outsourcing

Merge or put
company into
run-off

Raise capital –equity,subordinateddebt30Reinsurance and Capital Management - 2 Currently insurers may need to hedge their financial risks differently, depending on whetherthey focus on hedging− The IFRS balance sheet or− The regulatory balance sheet
 With the change to IFRS 17, some regulators are looking to change their approach to capital
to a more Solvency 2 / risk sensitive framework This will enable hedging strategies to closely match both accounting and regulatory treatment
of insurance liabilities
 It may also encourage more co-insurance / quota share / full risk transfer reinsurance
solutions, to offer better matching of assets and liabilities between insurance and reinsurance
 IFRS 9 will also encourage more active hedging of assets and liabilities with a move to fairvalue accounting

31

Reinsurance – selected issues
 Contract boundaries for reinsurance− Reinsurance contracts may well have different boundaries to the underlying policies
 Impact on transition to new standard− The retrospective application of the standard will involve a great deal of work and potentiallysignificant changes to brought forward balances such as retained earnings.
− Treatment of onerous contracts on transition?
 Business aims of reinsurance− The future volatility from changes in valuation parameters such as future claims, lapses,and even interest rate assumptions will highlight the role of reinsurance Differences with Solvency 2 / local regulations− Choices of interest rate used and risk adjustment calculation may vary from Solvency 2 orother regulatory capital frameworks
32Responding to IFRS 17 – potential solutions
 Co-Insurance− Ensure cash flows under reinsurance offset cash flows of underlying policies− Still issues on transition and contract boundaries− Reinsurers have a different level of aggregation from insurers
 Changing policy terms− Extending contract boundaries allows for initial expenses to be spread over a longer period,
but adds more risk to product and attracts more capital Hedging financial risks through derivatives and banking products− Reduce volatility of accounting results from changes in discounting rates and other financial
variables Selling run-off assets− Will run-off players in Bermuda or elsewhere stick with US GAAP for accounting?

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Disclaimer
This presentation and none of the information contained is intended to be legally binding orenforceable. The presentation is not exhaustive and shall not give rise to legal rights orobligations.
The information provided in this presentation does in no way whatsoever constitute legal,accounting, tax or other professional advice. While SCOR Global Life SE has endeavoured toinclude in this presentation information it believes to be reliable, complete and up-to-date, thecompany does not make any representation or warranty, express or implied, as to the accuracy,completeness or updated status of such information. Therefore, in no case whatsoever will
SCOR Global Life SE and its affiliated companies be liable to anyone for any decision made or
action taken in conjunction with the information in this presentation or for any related damages.

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