Term Life Insurance South Africa – 1 IFRS 4 Profit Reporting for South African Life Insurance Contracts Authored by Szymon Marszalek, Peter Tripe and Dave Strugnell Presented at the 2013 Convention of the Actuarial Society of South Africa 31 1 October 2013, Sandton Convention Center ABSTRACT Hoo e Approximately 20 years after its inception; Insurance accounting. The International Accounting Standards Board (IASB) project is nearing completion. The recently released June 2013 IFRS 4 Exposure Draft represents a possible picture of the future of global insurance accounting, and it is important for insurers to understand and begin to prepare for the changes it will bring. This paper reviews the key principles and potential implications of IFRS 4 Phase II in its currently proposed form in the South African life insurance context. In particular, the proposed IFRS 4 Phase II revenue reporting method is compared with the current Financial Strength Valuation (FSV) method for the image of subsidy verification and the simple term of the product. The results of this simulation are used to identify and discuss the key impacts that the new earnings reporting standard will have on insurance contract liabilities and, therefore, earnings reporting over time. This paper focuses on key areas of high certainty within the exposure framework and is more relevant to areas where change is expected. The paper’s findings show that while IFRS 4 will result in the greatest levels of profit reduction and preemption pressure for revenue-generating strategies, low-margin and not-for-profit strategies may experience less revenue disruption and premature stress than they do now. With FSV method. IFRS 4 will also help increase comparability between insurers’ financial results by reducing the discretion insurers have in generating additional profits. Keywords: IFRS 4 Step 2; assessing financial health; FSV; profit report; South Africa; life insurance; long-term insurance; insurance accounting; Option 109
2 110 SZYMON MARSZALEK, PETER TRIPE & DAVE STRUGNELL IFRS 4 Profit Reporting on Life Insurance Contracts with South African Provisions Szymon Marszalek, email@example.com, but try to change the way the profit is recognized. Given the long-term nature of many insurance contracts, this issue is perhaps the most important in insurance accounting. As a result, changes in reporting methods can have a material impact on the profits generated from insurance contracts over a period of time. In order for users to understand and compare an insurance company’s financial performance and financial position (both with other insurance companies and with other companies), it is important that the principles underlying insurance accounting are consistent with other accounting principles and are used across all accounting principles. Time by insurance company. Worldwide. 1.1 Development of Insurance Financial Reporting Systems Over time, life insurance reporting has changed little globally. This has led to very different insurance liability practices across countries and regions. In addition to the inherent inconsistencies in insurance reporting, the unique nature of insurance contracts makes insurance financial reporting largely incomparable to financial reporting in other industries. The financial statements of existing insurance companies were structured in accordance with the statutory settlement report and included a lot of discretion, resulting in a decrease in profits after the insurance period. This method was suitable for the joint ventures that dominated the insurance market at the time, as high solvency was considered more important than high profits (Fagan, 1991). As insurance companies decline over time, interest in finding realistic insurance rates of return that can meet the needs of shareholders and stakeholders increases. In recent decades, this focus has taken a step further with the development of quality measures, such as value added, to determine the value of future insurance profits. 1.2 Types of Insurance Financial Reporting Systems At a high level, financial reporting systems can be considered to be of two types: those that initially produce benefits and those that do not (Waugh, 1998). The financial reporting method currently used in South Africa, Financial Statements (FSV), allows a portion of profits to be deducted from seizures and the remaining profits to be shown from the beginning. Profit reductions may be made at the insurer’s discretion to control the amount of profit initially accrued and to prevent losses in future policy years.
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3 SZYMON MARSZALEK, PETER TRIPE & DAVE REPORT IFRS 4 PROFITS REPORTING FOR SOUTH AFRICAN LIFE INSURANCE COMPANIES 111 The proposed IFRS 4 earnings reporting method does not allow profits to appear early and the actual options are compared to the natural order. FSV method). There is widespread agreement around the world that financial reporting systems should not recognize excess profits in the first place, especially if they relate to future services or risk transfers. Like other reporting systems, financial reporting systems require a balance between rules and regulations in conducting business. A principles-based approach aims to capture all material risks, but allows discretion and company-specific risks to be set at the company level. On the other hand, rules-based approaches often provide forms with set parameters that provide little or no room for customization and company-specific customization. The shift to a principles-based approach can be seen as a step toward enterprise risk management and often requires sophisticated (i.e. specialized) tools and clear judgment. In particular, effective principles-based reporting standards require strong governance to ensure that the freedoms allowed in the principles are used to improve reporting and are not abused. To some extent, both the FSV and IFRS 4 approaches have elements of a rules-based approach. On the regulatory side, both FSV and IFRS 4 specify minimum margin levels that must be added to highly rated loans (either through mandatory provisions in FSV or contractual servicing limits and risk adjustments in IFRS 4). Undoubtedly, IFRS 4 has stricter rules as it does not allow the emergence of profits in the first place. In principle, both FSV and IFRS 4 require profits to be recognized positively over the life of the insurance contract. This principle is common to both methods, but the way it is used may differ. The FSV approach allows greater discretion by using specific estimates to maximize the value of insurance liabilities, which may be inherently risky. IFRS 4 allows discretion in the calculation and initiation of risk adjustments and allows some discretion, within certain requirements, in the recovery method used for contractual service limits. Therefore, the potential effect of discretion on insurance liabilities and profits is much higher under the FSV approach than under IFRS IFRS 4. Background The IFRS 4 project began in 1997 when the International Accounting Standards Committee (IASC) established a Management Committee to begin development work. Insurance accounting standards. At that time, insurance contracts were excluded from other accounting standards, and the accounting standards for insurance contracts were difficult to understand and different from those of other departments. The committee’s work resulted in the publication of an information document in 1999 (IASC, 1999). The report highlighted the various issues that need to be considered when developing international accounting standards and the IASC’s interim outlook on these issues.
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4 112 SZYMON MARSZALEK, PETER TRIPE & DAVE STRUGNELL IFRS 4 Quality Reporting for Life Insurance Contracts in South Africa Industry comments on this document were reviewed and taken into account in the development of the Draft Technical Statement (DSOP) presented by the Steering Committee. 2001 International Accounting Standards Board (IASB, replaced IASC) (IASB, 2001). The DSOP defined the principles that the IASB considers established in insurance accounting standards. This focused on the need for insurance to provide accurate and reliable information that users of financial statements can use to make economic decisions. In particular, the IASB has set specific goals for the standard. Improve financial reporting by providing a consistent basis for reporting insurance contracts. Helps users of financial statements understand how insurance contracts affect an entity’s financial position, financial performance, and cash flows. Enhances comparisons across institutions, regions and financial markets. In 2002, it was decided to split the IFRS 4 project into two phases. Phase 1, an interim standard, was completed in 2004 and focused on the classification and disclosure of insurance contracts, ensuring that many of the previous actuarial accounting practices were maintained. As Phase 2 progresses, countries that have adopted IFRS reporting are still in compliance with IFRS 4 Phase 1, which allows for a wide range of accounting methods for insurance contracts. Since 2004, Phase 2 has been under development by an IASB working group. in 2007
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