As insurance companies prepare themselves for the new International Financial Reporting Standard (IFRS) 17, Takaful companies are facing significant uncertainty in how to interpret and apply the standard to their businesses. Interpreting IFRS 17 for Takaful business is not a straightforward process. This paper by Milliman’s Farzana Ismail, Clement Bonnet, and Philip Simpson highlights several key issues and challenges in implementing IFRS 17 for Takaful business.
What involvement does the Financial Conduct Authority (FCA) have in Part VII transfers and what are its current expectations? This article summarises the key points of the FCA’s approach to the review of Part VII transfers and provides perspective from Milliman’s experience of Part VII transfers.
Milliman has announced the availability of a new report detailing embedded value (EV) results for 19 major insurance companies in Europe. The report examines trends among the companies reporting EVs as of year-end 2016, comparing practices adopted and discussing reporting issues following the implementation of Solvency II in Europe and the move toward the global adoption of International Financial Reporting Standards (IFRS).
“The future of embedded value reporting in Europe remains uncertain—although there has been increased alignment between EV and Solvency II reporting, we have continued to witness a gradual reduction in the number of firms reporting on an EV basis,” said Philip Simpson, a principal and consulting actuary in Milliman’s London office. “And with Solvency II disclosures via the SFCR lacking information around new business or analysis of change, for example, there is potentially a void appearing in the level of granularity of financial information reported.”
The release of the final IFRS 17 standard in May 2017 could signal an alternative reference point for Market Consistent Embedded Value (MCEV). And with substantial disclosure requirements involved, this may allow a sufficient amount of information to be obtained about the profitability of the business. However, the preparation of accounts under IFRS 17 gives rise to a different interpretation and timing of profit and loss compared with an EV basis, which will need to be considered. Ultimately time will tell whether companies use Solvency II or IFRS 17 as the reference point for MCEV.
Key insights from the European report include:
• There has been an ongoing, though moderate, reduction in firms reporting on an embedded value basis in 2016 compared with 2015.
• An amendment to the European Insurance CFO Forum Market Consistent Embedded Value Principles© (the MCEV Principles) was issued in May 2016, which permits the use of the projection methods and assumptions for market-consistent solvency regimes (e.g., Solvency II) in EV reporting. In light of this, during 2016 companies continued to change their approaches, with a continued trend to align EV and Solvency II reporting.
• The CFO Forum members (that disclosed their embedded values at the end of 2016) reported a combined embedded value of GBP 263 billion (EUR 308 billion) at the end of 2016 compared with GBP 246 billion (EUR 288 billion) at the end of 2015. Experience amongst the companies studied was mixed, with around half of companies experiencing an increase in embedded value compared with 2015.
• Overall, results for new business were fairly positive for the majority of companies in the report. The total value of new business (VNB) written by the current CFO Forum members (that disclosed their values of new business at the end of 2016) was GBP 11.3 billion (EUR 13.3 billion) in 2016, compared like-for-like with GBP 10.1 billion (EUR 11.9 billion) in 2015.
To download the report, click here.
Milliman today announced the availability of two new reports detailing embedded value (EV) results for 32 major insurance companies in Europe and Japan and 14 major insurance companies operating in Asia. The reports examine trends among those companies that reported EVs as of midyear 2015.
“In Europe, embedded value results in the first part of 2015 exceeded gains from the first six months of 2014,” said Milliman Principal and Consulting Actuary Philip Simpson. “Japanese companies reported strong results for the fiscal year ending in March 2015. Nonetheless, insurers remain cautious given the volatile markets and persistently low interest rates.”
Key insight from the European report include:
• Approximately half the companies saw their embedded value fall.
• Insurers’ market capitalizations have broadly mirrored embedded values in the first half of 2015, with both rising around 5%.
• Japanese life insurers have seen significant increases in value through new sales and investment gains, with EV growth often accompanying growth in market valuation.
• Insurers continue preparation for Solvency II regulations that come into force on 1 January 2016.
“The big story in Asia is the breakout growth of value of new business (VNB) in the first half of 2015 compared with the same period in 2014. This growth has been mainly new business volume driven (rather than by major margin enhancement efforts), primarily as a result of the burgeoning middle class in many Asian countries,” said Milliman Principal and Consulting Actuary Paul Sinnott.
Key insight from the Asian report include:
• Chinese companies experienced major growth in VNB compared with the same period in 2014, reflecting increased new business volumes and better profitability margins, which are typically heavily supported by optimistic increasing investment return assumptions.
• The low interest rate environment, especially for longer-dated bonds, remains a challenge for insurers in China, South Korea, and Taiwan in particular.
To obtain a copy of the Milliman studies, click here.
In the United Kingdom, insurers need to consider several factors before they calculate solvency capital requirements (SCR) using the standard formula under Solvency II. The Actuary quotes Milliman consultant Philip Simpson discussing these factors in this article.
Here is an excerpt:
Philip Simpson, principal at Milliman, said: “The emphasis is on the firm to demonstrate why the standard formula is suitable for risk exposures. It’s not simply an automatic default option.”
…He said life firms should consider factors such as longevity risk and the firm’s own pension scheme risk and credit risk, including whether their assets are “significantly different from the typical portfolio of corporate bonds”.
In addition, he said life firms needed to consider equity risk if they had a different equity portfolio with a different concentration risk from that assumed in the standard formula.
Simpson said non-life firms had to consider non-life underwriting risk “if the deviations are significant from the standard formula assumptions”. Catastrophe risk also needed to be taken into account.
The Solvency II implementation date is quickly approaching. To date, several milestones have been met. In October 2014, the European Commission adopted the text for delegated acts, also known as implementing measures. In addition, the European Insurance and Occupational Pensions Authority (EIOPA) recently published a number of implementing technical standards, regulatory technical standards, and guidelines consultation papers. Much of the final framework for Solvency II has been drafted, but more changes are expected before 2018. Milliman consultants Matthew Cocke and Philip Simpson provide perspective in a Solvency II Wire article.