International Financial Reporting Standard (IFRS) 17 and US GAAP long-duration contract targeted improvements (LDTI) will both become effective on January 1, 2022. Both frameworks require a current estimate of insurance liabilities instead of following a traditional net level premium reserve approach using assumptions locked in at policy issue. However, the source of period-by-period profit, and the resulting profit signatures due to experience or assumption changes, could differ significantly between the two. This briefing note by Milliman consultants Takanori Hoshino and William Hines illustrates these potential differences using a traditional level premium endowment contract.
International Financial Reporting Standard (IFRS) 17 embraces a marketing value accounting concept under which insurance contract liabilities are constantly updated to reflect environments at the reporting date. It also has a deferral accounting aspect. These features are anticipated to replace the roles that embedded value (EV) disclosure has been taking. However, as the insurance contract valuation by IFRS 17 is very complex, simpler market value accounting approaches like EV disclosure will be still more useful in some situations. This paper by Milliman consultant Takanori Hoshino compares the valuation approaches between IFRS 17 and EV and infers a potential future of EV disclosure.
While International Financial Reporting Standard (IFRS) 17 provides little guidance about coverage units and the contractual service margin (CSM), insurers may be able to find quick but reasonable choices from current modeling philosophy or certain existing standards such as U.S. GAAP. Insurers should carefully examine the consequences and reasonableness of those choices in light of the characteristics of their businesses, as coverage units are very important factors for determining the future profit signature under IFRS 17. Milliman’s Takanori Hoshino, Kurt Lambrechts, Sjoerd Brethouwer, and William Hines provide perspective in this paper.
Risk assessment and risk management are critical to survival in today’s business climate, and the accurate calculation of economic capital is more important now than ever before. An effective economic capital management framework also plays a crucial role in product pricing, capital allocation and project financing, performance management, and financial reporting.
A recent Milliman white paper examines various techniques for the aggregation and allocation of capital.