Moody's Corporation · NYSE:MCO
Moody's — Technical Presentation (September 2019)
32 slides from Moody's's technical presentation, September 2019
Slide 1: Impact and implementation of new accounting standards on the Insurance Industry
Impact and implementation of new accounting standards on the Insurance Industry September, 2019
Slide 2: Speakers
Speakers Laurent Birade Srini Iyer Senior Director, Regulatory and Senior Director, Regulatory and Accounting Solutions Accounting Solutions Moody’s Analytics Moody’s Analytics Impact and implementation of new accounting standards on the Insurance Industry 2
Slide 3: Today's Discussion Points
Today’s Discussion Points 1 Accounting Standards – Definitions 2 Business Implications and Interactions 3 Implementation Considerations Impact and implementation of new accounting standards on the Insurance Industry 3
Slide 4: Accounting Standards Definitions
1 Accounting Standards Definitions
Slide 5: Insurers Balance Sheet
Insurers Balance Sheet Comprehensive impact of new standards IFRS9 IFRS17 CECL LTDI New Allowance Insurance Standard Contracts Standard Fair Value: Market Consistent Valuations of Assets and Liabilities Reference: KPMG Illustrative Disclosures for Insurers Impact and implementation of new accounting
Slide 6: Insurers Balance Sheet
Insurers Balance Sheet Comprehensive impact of new standards AICPA conference 2018 IFRS9 IFRS17 CECL LTDI New Allowance Insurance Standard Contracts Standard Fair Value: Market Consistent Valuations of Assets and Liabilities Reference: KPMG Illustrative Disclosures for Insurers Impact and implementa
Slide 7: Timeline for CECL, IFRS 9, LDTI, and IFRS 17
Timeline for CECL, IFRS 9, LDTI, and IFRS 17 Alignment of the LDTI and IFRS 17 effective dates allows insurers to implement simultaneously and efficiently. Impact and implementation of new accounting standards on the Insurance Industry 7
Slide 8: Insurance Contracts Standards
Insurance Contracts Standards IFRS17 and LTDI – Liability Side Impact IFRS 17 𝑳𝑳𝑳𝑳𝑳𝑳 𝑳𝑳𝑳𝑳𝑳𝑳 (𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹 𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄) General Premium Fulfillment Variable Fee Measurement Allocation Cashflows Approach Model Approach Discount Rates Explicit…
Slide 9: Insurance Contracts Standards
Insurance Contracts Standards IFRS17 and LTDI – Liability Side Impact LDTI IFRS 17 ( Targeted Improvements to the Accounting for Long-duration Contracts ) 𝑳𝑳𝑳𝑳𝑳𝑳 𝑳𝑳𝑳𝑳𝑳𝑳 (𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹 𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄) Cohort based calculation. Current assumptions…
Slide 10: IFRS 17 and LDTI continue to have broad implications for Insurers
Ratings and Investor: Increase in earnings volatility for most Insurers. Impact on ratings will depend on comparison to peers. IFRS 17 and Business Mix: Detailed reporting and LDTI earnings transparency could influence strategy and product mix continue to have broad ALM and Hedging: Fair Value appro
Slide 11: New Allowance Standards
New Allowance Standards IFRS9 and CECL standard – Asset Side Impact What is the business Measurement Alternatives model Category FVTPL option (if Held to collect Amortized cost acc. Mismatch) Held to collect FVTPL option (if Yes FVTOCI AND sell acc. Mismtach) Cashflows “SPPI” All other FVTPL FVOCI o
Slide 12: New Allowance Standards
New Allowance Standards IFRS9 and CECL standard – Asset Side Impact What is the business Measurement Alternatives model Category FVTPL option (if Held to collect Amortized cost acc. Mismatch) Held to collect FVTPL option (if Yes FVTOCI AND sell acc. Mismtach) Cashflows “SPPI” All other FVTPL FVOCI o
Slide 13: New Allowance Standards
New Allowance Standards IFRS9 and CECL standard – Asset Side Impact What is the business Measurement Alternatives model Category FVTPL option (if Held to collect Amortized cost acc. Mismatch) Amortized cost Held to collect FVTPL option (if Yes AND sell FVTOCI acc. Mismtach) HFI One time election – F
Slide 14: New Allowance Standards
New Allowance Standards IFRS9 and CECL standard – Asset Side Impact What is the business Measurement Alternatives model Category FVTPL option (if Held to collect Amortized cost acc. Mismatch) Amortized cost Held to collect FVTPL option (if Yes AND sell FVTOCI acc. Mismtach) HFI One time election – F
Slide 15: IFRS 9 and CECL will have broad implications for Insurers
Ratings and Investor: Shareholder’s Equity, Earnings Volatility, Results and Roll Forward IFRS 9 and Business: Investment Mix Shift, Duration, CECL will Portfolio Management, Maximizing risk return with allowance constraints… have broad implications Regulatory: ECL reporting, Stress Testing, for Ins
Slide 16: Interactions and Implications
2 Interactions and Implications
Slide 17: Interactions Among the Standards
Interactions Among the Standards New standards could drive big changes to profit timing and volatility ‒ Impact of Economic ‒ Classification and separation of Insurance Assumptions Contract aspects IFRS 17 ‒ Impact of Discount Rates ‒ Grouping of insurance contracts and / LDTI alignment with assets
Slide 18: Impact of Economic Assumptions
Impact of Economic Assumptions Discount Rate and Illiquidity Premium Modelling BBB A AA SII VA 400 350 y = 0.65x Illiquidity Premium 300 y = 0.5683x 250 200 y = 0.3735x 150 100 y = 0.1999x 50 0 0 100 200 Excess Spread 400 300 500 600 BBB A AA DEM GOVT 5.00% 4.00% 3.00% Spot Rate 2.00% 1.00% 0.00% 11
Slide 19: Impact of Discount Rate Assumptions
Impact of Discount Rate Assumptions Profit Emergence Pattern (1) Liability discount rate = (2) Liability discount rate = (3) Liability discount rate = Risk-free rate Risk-free rate + liquidity premium Asset discount rate Initial balance sheet Expected profits Profit Emergence under IFRS 17 Source: h
Slide 20: Impact of Discount Rate Assumptions
Impact of Discount Rate Assumptions P&L volatility Liability discount rate = Liability discount rate = Liability discount rate = Risk-free rate Risk-free rate + illiquidity premium* Asset discount rate Net Financial Result Insurance Service Result Profit Emergence under IFRS 17 Source: https://www.m
Slide 21: Impact of Classification and Policy Choices
Impact of Classification and Policy Choices Fig. 1 Fig.2 Fig.3 Fig. 4 Source: IFRS17 and IFRS9: Bridging the Gap, Bhana and Schaeffer Deloitte Impact and implementation of new accounting standards on the Insurance Industry 21
Slide 22: A Modeling Framework for Business Insight
A Modeling Framework for Business Insight Business insight. Need to understand the 1 changes to profit emergence introduced by IFRS 17 (& 9), their impact on KPIs and resulting impact on business. Investor communication. Need to clearly 2 communicate these changes to investors and other external sta
Slide 23: Implementation Considerations
3 Implementation Considerations
Slide 24: Broad Implications of CECL and IFRS9
Broad Implications of CECL and IFRS9 Waterfall Reconciliation IFRS 9 » Data Management » Support for credit deterioration » Support for all Measurement approaches » Cashflow models » Volatility cliff for stage 2 migration » Period over period analysis of changes » Narrative behind the numbers CECL »
Slide 25: Target Operating Model for IFRS9/CECL
Target Operating Model for IFRS9/CECL Connecting the Accounting and Credit Risk worlds Estimation Analysis Reporting • Exposures • 12M/Lifetime ECL • Qualitative factors Approach • Counter-parties • Allowance • Supporting documentation • Risk mitigants • Provision • SPPI • Scenarios • Stage Allocati
Slide 26: Broad Implications of IFRS 17 and LDTI
Broad Implications of IFRS 17 and LDTI IFRS 17 » Data Management » Dealing with granularity different from IFRS 17 groups » Support for all Measurement approaches » Tracking CSM and LC separately » LRC/LIC calculations » Reinsurance held/ceded » Flexible Analysis of Change » Flexible Accounting Engi
Slide 27: Target Operating Model for LDTI/IFRS 17
Target Operating Model for LDTI/IFRS Connecting the Accounting and Actuarial worlds Measurement Collaborative Reporting • Historical • Analysis of Change sign-off • Soft Postings balances • Run Actuarial • Rollforward • Accounting Models • Revision Using both Actuarial • Approvals policies • Adjustm
Slide 28: Aligning Target Operating Models
Aligning Target Operating Models Alignment of assumptions across the balance sheet Systems Architecture - Synergies Resource optimization Consistency of assumptions and optionality Implementation Considerations & Transition choices Impact and implementation of new accounting standards on the Insuran
Slide 29: Our Focus Areas
Our Focus Areas Definitions of the standards and its implications Interactions and importance of a projections model Implementation Considerations Tactical vs Strategic Solution Approach Impact and implementation of new accounting standards on the Insurance Industry 29
Slide 30: Moody's Analytics Thought Leadership
Moody’s Analytics Thought Leadership Earnings Volatility, Share Price Permitted approaches for constructing Reasonable and supportable forecast Profit emergence under IFRS 17 Performance, and Credit Portfolio IFRS 17 Discount Rates from principle to practice Management Under CECL and IFRS 9 Managing
Slide 31: Questions and Answers
Questions and Answers Q. A. Impact and implementation of new accounting standards on the Insurance Industry 31
Slide 32: Appendix
Laurent Birade Srini Iyer Senior Director Senior Director Laurent.Birade@Moodys.com Srinivasan.Iyer@Moodys.com +1 (212) 553-3914 +1 (212) 553-5930 Appendix