IFRS – eine CFO-Perspektive - EYFILE/ey-013-wemmer-ifrs-eine-cfo-perspektive.pdfInternational...

International Financial Reporting StandardsDer 16. IFRS Kongress 2017 in Berlin

IFRS– eine CFO-Perspektive

Dr. Dieter WemmerAllianz SE

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Agenda

► International Financial Reporting at Allianz

► IFRS 17 – Chances and Challenges

► IFRS 9 – Mission accomplished?

7./8. September 2017 16. IFRS Kongress 2017

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20 years of international financial reporting atAllianz


As a leading global financial institution we support the creation of an IFRS forinsurance contracts.

20171997 2021

IASB

Alli

anz

Gro

up

2005 2010

Effective date ofIFRS 4 Phase I

First IFRS 17Exposure Draft

Final IFRS 17issued May 2017

IASC startsproject oninsurancecontracts

Voluntary application ofIAS for consolidatedfinancial statementsð For insurancecontracts: US GAAP

Application of IFRS 4 Phase Ifor insurance contractsð For recognition andmeasurement:“Frozen US GAAP as of1st January 2005”

1998

Increasing number of Allianz entities appliesIFRS for separate financial statements

Financial crisistriggersrevisionof IAS 39

2008

FinalIFRS 9issued

Jul 2014

2014

IFR

S17

IFR

S9

Effective dates ofIFRS 17 and 9

(IFRS 9 deferral forinsurers)

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IFRS 17 – Fundamental change of insuranceaccounting ahead


IFRS 17 will increase harmonization, comparability and transparency.

US GAAP(“frozen”)IF

RS

4

Allianz

Local GAAP 2

Company 2

Local GAAP 5

Company 3

Local GAAP 4Local GAAP 3

Local GAAP N

Company n

…

IFR

S17

One set of rules for definition, recognition and measurement of insurance contracts

Fundamental change for Life insuranceà Prospective current value

measurement

Limited impact onProperty & Casualty insurance given

policy choices

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Performance reporting under IFRS 17 Life /Health – non-GAAP measures


Currently strong focus on non-GAAP measures

Heterogeneity andcomplexity of products

Diversity in local GAAPs

§ Alternative measures (so-called Marketconsistent embedded value / MCEV) developedby European Insurance Industry

§ Financial crisis revealed MCEV’s weaknesses,resulting in entity-specific adjustments andimpaired comparability

IFRS 17 as opportunity for improvement

§ IFRS 17 has its roots in MCEV reporting, but reflects learnings from financial crisis (eg, by introducing the so-calledvariable fee approach / VFA).

§ More consistency of GAAP and non-GAAP numbers, specific MCEV concept no more needed.

§ Better comparability with global peers, e.g. also in Asian market (IFRS often used also for stand alone financials).

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Performance reporting under IFRS 17 Life /Health – Alignment with Solvency II

Market Value Balance Sheet(MVBS) for Solvency IIð Measurement of insurance

liabilities based onprospective, stochasticvaluation

Current IFRS(= local GAAP or US GAAP)ð Measurement of insurance

liabilities generally basedon locked-in assumptions /amortized cost

1) Disconnect inmeasurement models

2) No income statementunder MVBSð Difficulties to

explain own fundsmovement

IFRS 17 as opportunity to better link Solvency II to IFRS

Ø Similar conceptual basis: IFRS 17 and Solvency II based on a prospective current value measurement model.

Ø Misalignment of project timelines of Solvency II and IFRS 17 resulted in development of two separate balancesheets with unnecessary differences.

Ø Our long-term goal: Use IFRS balance sheet as basis for Solvency II, similar to the approach taken under Basel IIIfor banks.

Ø Would allow one standardized audit and avoid conflicting steering implications.


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Performance reporting under IFRS 17 forProperty & Casualty (P&C)


Status Quo: Only little complaints about inconsistency and intransparency from user side

Local GAAPs are similarall over the world

Challenges regardingtransparency about

adequacy of loss reservesis due to its nature

Limited focus on non-GAAP measures

No need for fundamental change through IFRS 17

Ø IFRS 17 offers accounting option for most part of the P&C business that is conceptually similar to current practiceand generally provides a workable solution for P&C business (so-called Premium Allocation Approach / PAA)

Ø Introduction of discounting of loss reserves and explicit risk adjustment with limited impact only

Ø Risk areas during implementation:

Ø By nature, principle-based guidance requires interpretation when applied

Ø Inappropriate interpretations may result in significant cost without substantial benefit for users

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IFRS 17 – Impact on product mix andinvestment strategy

Property-Casualty§ No impact expectedLife/Health§ In Europe, major potential impacts already anticipated by introduction of Solvency II; impact

may be more significant in other jurisdictionsProduct mix

Property-Casualty§ No impact from IFRS 17 expected as only weak link between underwriting and investments

(IFRS 9 may trigger changes*)Life/Health§ Generally better reflection of strong interaction between investments and policyholder

benefits for so-called participating contracts**

Investmentstrategy

IFRS 17 not expected to change existing trends in the insurance market

Reduction of accounting constraints for asset-liability management ofparticipating contracts


* See p. 13 for more detail – no recycling of OCI result for equities under IFRS 9.** Insurance policies (typically Life) that pay dividends to the policyholder based on the insurer‘s profit.

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IFRS 17 – Questions and implementationchallenges remain


Critical but constructive facilitation of IFRS 17 by Allianz.

§ Work with insurance industry, Big 4, TRG, IASB andEFRAG to ensure meaningful interpretation of IFRS17.

Workablesolutions needed

§ Management to understand new KPIs – planningand steering processes to be adopted

§ Users to adopt to new accounting world and rebuildexperience and trust in the numbers

Internal andexternalcommunicationchallenging

§ Implementation costs in the lower three digit millionEuro range expected (incl. IFRS 9)

§ Significant implementation efforts incl. parallel andtest runs

Significantinvestments in ITand processes

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Bringing IFRS 9 to life is extensive work…


Central vs.local set-up

• Allianz’ chosen central set-up ensures governance and avoids multiple localimplementations.

• But: High data traffic and need for interfaces to local systems.

Adjustments toclosing process

• Need to integrate IFRS 9 into existing closing process within given tight deadlines.

IFRS 17 inter-dependencies

• Classification of assets partially dependent on IFRS 17 measurement model for relatedinsurance contracts.

• Indispensible to align first-time applications of IFRS 9 and 17.

Immense implementation and ongoing operational efforts and interdependencieswith IFRS 17.

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… but impact for an insurer ranges from limitedto detrimental


IFRS 9 – major changes to classification logic and impairment calculation

IFRS 9classification

IFRS 9impairments

ü IFRS classification principles generally work for debt instruments (SPPI,business model considerations)

§ Equities (no recycling or P/L volatility) will lose attractiveness as majorasset class for insurance companies

§ General increase in earnings volatility expected (debt funds, embeddedderivatives)

O

O

ü Generally, earlier recognition of credit losses under IFRS 9§ However, (pro-cyclical) cliff effects not fully mitigated and recognized

credit losses likely too high§ Presumably limited impact on insurance companies beyond one-time

transition effect

O

º

From the insurance industry‘s perspective prohibiting recycling for equityinstruments is major criticism of the IFRS 9 classification model.

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Vielen Dank

IFRS – eine CFO-Perspektive - EYFILE/ey-013-wemmer-ifrs-eine-cfo-perspektive.pdfInternational...

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