there is generally an option to convert the contract to a universal life contract. After the initial period, the premium
rates are not guaranteed, but cannot exceed the age-related guaranteed premium.
Reinsurance is used within the protection businesses to manage exposure to large claims. These practices lead to the
establishment of reinsurance assets on the group’s balance sheet. Within LGIA, reinsurance and securitisation is also used to provide regulatory solvency relief (including relief from regulation governing term insurance and universal life reserves).
US universal life
Universal life contracts written by LGIA provide savings and death benefits over the medium to long term. The
savings element has a guaranteed minimum growth rate. LGIA has exposure to loss in the event that interest rates
decrease and it is unable to earn enough on the underlying assets to cover the guaranteed rate. LGIA is also exposed
to loss should interest rates increase, as the underlying market value of assets will generally fall without a change in
the surrender value. The reserves for universal life totalled $557m (£412m) at 31 December 2017 ($596m (£482m)
at 31 December 2016). The guaranteed interest rates associated with these reserves ranged from 1.5% to 6%, with the
majority of the policies having guaranteed rates ranging from 3% to 4% (2016: 3% to 4%).
The following extract from the financial statements of Amlin illustrates a tabular
presentation of insurance risk showing information about premiums and line sizes by
class of business.
Extract 51.28: MS Amlin plc (2016)
Notes to the financial statements [extract]
for the year ended 31 December 2016
13. Insurance liabilities and reinsurance assets [extract]
g) Underwriting risk [extract]
Marine & Aviation portfolios (unaudited) [extract]
Europe
UK Gross
Gross
Europe
UK
Europe
written
written
UK Max
Max line
Average
Average
premium
premium
line size
size
line size
line size
2016
£m £m £m £m £m £m
(i)
Hull
45 52 50 50 3 2
(ii)
Cargo
46 30 50 33 9 2
(iii)
Energy
34 – 73 – 6 –
(iv)
War and Terrorism
51
–
50
–
15
–
(v)
Yacht
52 3 67 33 7 8
(vi)
Marine
Liability
81 19 67 67 12 6
(vii)
Specie
15 – 43 – 7 –
(viii)
Aviation
47 – 87 –
17 –
Total Marine & Aviation
371
104
4400 Chapter 51
11.2.3
Insurance risk – sensitivity information
As noted at 11.2 above, IFRS 4 requires disclosures about sensitivity to insurance risk.
[IFRS 4.39(c)(i)].
To comply with this requirement, disclosure is required of either:
(a) a sensitivity analysis that shows how profit or loss and equity would have been
affected had changes in the relevant risk variable that were reasonably possible at the
end of the reporting period occurred; the methods and assumptions used in preparing
that sensitivity analysis; and any changes from the previous period in the methods and
assumptions used. However, if an insurer uses an alternative method to manage
sensitivity to market conditions, such as an embedded value analysis, it may meet this
requirement by disclosing that alternative sensitivity analysis. Where this is done, the
methods used in preparing that alternative analysis, its main parameters and
assumptions, and its objectives and limitations should be explained; or
(b) qualitative information about sensitivity, and information about those terms and
conditions of insurance contracts that have a material effect on the amount, timing
and uncertainty of future cash flows. [IFRS 4.39A].
Quantitative disclosures may be provided for some insurance risks and qualitative
information about sensitivity and information about terms and conditions for other
insurance risks. [IFRS 4.IG52A].
Although sensitivity tests can provide useful information, such tests have limitations.
Disclosure of the strengths and limitations of the sensitivity analyses performed might
be useful. [IFRS 4.IG52].
Insurers should avoid giving a misleading sensitivity analysis if there are significant non-
linearities in sensitivities to variables that have a material effect. For example, if a change
of 1% in a variable has a negligible effect, but a change of 1.1% has a material effect, it might
be misleading to disclose the effect of a 1% change without further explanation. [IFRS 4.IG53].
Further, if a quantitative sensitivity analysis is disclosed and that sensitivity analysis does
not reflect significant correlations between key variables, the effect of those
correlations may need to be explained. [IFRS 4.IG53A].
If qualitative information about sensitivity is provided, disclosure of information about those
terms and conditions of insurance contracts that have a material effect on the amount, timing
and uncertainty of cash flows should be made. This might be achieved by disclosing the
information discussed at 11.2.2 above and 11.2.6 below. An entity should decide in the light of
its circumstances how best to aggregate information to display an overall picture without
combining information with different characteristics. Qualitative information might need to
be more disaggregated if it is not supplemented with quantitative information. [IFRS 4.IG54A].
Insurance contracts (IFRS 4) 4401
QBE provide the following quantitative information about non-life insurance
sensitivities in their financial statements:
Extract 51.29: QBE Insurance Group (2016)
Notes to the financial statements [extract]
for the year ended 31 December 2016
2.3.7. Impact of changes in key variables on the net outstanding claims liability [extract]
Overview
The impact of changes in key variables used in the calculation of the outstanding claims liability is summarised in the
table below. Each change has been calculated in isolation from the other changes and shows the after tax impact on
profit assuming that there is no change to any of the other variables. In practice, this is considered unlikely to occur
as, for example, an increase in interest rates is normally associated with an increase in the rate of inflation. Over the medium to longer term, the impact of a change in discount rates is expected to be largely offset by the impact of a
change in the rate of inflation.
The sensitivities below assume that all changes directly impact profit after tax. In practice, however, if the central
estimate was to increase, at least part of the increase may result in an offsetting change in the level of risk margin
rather than in a change to profit after tax, depending on the nature of the change in the central estimate. Likewise, if
the coefficient of var
iation were to increase, it is possible that the probability of adequacy would reduce from its
current level rather than result in a change to net profit after income tax.
PROFIT
(LOSS)
1
SENSITIVITY
2016
2015
%
US$M
US$M
Net discounted central estimate +5
(444)
(494)
–5
444
494
Risk margin
+5
(38)
(44)
–5
38
44
Inflation rate
+0.5
(130)
(145)
–0.5
124
139
Discount rate
+0.5
124
139
–0.5
(130)
(145)
Coefficient of variation
+1
(114)
(124)
–1
114
124
Probability of adequacy
+1
(37)
(43)
–1
35
40
Weighted average term to settlement
+10
43
58
–10
(43)
(59)
1 Net of tax at the Group’s prima facie income tax rate of 30%.
4402 Chapter 51
11.2.4
Insurance risk – concentrations of risk
As noted at 11.2 above, IFRS 4 requires disclosure of concentrations of insurance risk,
including a description of how management determines concentrations and a
description of the shared characteristic that identifies each type of concentration (e.g.
type of insured event, geographical area, or currency). [IFRS 4.39(c)(ii)].
Such concentrations could arise from, for example:
(a) a single insurance contract, or a small number of related contracts, for example when
an insurance contract covers low-frequency, high-severity risks such as earthquakes;
(b) single incidents that expose an insurer to risk under several different types of
insurance contract. For example, a major terrorist incident could create exposure
under life insurance contracts, property insurance contracts, business interruption
and civil liability;
(c) exposure to unexpected changes in trends, for example unexpected changes in
human mortality or in policyholder behaviour;
(d) exposure to possible major changes in financial market conditions that could cause
options held by policyholders to come into the money. For example, when interest
rates decline significantly, interest rate and annuity guarantees may result in
significant losses;
(e) significant litigation or legislative risks that could cause a large single loss, or have
a pervasive effect on many contracts;
(f) correlations and interdependencies between different risks;
(g) significant non-linearities, such as stop-loss or excess of loss features, especially if a
key variable is close to a level that triggers a material change in future cash flows; and
(h) geographical and sectoral concentrations. [IFRS 4.IG55].
Disclosure of concentrations of insurance risk might include a description of the shared
characteristic that identifies each concentration and an indication of the possible
exposure, both before and after reinsurance held, associated with all insurance liabilities
sharing that characteristic. [IFRS 4.IG56].
Disclosure about the historical performance of low-frequency, high-severity risks might
be one way to help users assess cash flow uncertainty associated with those risks. For
example, an insurance contract may cover an earthquake that is expected to happen,
on average, once every 50 years. If the earthquake occurs during the current reporting
period the insurer will report a large loss. If the earthquake does not occur during the
current reporting period the insurer will report a profit. Without adequate disclosure of
long-term historical performance, it could be misleading to report 49 years of large
profits, followed by one large loss, because users may misinterpret the insurer’s long-
term ability to generate cash flows over the complete cycle of 50 years. Therefore,
describing the extent of the exposure to risks of this kind and the estimated frequency
of losses might be useful. If circumstances have not changed significantly, disclosure of
the insurer’s experience with this exposure may be one way to convey information
about estimated frequencies. [IFRS 4.IG57]. However, there is no specific requirement to
disclose a probable maximum loss (PML) in the event of a catastrophe because there is
no widely agreed definition of PML. [IFRS 4.BC222].
Insurance contracts (IFRS 4) 4403
Brit Limited discloses the potential impact of modelled realistic disaster scenarios
(estimated losses incurred from a hypothetical catastrophe).
Extract 51.30: Brit Limited (2016)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [extract]
4 RISK MANAGEMENT POLICIES [extract]
(v) Aggregate exposure management [extract]
The Group is exposed to the potential of large claims from natural catastrophe events. The Group’s catastrophe risk
tolerance is reviewed and set by the Board on an annual basis. The Board has last reviewed its natural and non-natural
catastrophe risk tolerances in April 2016.
Overall, the Group has a maximum catastrophe risk tolerance for major catastrophe events (as measured through world
wide all perils 1-in-30 AEP) of 25% of Brit Limited Group level net tangible assets. This equates to a maximum
acceptable loss (after all reinsurance) of US$268.7m at 31 December 2016.
The Group closely monitors aggregation of exposure to natural catastrophe events against agreed risk appetites using
stochastic catastrophe modelling tools, along with knowledge of the business, historical loss information, and
geographical accumulations. Analysis and monitoring also measures the effectiveness of the Group’s reinsurance
programmes. Stress and scenario tests are also run, such as Lloyd’s and internally developed Realistic Disaster
Scenarios (RDS). The selection of the RDS is adjusted with development of the business. Below are the key RDS
losses to the Group for all classes combined (unaudited).
Modelled
Modelled
Group loss
Group loss
Estimated
at
at
industry
1 October
1 October
loss
Gross
2016 Net
Gross
2015 Net
US$m
US$m US$m US$m US$m
Gulf of Mexico windstorm
113,500
829 191 813 174
Florida Miami windstorm
128.250
654 168 601 149
US North East windstorm
80,500
748 156 737 155
San Francisco earthquake
87,750
716 282 716 222
Japan earthquake
44,716
237 156 207 150
Japan windstorm
13,329
92 58 79 52
European windstorm
25,595
; 228 163 190 127
11.2.5
Insurance risk – claims development information
As noted at 11.2 above, IFRS 4 requires disclosure of actual claims compared with
previous estimates (i.e. claims development). The disclosure about claims development
should go back to the period when the earliest material claim arose for which there is
still uncertainty about the amount and the timing of the claims payments, but need not
go back more than ten years. Disclosure need not be provided for claims for which
uncertainty about claims payments is typically resolved within one year. [IFRS 4.39(c)(iii)].
These requirements apply to all insurers, not only to property and casualty insurers.
However, the IASB consider that because insurers need not disclose the information for
claims for which uncertainty about the amount and timing of payments is typically
resolved within a year, it is unlikely that many life insurers will need to give the
disclosure. [IFRS 4.IG60, BC220]. Additionally, the implementation guidance to IFRS 4 states
4404 Chapter 51
that claims development disclosure should not normally be needed for annuity contracts
because each periodic payment is regarded as a separate claim about which there is no
uncertainty. [IFRS 4.IG60].
It might also be informative to reconcile the claims development information to
amounts reported in the statement of financial position and disclose unusual claims
expenses or developments separately, allowing users to identify the underlying trends
in performance. [IFRS 4.IG59].
The implementation guidance to IFRS 4 provides an illustrative example of one possible
format for presenting claims development which is reproduced in full below. From this
it is clear that the IASB is expecting entities to present some form of claims development
table. This example presents discounted claims development information by
underwriting year. [IFRS 4.IG61 IE5]. Other formats are permitted, including for example,
presenting information by accident year or reporting period rather than underwriting
year. [IFRS 4.IG61].
Example 51.42: Disclosure of claims development
This example illustrates a possible format for a claims development table for a general insurer. The top half
of the table shows how the insurer’s estimates of total claims for each underwriting year develop over time.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 871