3. New Insurance Regulations - Pakistan Society of Actuaries

Download Report

Transcript 3. New Insurance Regulations - Pakistan Society of Actuaries

A PRESENTATION ON MODIFIED ACCOUNTING REGULATIONS FOR INSURANCE COMPANIES

By: FARRUKH REHMAN

Partner, A.F. Ferguson & Co.

a member firm of the PwC network

Date: 20 August 2013

Scope

Draft Insurance Accounting Regulations, 2012 were issued by SECP on 19 November 2012 Therefore, this presentation covers the applicability and changes applied through these regulations.

Session to cover:

• • • • • • • • • PwC Developments in respect of Accounting Regulations for insurance companies in Pakistan Some concerns in existing Accounting Regulations Changes in presentation of Published Financial Statements Presentation of Insurance Liabilities for life insurers Applicability of IAS-27, IAS-39 & IAS-40 Recognition of Cover Note in the books of accounts Explanation of management and other expenses – non-life insurers Change in premium deficiency requirement Key issues identified in modified regulations 3

• • •

Developments in respect of Accounting regulation for Insurance companies

Prior to the Insurance Ordinance, 2000 the concept of Accounting Regulations alongwith the prescribed format of financial statements was also given in Insurance Act, 1938. The Accounting Regulations were basic and the formats of financial statements were not keeping pace with the changes happening in the world with respect to the International Accounting standards.

The Insurance Ordinance, 2000 brought about number of changes for the insurance industry and there under the new Accounting Regulations & formats of financial statements were introduced in 2002. The accounting regulations both for life and non life segments were detailed enough to address all aspects of the insurance transactions. The financial statements formats were also largely brought in line with International Accounting Standards. Some of the major changes included method of premium income, recognition of IBNR claims, creation of separate statutory funds for life business, introduction of premium deficiency etc. This was considered a major change at that time.

Developments in respect of Accounting regulation for Insurance companies – contd.

• • • With the passage of almost 10 years now there have been further developments in the International Accounting Standards relating to insurance. In 2004, the first Insurance specific IFRS-4 was issued and SECP made this applicable for insurance companies from period commencing from 1 January 2009. IFRS -4 did not change the existing accounting practices in any substantive way. It catered more of disclosure requirements than recognition and measurement.

Recently the IASB has issued exposure draft of IFRS-4 as part of its phase II for developing insurance specific standard. This is expected to change significantly the recognition and measurement requirements of insurance industry.

• • • • • • •

Some concerns in existing regulations

• Difference in Financial Statements for Insurers and Other Sectors under the International Financial Reporting Standards (IFRS) Total earnings of the Life Insurer not reflected completely Consolidated financial statements are not required for investment by statutory funds Applicability of IAS 39 and IAS 40 Issues relating to calculation and classification of incurred but not reported claims – IBNR Correct classification / allocation of Management Expenses Recognition of Cover Note in the books of accounts No basis of preparation for Statement of Exposures 6

Changes in presentation of Published Financial Statements

 The modified accounting regulations now prescribes format of Financial Statements in accordance with International Accounting Standards.

 A complete and detailed illustrative accounts have now been provided in Published Financial Statements format by SECP. This has been done to provide consistency across the insurance sector as done in banking sector.

 A comparison of existing and revised Statements comprising Financial Statements is given in the following slide.

PwC 7

• • • •

Changes in presentation of Published Financial Statements - contd .

Balance sheet • Statement of financial position Profit and loss account Statement of cash flows Revenue account (for life insurers only) • • • • Statement of comprehensive income Statement of cash flows Statement of changes in equity Notes to the accounts • Statement of premiums • Statement of claims • Statement of expenses • Statement of investment income • PwC Notes to the accounts 8

Comparison of balance sheet (Life insurers)

Cash and Bank Deposits

Cash and others Current and other accounts Deposits maturing within 12 months Fixed Deposits maturing after 12 months

Loans Secured Against Life Insurance Policies Loans Secured Against other assets

To employees To agents Others

Unsecured Loans

To employees or agents Others

Investment Property Investment in subsidiaries and associates

Fixed Income Securities Listed Equities Unlisted Equities

Other Investments

Government Securities Other Fixed Income Securities Listed Equities Unlisted Equities Mutual Funds Others (describe)

Deferred Taxation Preliminary and Deferred Expenses Current Assets - Others

Premiums due but unpaid Amounts due from other insurers/ reinsurers Investment Income Due but Outstanding Investment Income Accrued Taxation - payments less provision Prepayments Sundry receivables Others (please specify)

Fixed Assets Tangible & Intangible

Land and Builldings Furniture, Fixtures and Office Equipment Motor Vehicles Capital Work in Progress Intangibles (Please specify)

TOTAL ASSETS Shareholders Fund Aggregate Aggregate Ordinary life Conventional Accident & current (investment linked) business health year prior year Asse ts

Property and equipment Intangible assets Investment property Investments in subsidiaries and associates (applicable where equity accounting is followed) Investments Equity securities Government securities Debt securities Term deposits Mutual funds Others (please specifiy) Loans secured against life insurance policies Insurance / reinsurance receivables Other loans and receivables Deferred tax asset Taxation - payments less provision Prepayments Cash & Bank

Total Asse ts Equity and Liabilitie s Capital and re se rve s attributable to Company's e quity holde rs

Ordinary share capital Share premium Reserves Unappropriated profit/(Accumulated loss)

Total Equity

Surplus on Revaluation of Fixed Assets

Liabilitie s

Insurance Liabilities Liabilities under Investment Contracts Retirement benefit obligations Deferred taxation Borrowings Premium received in advance Insurance / reinsurance payables Other creditors and accruals Taxation - provision less payments

Total Liabilitie s Total Equity and Liabilitie s Continge ncy(ie s) and commitme nt(s)

19 20 21 22 23 16 24 25 26

Note Curre nt ye ar Prior ye ar Rupe e s in thousand

5 6 7 8 9 10 11 12 13 14 15 16 17 18 -

27 -

Comparison of balance sheet (Life insurers) – contd.

Share Capital and Reserves

Authorised Share Capital Issued, subscribed and paid up Share Capital Accumulated Surplus/(Deficit) Other Reserves (describe) Less: Capital contributed by shareholders fund Net Shareholders' Equity

Balance of statutory fund (including policyholder liabilities Rs. Prior year: Rs. ) Deferred Liabilities

Deferred Taxation Staff Retirement Benefits Others

Creditors and Accruals

Outstanding claims (including IBNR) Premiums Received in Advance Amounts due to other insurers/reinsurers Amounts due to Agents Accrued Expenses Taxation - Provision less payments Other Creditors and Accruals (describe)

Borrowings

Short term running finance Loans received from banks Other loans Other debt security issued

Other liabilities

Other liabilities (please specify)

TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES CONTINGENCIES AND COMMITMENTS (if applicable) Shareholders Fund Aggregate Ordinary life Conventional Accident & current (investment business linked) health year Aggregate prior year Asse ts

Total Asse ts Equity and Liabilitie s Capital and re se rve s attributable to Company's e quity holde rs

Ordinary share capital Share premium Reserves Unappropriated profit/(Accumulated loss)

Total Equity

Surplus on Revaluation of Fixed Assets

Liabilitie s

Total Liabilitie s Total Equity and Liabilitie s Continge ncy(ie s) and commitme nt(s) Note

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 16 24 25 26 27

Curre nt ye ar Prior ye ar Rupe e s in thousand

Comparison of profit and loss (Life insurers)

Investment income not attributable to statutory funds Income from trading investments

Gain/ loss on trading Dividend Income Others if any (please specify)

Income from non-trading investments

Held to maturity or Available for sale (classify as appropriate) Return on government securities Return on other fixed income securities and deposits Dividend income Others (please specify)

Gain/(Loss) on Sale of Investments Available for sale Gain/(Loss) on revaluation of investments

Trading investments Available for sale

Provision for Impairment in Value of investments

Provision for portfolio held to maturity Provision for portfolio available for sale

Less: Investment Related Expenses Net Investment Income Rental income from investment property

Other revenue (provide details) Less: Expenses not attributable to statutory funds (provide details) Add: Surplus transferred from statutory funds

Profit/(Loss) before tax (and extraordinary items, if any)

Extraordinary items (provide details)

Profit/(Loss) before Tax and after extraordinary items

Tax expense

Profit/(Loss) after tax Current Year Profit and Loss appropriation account

Balance at commencement of the year Profit for the year Prior year adjustment (provide details) Dividends paid Transfers to / (from) reserves PwC Other appropriations (provide details) Balance at end of year

Prior Year

Premium Revenue Premium ceded to reinsurers

Ne t pre mium re ve nue

Fee income Net investment income Net rental Income Net realised gains / losses on investment property Net unrealised gains / losses on investment property Other income / loss

Ne t income

Insurance benefits Recoveries from reinsurers Claims related expenses

Ne t claims

Acquisition expenses Marketing and administration expenses Other expenses

Total Expe nse s

Finance costs

Exce ss of Income ove r Claims and Expe nditure

Add: Policyholder liabilities at beginning of year Less: Policyholder liabilities at end of year

Re sults of ope rating activitie s

Share of (loss)/profit of associates

Profit be fore tax

Income tax expense

Profit for the ye ar Othe r compre he nsive income :

Change in unrealised gains/(losses) on available-for-sale financial assets Currency translation differences (related to net investment in foreign currency) Other comprehensive income for the year, net of tax

Total compre he nsive income for the ye ar

Earnings (after tax) per share - Rupees

Note

28 29 30 31

Curre nt Ye ar

32 33 34 35 36 37 38 39

Prior Ye ar

11 -

Comparison of balance sheet (Non - life insurers)

Share Capital and Reserves Domestic companies

Authorised Share Capital Paid-up share capital Retained earnings Reserves Other equity (please specify)

Foreign companies

Head office account Other equity (please specify)

Underwriting provisions

Provision for outstanding claims (including IBNR) Provision for unearned premium Commission income unearned Current Prior year year

Cash and Bank Deposits

Cash and other equivalent Current and other accounts Deposits maturing within 12 months Deposits maturing after 12 months

Loans (Secured or un-secured - classify as appropriate)

To employees To agents Others

Investments Investment Property Deferred Taxation

Current year Prior year Total underwriting provisions

Deferred Liabilities

Deferred Taxation Staff Retirement Benefits Others (please specify)

Creditors and Accruals

Premiums Received in Advance Amounts due to other insurers/reinsurers Accrued Expenses Taxation - Provision less payments Other Creditors and Accruals (describe)

Borrowings

Short term running finance Loans received from banks Other loans Other debt security issued

Other liabilities

Other liabilities (please specify)

TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES CONTINGENCIES AND COMMITMENTS (if applicable) Preliminary and Deferred Expenses Current Assets - Others

Premiums due but unpaid Amounts due from other insurers/ reinsurers Reinsurance recoveries due but unpaid Reinsurance recoveries against outstanding claims Salvage recoveries accrued Premium and claim reserves retained by cedants Accrued investment income Taxation - payments less provision Deferred commission expense Other deferred acquisition costs Prepayments Sundry receivables(provide details)

Fixed Assets Tangible & Intangible

Land and Builldings Furniture, Fixtures and Office Equipment Motor Vehicles Capital Work in Progress Intangibles (Please specify)

TOTAL ASSETS Assets

Property and equipment Intangible assets Investment property Investments in subsidiary and associate Investments Equity securities Debt securities Term deposits Loans and other receivables Insurance / Reinsurance receivables Reinsurance recoveries against outstanding claims Salvage recoveries accrued Deferred Commission Expense / Acquisition cost Deferred taxation Taxation - payment less provisions Prepayments Cash & Bank

Total Assets Equity and Liabilities Capital and reserves attributable to Company's equity holders

Ordinary share capital Share premium Reserves Unappropriated profit/(Accumulated loss)

Total Equity Surplus on revaluation of fixed assets Liabilities Underwriting Provisions

Outstanding claims including IBNR Unearned premium reserves Premium deficiency reserves Unearned commission income Retirement benefit obligations Deferred taxation Borrowings Premium received in advance Insurance / Reinsurance Payables Other Creditors and Accruals Taxation - provision less payment

Total Liabilities Total Equity and Liabilities Contingency(ies) and commitment(s) Note

29 15 16 17 18 19 23 5 6 7 8 9 10 11 12 13 27 24 26 14 15 20 21 22

Current year

Prior year Rupees in thousand

Comparison of profit and loss (Non - life insurers)

Revenue Account

Net Premium Revenue Net Claims Premium Deficiency Expenses Expenses Net Commission

Underwriting result

Investment Income Rental Income Other Income (provide details) General and administration expenses

Profit/(Loss) before tax

Provision for Taxation

Profit/(Loss) after tax Profit and Loss Appropriation Account Balance at commencement of year

Profit/Loss after tax for the year Prior Year Adjustments (provide details) Proposed Dividend/Remittance to Head Office Transfers to/(from) reserves (provide details)

Note Fire Marine, Motor Act Liability Others Treaty Current & Aviation & Year Property Transport Prior Year AggregateAggregate

Net insurance premium Net Insurance Claims Premium Deficiency Net commission and other acquisition cost Insurance claims and acquisition expenses Management Expenses Underwriting results Investment income Rental income Other income Other expenses Results of operating activities Finance costs Share of (loss)/profit of associates

Profit before tax Note

28 29 30 31 24 25 26 27 32

Balance Unappropriated Profit/(Loss) at end of Year

Income tax expense

Profit after tax Other comprehensive income:

Unrealised gains / (losses) on available-for-sale investments Others (please specify)

Other comprehensive income for the year Total comprehensive income for the year

Earnings (after tax) per share - Rupees 33 34 -

Current year

Prior year Rupees in thousand -

Change in presentation of Financial Statements - contd .

Segmental information to be disclosed

The segment information which at present is given on the face of the profit and loss account and the information in the statements of premiums, claims, investment income and expenses have now been presented in the note Segment Information.

Revenue Account in the life insurers financial statements now also forms part of the Segment Information. Additionally Segmental results by line of business are now to be disclosed: o o an analysis between group life, group health, individual life distributed through direct sales force, individual life distributed through banks; an analysis between business written in Pakistan and business written outside Pakistan.

PwC 14

Presentation of insurance liabilities

One of the major changes in the modified accounting regulations for life insurers relates to the classification of insurance liabilities:

1. Balance of statutory funds

Previously, retained earnings accounts A to D were part of balance of statutory funds which was disclosed after the Shareholders’ Equity. In the modified accounting regulations retained earnings accounts C and D, which are effectively arising out of surplus of the statutory funds attributable to the shareholders are therefore made part of shareholders’ equity. PwC 15

Presentation of insurance liabilities – contd.

2. Incurred But Not Reported Claims (IBNR)

IBNRs were previously made part of Policyholder Liabilities on the basis that these are determined by actuaries and payable to policyholders. However, the nature of IBNR is different from policyholder liabilities in that IBNR is something where the claim event has actually happened but yet to be reported to the insurer. Whereas, policyholder liability is in respect of future event. The revised format of Financial Statements includes IBNR as insurance liabilities after outstanding claims.

PwC 16

Presentation of insurance liabilities – contd.

EXISTING BALANCE SHEET LINE ITEMS • Outstanding Claims • Balance of statutory fund Balance of statutory fund includes: o Policyholder liabilities (including IBNR) o Balance in ledger account A o Balance in ledger account B o Balance in ledger account C PwC o Balance in ledger account D • • POST CHANGE BALANCE SHEET LINE ITEMS Insurance Liabilities Unappropriated Profit / (Loss) Insurance Liabilities include: o Outstanding claims o IBNR o o o Policyholder liabilities Balance in ledger account A Balance in ledger account B 17

Applicability of IAS 27, IAS 39 and IAS 40

• As per existing regulations, insurers are given certain exemptions from IAS 27, IAS 39 and IAS 40.

• However, revised regulations have encouraged compliance with IFRS, therefore these exemptions have been withdrawn.

• These are presented in next slides.

PwC 18

Applicability of IAS 27, IAS 39 and IAS 40 – contd.

Applicability of IAS 27

As per existing regulations, consolidated published financial statements in respect of investments made through statutory funds is not required to be presented. However, this exemption has been withdrawn in modified regulations.

PwC 19

Applicability of IAS 27, IAS 39 and IAS 40 – contd.

Applicability of IAS 39

The existing regulations requires available for sale investments to be valued at lower of cost or market value.

Now the accounting regulations adopts the requirements of IAS 39 completely and all investments requiring marked to market will be valued accordingly.

PwC 20

Applicability of IAS 27, IAS 39 and IAS 40 – contd.

Applicability of IAS 40

Under IAS 40 companies have the option to select accounting policy of valuing investment property either on cost or fair value basis. The existing regulations however provides restriction and do not allow the use of fair value option. The revised accounting regulation removes this restriction.

PwC 21

Recognition of Cover Note in the books of accounts

In non-life insurance business, particularly in Marine Insurance there is a practice of issuing cover notes for temporary period which remain in force until the insurance policy is issued. It was observed that the insurance companies start recognising the accounting for such transactions only when the insurance policy is issued. However, it was viewed that the company needs to record the transaction since its inception. The existing and revised requirements of the accounting regulations are in the next slide: PwC 22

Recognition of Cover Note in the books of accounts- contd.

EXISTING

Premium receivable under a policy shall be recognised as written from the date of attachment of the policy to which it relates.

REVISED

Premium receivable under a policy / cover note shall be recognised as written from the date of attachment of risk of the policy / cover note. PwC 23

Explanation of management and other expenses – non-life insurers

Previously, there was no explanation of ‘expenses’ and ‘general and administrative expenses’ for non-life insurers. However, in modified accounting format ‘management expenses’ and ‘other expenses’ have been identified.

Following are included in other expenses in modified format: o Legal and professional fee other than business related o o Auditors’ remuneration Subscription o o Registration fee Expenses of bonus issue o Donations o PwC Workers Welfare Fund 24

Change in premium deficiency requirement

Existing Revised

Where the unearned premium liability for any class of business is not adequate to meet the expected future liability, after reinsurance, from claims and other expenses, including reinsurance expense, commissions and other underwriting expenses, expected to be incurred after balance date in respect of policies in that class of business in force at balance date, a premium deficiency reserve shall be The provision for premium deficiency (liability adequacy test) shall be recognised in accordance with the requirements given in International Financial Reporting Standard 4 – Insurance Contracts.

Change in premium deficiency requirement– contd.

Liability adequacy test IF

Liability less related deferred acquisition cost and intangible assets Current estimates of future contractual cash flows then recognise deficiency in profit and loss If an insurer's liability adequacy test meets the minimum requirements as above, the test is applied at the level of aggregation specified in that test.

PwC 26

Key issues highlighted in modified regulations – life insurance

Possible adverse impact of taxation

• The taxability of life insurers is computed as per the provisions of Fourth Schedule of Income Tax Ordinance, 2001. As per the Fourth Schedule only the amount of surplus transferred from revenue account to profit and loss account is subject to taxation. • The existing regulations present separate revenue account and profit and loss account in which the transfer of surplus from revenue account to profit and loss account is separately disclosed. PwC Page 27 27

Key issues highlighted in modified regulations – life insurance – contd.

Possible adverse impact of taxation

• In the modified accounting regulations there will be no revenue account and profit and loss account is prepared on a combined basis for all statutory funds and shareholders fund therefore, the transfer of surplus would not be separately identifiable on the face of profit and loss account. • The life insurance industry strongly feels that unless the requirements of Income Tax Ordinance are changed to reflect the new accounting regulations, taxation authorities may create huge demands on the PwC insurance companies.

Page 28 28

insurance – contd.

The amount representing solvency margin in account D shall not be taken as equity.

The surplus of any statutory fund which is not yet transferred to profit and loss account is disclosed as ledger account D relating to non participating business. This amount may be held in view of solvency margins. It is viewed that since there is a restriction on transfer such amount should be treated as liability.

PwC Page 29 29

Thank you

PwC Page 30