International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 873
also be subject to credit risk. [IFRS 4.IG64A].
The specific disclosure requirements about credit risk in IFRS 7 are:
(a) an amount representing the maximum exposure to credit risk at the reporting date
without taking account of any collateral held or other credit enhancements;
(b) in respect of the amount above, a description of the collateral held as security and
other credit enhancements;
(c) information about the credit quality of financial assets that are neither past due
nor impaired;
(d) the carrying amount of financial assets that would otherwise be past due or
impaired whose terms have been renegotiated;
(e) for
financial
assets:
(i) an analysis of the age of those that are past due at the reporting date but
not impaired;
(ii) an
analysis
of
those that are individually determined to be impaired as at the
reporting date, including the factors considered in determining that they are
impaired; and
(iii) for the amounts disclosed above a description of collateral held as security
and other credit enhancements and, unless impracticable, an estimate of the
fair value of this collateral or credit enhancement.
Insurance contracts (IFRS 4) 4409
(f) when possession is taken of financial or non-financial assets during the reporting
period either by taking possession of collateral held as security or calling on other
credit enhancements and such assets meet the recognition criteria in other IFRSs,
for such assets held at the reporting date disclosure is required of:
(i) the nature and carrying amount of the assets obtained; and
(ii) when the assets are not readily convertible into cash, the entity’s policies for
disposing of such assets or for using them in its operations.
The disclosures in (a) to (e) above are to be given by class of financial instrument.
[IFRS 7.36-38].
IFRS 7 also contains a requirement to disclose a reconciliation of an entity’s allowance
account for credit losses. However, this requirement does not apply to insurance
contracts as the relevant paragraph in IFRS 7 is not specified in IFRS 4 as one of those
that should be applied to insurance contracts. Nevertheless, this requirement does apply
to financial assets held by insurers that are within the scope of IAS 39 or IFRS 9, such
as mortgages and other loans and receivables due from intermediaries which have a
financing character or are due from those not acting in a fiduciary capacity.
Zurich provides the following disclosures about the credit risk for reinsurance assets
and insurance receivables.
Extract 51.32: Zurich Insurance Group, Zurich (2016)
Risk review [extract]
Credit risk related to reinsurance assets [extract]
The Group’s Corporate Reinsurance Security Committee manages the credit quality of our cessions and reinsurance
assets. The Group typically cedes new business to authorized reinsurers with a minimum rating of ‘A–’. As of
December 31, 2016 and 2015 respectively, 66 percent and 73 per cent of the business ceded to reinsurers that fall
below ‘A–’ or are not rated is collateralized. Of the business ceded to reinsurers that fall below ‘A–’ or are not rated, 32 percent was ceded to captive insurance companies, in 2016 and in 2015.
Reinsurance assets included reinsurance recoverables (the reinsurers’ share of reserves for insurance contracts) of USD
18.4 billion and USD 17.9 billion, and receivables arising from ceded reinsurance of USD 1.4 billion and USD 0.9 billion
as of December 31, 2016 and 2015, respectively, gross of allowance for impairment. Reserves for potentially
uncollectable reinsurance assets amounted to USD 94 million as of December 31, 2016 and USD 149 million as of
December 31, 2015. The Group’s policy on impairment charges takes into account both specific charges for known
situations (e.g. financial distress or litigation) and a general, prudent provision for unanticipated impairments.
Reinsurance assets in table 11 are shown before taking into account collateral such as cash or bank letters of credit
and deposits received under ceded reinsurance contracts. Except for an immaterial amount, letters of credit are from
banks rated ‘A–’ and better. Compared with December 31, 2015, collateral decreased by USD 0.6 billion to USD
8.4 billion. In 2015, reinsurance assets and collateral increased due to the sale of a run-off portfolio.
Table 11 shows reinsurance premiums ceded and reinsurance assets split by rating.
4410 Chapter 51
Table 11 – Reinsurance premiums ceded and reinsurance assets by rating of reinsurer and captive
as of December 31
2016
2015
Premiums ceded
Reinsurance assets
Premiums ceded
Reinsurance assets
USD
% of
USD
% of
USD
% of
USD
% of
millions
total
millions
total
millions
total
millions
total
Rating
AAA
68 0.9%
29 0.1%
72 0.9%
36 0.2%
AA
2,178 27.9% 5,402 27.3% 1,188 14.7% 4,770 25.6%
A
2,883 36.9% 8,625 43.6% 2,284 28.3% 8,271 44.3%
BBB
933 11.9% 1,366 6.9%
861 10.7% 1,244 6.7%
BB
267 3.4% 566 2.9% 325 4.0% 530 2.8%
B
310 4.0% 379 1.9% 258 3.2% 194 1.0%
Unrated
1,205 15.0% 3,383 17.3% 3,090 38.3% 3,617 19.4%
Total
7,843 100.0% 19,749 100.0% 8,078 100.0% 18,662 100.0%
Credit risk related to receivables
The Group’s largest credit-risk exposure to receivables is related to third-party agents, brokers and other
intermediaries. It arises where premiums are collected from customers to be paid to the Group, or to pay claims to
customers on behalf of the Group. The Group has policies and standards to manage and monitor credit risk related to
intermediaries. The Group requires intermediaries to maintain segregated cash accounts for policyholder money. The
Group also requires that intermediaries satisfy minimum requirements in terms of capitalization, reputation and
experience and provide short-dated business credit terms.
Receivables that are past due but not impaired should be regarded as unsecured, but some of these receivable positions
may be offset by collateral. The Group reports internally on Group past-due receivable balances and strives to keep
the balance of past-due positions as low as possible, while taking into account customer satisfaction.
11.2.6.B
Liquidity risk disclosures
Liquidity risk is defined in IFRS 7 as ‘the risk that an entity will encounter difficulty in
meeting obligations associated with financial liabilities that are settled by delivering cash
or another financial asset’.
The specific disclosure requirements in IFRS 7 relating to liquidity risk are:
(a) a maturity analysis for non-derivative financial liabilities (including issued financial
guarantee contracts) that shows the remaining contractual maturities;
; (b) a maturity analysis for derivative financial liabilities. The maturity analysis should
include the remaining contractual maturities for those derivative financial
liabilities for which contractual maturities are essential for an understanding of the
timing of cash flows; and
(c) a description of how the liquidity risk inherent in (a) and (b) is managed. [IFRS 7.39].
Insurance contracts (IFRS 4) 4411
IFRS 7 also requires disclosure of a maturity analysis of financial assets an entity
holds for managing liquidity risk (e.g. financial assets that are readily saleable or
expected to generate cash inflows to meet cash outflows on financial liabilities) if
that information is necessary to enable users of its financial statements to evaluate
the nature and extent of liquidity risk. [IFRS 7.B11E]. As most insurers hold financial
assets in order to manage liquidity risk (i.e. to pay claims) they are likely to have to
provide such an analysis and, indeed, some insurers have historically provided such
an analysis.
For financial liabilities within the scope of IFRS 7 the maturity analysis should
present undiscounted contractual amounts. [IFRS 7.B11D]. However, an insurer need
not present the maturity analyses of insurance liabilities using undiscounted
contractual cash flows if it discloses information about the estimated timing of the
net cash outflows resulting from recognised insurance liabilities instead. This may
take the form of an analysis, by estimated timing, of the amounts recognised in the
statement of financial position. [IFRS 4.39(d)(i)]. The guidance in respect of the maturity
analysis for financial assets is silent as to whether such analysis should be on a
contractual undiscounted basis or on the basis of the amounts recognised in the
statement of financial position.
The reason for this concession is to avoid insurers having to disclose detailed cash flow
estimates for insurance liabilities that are not required for measurement purposes.
Because various accounting practices for insurance contracts are permitted, an insurer
may not need to make detailed estimates of cash flows to determine the amounts
recognised in the statement of financial position. [IFRS 4.IG65B].
However, this concession is not available for investment contracts whether or not they
contain a DPF. These contracts are within the scope of IFRS 7 not IFRS 4.
Consequently, a maturity analysis of contractual undiscounted amounts is required for
these liabilities.
An insurer might need to disclose a summary narrative description of how the flows
in the maturity analysis (or analysis by estimated timing) could change if policyholders
exercised lapse or surrender options in different ways. If lapse behaviour is likely to
be sensitive to interest rates, that fact might be disclosed as well as whether the
disclosures about market risk (see 11.2.6.C below) reflect that interdependence.
[IFRS 4.IG65C].
Prudential’s liability maturity analysis for its UK insurance operations is shown below.
The disclosure is on a discounted basis and includes investment contracts although an
undiscounted maturity profile of those investment contracts is disclosed elsewhere in
the financial statements.
4412 Chapter 51
Extract 51.33: Prudential plc (2016)
Notes to Primary statements [extract]
C4. Policyholder liabilities and unallocated surplus [extract]
C4.1(d). UK insurance operations [extract]
(ii) Duration of liabilities [extract]
With the exception of most unitised with-profit bonds and other whole of life contracts the majority of the contracts
of the UK insurance operations have a contract term. In effect, the maturity term of the other contracts reflects the
earlier of death, maturity, or the policy lapsing. In addition, as described in note A3.1, with-profits contract liabilities include projected future bonuses based on current investment values. The actual amounts payable will vary with
future investment performance of SAIF and the WPSF.
The following tables show the carrying value of the policyholder liabilities and the maturity profile of the cash flows,
on a discounted basis for 2016 and 2015:
2016
£m
Annuity business
With-profits
business
(insurance contracts)
Other
Non-
profit
Shareh
annuities
older-
Insurance
Investment
within
backed
Insurance
Investment
contracts
contracts
Total WPSF annuity Total contracts
contracts Total
Policyholder
liabilities
37,848
52,495 90,343 11,153 33,881 45,034
6,111
16,166 22,277
2016%
Expected maturity:
0 to 5 years
37
37
37
29
25
26
40
34
37
5 to 10 years
23
29
26
24
22
23
23
23
23
10 to 15 years
15
16
16
18
18
18
12
17
15
15 to 20 years
9
10
10
12
14
13
7
12
10
20 to 25 years
7
4
5
7
9
9
4
7
6
Over 25 years
9
4
6
10
12
11
14
7
9
[...]
– The cash flow projections of expected benefit payments used in the maturity profile table above are from value of
in-force business and exclude the value of future new business, including vesting of internal pension contracts.
– Benefit payments do not reflect the pattern of bonuses and shareholder transfers in respect of the with-profits business.
– Shareholder-backed annuity business includes the ex-PRIL and the legacy PAC shareholder annuity business.
– Investment contracts under ‘Other’ comprise certain unit-linked and similar contracts accounted for under IAS 39 and IAS 18.
– For business with no maturity term included within the contracts; for example with-profits investment bonds such
as Prudence Bonds, an assumption is made as to likely duration based on prior experience.
11.2.6.C
Market risk disclosures
Market risk is defined in IFRS 7 as ‘the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market prices’. Market risk
comprises three types of risk: currency risk, interest rate risk and other price risk.
The specific disclosure requirements in respect of market risk are:
Insurance contracts (IFRS 4) 4413
(a) a sensitivity analysis
for each type of market risk to which there is exposure at the
reporting date, showing how profit or loss and equity would have been affected by
changes in the relevant risk variable that were reasonably possible at that date;
(b) the methods and assumptions used in preparing that sensitivity analysis; and
(c) changes from the previous reporting period in the methods and assumptions used,
and the reasons for such changes. [IFRS 7.40].
These disclosures are required for insurance contracts. However, if an insurer uses an
alternative method to manage sensitivity to market conditions, such as an embedded
value analysis, it may use that sensitivity analysis to meet the requirements of IFRS 4.
[IFRS 4.39(d)(ii)]. In addition, it should also disclose:
(a) an explanation of the method used in preparing such a sensitivity analysis, and of
the main parameters and assumptions underlying the data provided; and
(b) an explanation of the objective of the method used and of limitations that may
result in the information not fully reflecting the fair value of the assets and liabilities
involved. [IFRS 7.41].
Because two approaches are permitted, an insurer might use different approaches for
different classes of business. [IFRS 4.IG65G].
Where the sensitivity analysis disclosed is not representative of the risk inherent in the
instrument (for example because the year-end exposure does not reflect the exposure
during the year), that fact should be disclosed together with the reasons the sensitivity
analyses are unrepresentative. [IFRS 7.42].
If no reasonably possible change in a relevant risk variable would affect either profit or
loss or equity, that fact should be disclosed. A reasonably possible change in the relevant
risk variable might not affect profit or loss in the following examples:
• if a non-life insurance liability is not discounted, changes in market interest rates
would not affect profit or loss; and
• some entities may use valuation factors that blend together the effect of various
market and non-market assumptions that do not change unless there is an
assessment that the recognised insurance liability is not adequate. In some cases a
reasonably possible change in the relevant risk variable would not affect the
adequacy of the recognised insurance liability. [IFRS 4.IG65D].