Non financial assumption change under GMM

[vikky]

First I wanted to check if my understanding is correct. With a (say ) mort change , the locked in bel moves by +£10 the CSM and RA (or only CSM??) move by -£10 so that bel+ra+CSM total movement is 0. This is all measured and done on locked in rates.

The BEL on the Balance Sheet. Am assuming this is on current discount rates. What happens to the difference between the Bel on locked in and current discount rates for this step?
Would really help if someone put numbers to this as I cant get my head around this one

Also purely for a non financial assumption change is there any diff between GMM and VFA treatment?

Thanks
Asim

 

[Em Francis]

Hi
If using the GMM, then a move in non-economic assumptions, such as say mortality, will change the BEL and possibly the RA. The CSM will be unlocked to absorb this change so that there is no impact on profit at the time of the change.

The BEL will be discounted using the current market rates (for GMM this will be irrespective of what the backing assets earn). Therefore there is no concept of locked in vs current rates. The change in the market consistent rate will be reflected in the change in the BEL.

Under the VFA approach, regardless if the CSM is unlocked, there will be VFA element which will need to be reported. But regarding change in non financial assumptions, there should be little difference in liability between the GMM and the VFA approach.

 

[vikky]

Thank you for the response.
So if am understanding this, there are 2 bels calculated for every AOC step in GMM?
One would be on the locked in rate which governs how the CSM is recalibrated (based on how much the RA and BEL move)
The other calculation would be on current discount rates (which is what makes its way to the balance sheet)
My question is you would have to account for the difference in bel between locked in and current rates somewhere OR have I completely misunderstood this?

 

[Em Francis]

Hi

There is indeed a requirement to provide a reconciliation between opening and closing balance sheet items under IFRS 17. As stated in the Core Reading, this would need to be done for the PVFC, RA and CSM. The main contributors to the change in CSM are set out in the course notes; as you say, this is done using the original (locked-in) discount rates.

In terms of the movement in PVFC, bear in mind that the reconciliation is done between the start year value and end year value. So if interest rates have moved over the year, and hence discount rates at year end differ from those used at the start of the year (ie end of previous year), this difference would be a contributory factor to the analysis – but just looking at the change over that accounting period.

Hope this helps

Thanks

 

[Frederic Le]

Hi
If using the GMM, then a move in non-economic assumptions, such as say mortality, will change the BEL and possibly the RA. The CSM will be unlocked to absorb this change so that there is no impact on profit at the time of the change.

The BEL will be discounted using the current market rates (for GMM this will be irrespective of what the backing assets earn). Therefore there is no concept of locked in vs current rates. The change in the market consistent rate will be reflected in the change in the BEL.

Under the VFA approach, regardless if the CSM is unlocked, there will be VFA element which will need to be reported. But regarding change in non financial assumptions, there should be little difference in liability between the GMM and the VFA approach.

Um, no, you're wrong... There is in fact locked in vs current rates impact, which is precisely the impact coming from BEL adjusting at current rate whereas CSM adjusting at locked in rate. So ignoring RA, if locked in BEL +9 and current BEl +10, then CSM will only -9, and the net impact on total liability is +10 - 9 = +1, and this will hit P/L directly, i.e. -1 to P/L...

I have worked in IFRS17 for almost 6 years now, for two different, very large companies.

 

[Frederic Le]

Um, no, you're wrong... There is in fact locked in vs current rates impact, which is precisely the impact coming from BEL adjusting at current rate whereas CSM adjusting at locked in rate. So ignoring RA, if locked in BEL +9 and current BEl +10, then CSM will only -9, and the net impact on total liability is +10 - 9 = +1, and this will hit P/L directly, i.e. -1 to P/L...

I have worked in IFRS17 for almost 6 years now, for two different, very large companies.

For actual examples of this, you can refer, for example, to Aviva's 2023 financial report.

 

[Lindsay Smitherman]

Hi Frederic - thanks for your input on this.

I think that what Em was saying was simply that locked-in discount rates are not relevant to the calculation of the BEL (or PVFC) itself. But yes, they are of course relevant to the calculation of the CSM.

We do have to be a little careful here though. The SA2 exam is based on Core Reading and the principles that are described there. There are lots of areas of IFRS detail that are not included in the Core Reading, in the same way that there are lots of 'missing' elements of detail about the other topics covered throughout the course. It would be unrealistic to include everything across every possible topic (particularly now that the course is pan-global). Indeed, the aim of the actuarial study courses is not to enable students to immediately become focussed practitioners in a particular area (that is what on-the-job and 'lifelong' learning is for) but to appreciate the basic principles across a wide range of relevant areas. In SA2's case, this means enabling them to start their career as a qualified life insurance actuary with an ability to then delve more deeply into (and understand further) whichever area they find themselves involved in. Everyone will have their own areas of interest and expertise - but the exams need to be as fair as possible to everyone taking them, irrespective of where they happen to work.

The Core Reading on IFRS 17 refers to the use of the CSM to smooth out profits and to 'offset' the impact of non-economic assumption changes. It also refers to the 'accretion of interest' being on locked-in rates as part of the change in CSM over the period and similarly (briefly) to the 'changes in estimates of cashflows relating to future coverage'. But that's as far as it goes in explaining how the CSM is actually determined: nothing explicit about using the locked-in rather than current rates for the determination of the change in fulfilment cashflows. So yes, in reality this offsetting is not perfect due to the different discount rates being used, but the underlying principle (smoothing out of profits / losses that might otherwise arise when assumptions are changed) is what is important - this being what the Core Reading focusses on.

Hope that makes sense. It's great to have this additional insight, but be careful not to go too far beyond what a reasonable expectation would be in terms of applying the Core Reading to a given scenario. People who don't have the level of IFRS 17 experience you have might be rather panicked by thinking they would have to know about the details you have mentioned here (and any of the other numerous tricky nuances of IFRS 17 implementation that the Core Reading doesn't delve into) to be able to answer exam questions. A requirement to know such detail in order to be able to tackle a question wouldn't be fair - in the same way that those who specialise purely in IFRS probably wouldn't be too keen to think they have to know lots of additional detail about the taxation system in various countries of the world (or whatever) beyond what is presented in the Core Reading! It should be possible to answer an exam question sufficiently robustly based on an understanding of the information and principles provided, without requiring knowledge of more detailed factual content going beyond that. Obviously we cannot say exactly what the examiners will and won't ask / expect, but this is very much based on our experience of their approach in the previous sittings.

Hope that provides some reassurance to the (many) non-practitioners out there.

 

[Frederic Le]

Hi Frederic - thanks for your input on this.

I think that what Em was saying was simply that locked-in discount rates are not relevant to the calculation of the BEL (or PVFC) itself. But yes, they are of course relevant to the calculation of the CSM.

We do have to be a little careful here though. The SA2 exam is based on Core Reading and the principles that are described there. There are lots of areas of IFRS detail that are not included in the Core Reading, in the same way that there are lots of 'missing' elements of detail about the other topics covered throughout the course. It would be unrealistic to include everything across every possible topic (particularly now that the course is pan-global). Indeed, the aim of the actuarial study courses is not to enable students to immediately become focussed practitioners in a particular area (that is what on-the-job and 'lifelong' learning is for) but to appreciate the basic principles across a wide range of relevant areas. In SA2's case, this means enabling them to start their career as a qualified life insurance actuary with an ability to then delve more deeply into (and understand further) whichever area they find themselves involved in. Everyone will have their own areas of interest and expertise - but the exams need to be as fair as possible to everyone taking them, irrespective of where they happen to work.

The Core Reading on IFRS 17 refers to the use of the CSM to smooth out profits and to 'offset' the impact of non-economic assumption changes. It also refers to the 'accretion of interest' being on locked-in rates as part of the change in CSM over the period and similarly (briefly) to the 'changes in estimates of cashflows relating to future coverage'. But that's as far as it goes in explaining how the CSM is actually determined: nothing explicit about using the locked-in rather than current rates for the determination of the change in fulfilment cashflows. So yes, in reality this offsetting is not perfect due to the different discount rates being used, but the underlying principle (smoothing out of profits / losses that might otherwise arise when assumptions are changed) is what is important - this being what the Core Reading focusses on.

Hope that makes sense. It's great to have this additional insight, but be careful not to go too far beyond what a reasonable expectation would be in terms of applying the Core Reading to a given scenario. People who don't have the level of IFRS 17 experience you have might be rather panicked by thinking they would have to know about the details you have mentioned here (and any of the other numerous tricky nuances of IFRS 17 implementation that the Core Reading doesn't delve into) to be able to answer exam questions. A requirement to know such detail wouldn't be fair - in the same way that those who specialise purely in IFRS probably wouldn't be too keen to think they have to know lots of additional detail about the taxation system in various countries of the world (or whatever) beyond what is presented in the Core Reading! It should be possible to answer an exam question sufficiently robustly based on an understanding of the information and principles provided, without requiring knowledge of more detailed factual content going beyond that. Obviously we cannot say exactly what the examiners will and won't ask / expect, but this is very much based on our experience of their approach in the previous sittings.

Hope that provides some reassurance to the (many) non-practitioners out there.

Hi, sure it's fair that we shouldn't go into too much details, but then that's what should have been said. This is basically the same as one of those teachers who insist flat out that, for example, "there are no negative numbers" just because it's not part of the syllabus.

Anyway, it's up to other people to decide for themselves what they think of this. Thanks for your answer.

 

[Lindsay Smitherman]

That's a fair call: the original reply at the start of this thread should have been less dogmatic. Point taken!

 

[vikky]

Thanks everyone for your responses. Much appreciated.
Asides to Frederic I did have a look at the Aviva YE23 report and still trying to work through what it says in terms of the assumption change

 

[Frederic Le]

Hi Vikky, you can refer to for example page 3.24, section (I) of the Accounting Policies for a fairly explicit description of where the difference between changes to FCF using current financial assumptions and corresponding changes to CSM using locked in financial assumptions goes.

For an actual numerical example, you can refer to page 3.122, note 43, Effect of changes in non-financial assumptions, or you can go to page 3.151, and look at the sensitivity impact of changing non-financial assumptions.

One thing that you might notice that in a lot of these cases, you get a very peculiar outcome that increases in expense assumptions or mortality assumptions might end up increasing both BEL and P/L at the same time (and conversely). A very counterintuitive outcome that requires much pain explaining, especially to those who have misunderstood/been misled that CSM always offset FCF perfectly.

 

[CAKABOGU23]

First I wanted to check if my understanding is correct. With a (say ) mort change , the locked in bel moves by +£10 the CSM and RA (or only CSM??) move by -£10 so that bel+ra+CSM total movement is 0. This is all measured and done on locked in rates.

The BEL on the Balance Sheet. Am assuming this is on current discount rates. What happens to the difference between the Bel on locked in and current discount rates for this step?
Would really help if someone put numbers to this as I cant get my head around this one

Also purely for a non financial assumption change is there any diff between GMM and VFA treatment?

Thanks
Asim

To add to Fred's response for a GMM contract, which I agree with, under VFA, the concept of locked-in rates falls away, so that in Fred's numerical example, the full 10 is absorbed by the CSM. Under VFA, the effect of financial risk is considered a future service item.
Re Fred's latest response, situations where FCF impacts are not fully offset by the CSM e.g. some of that 9 in the example hit the P&L, is due to insufficient or zero CSM i.e. a loss component...but this is much detail as pointed out by the tutors.

 

[Lindsay Smitherman]

Hi - that's a great extra point. The Core Reading does explain that the CSM cannot be negative, and so the course notes pick up on the fact that there would be an immediate loss recognised in P&L to the extent to which the CSM is insufficient to absorb a change in PVFC (which would of course include the situation where the CSM is already zero) - as we think that could well be something you would be expected to appreciate, based on what is covered in the Core Reading.

 

[1495_sc]

Hi
If CSM falls for current year in GMM method due to non-economic assumptions change, will the CSM written off in current period not change? CSM written off in future years will change of course as year end CSM will change. Core Reading says that the amount of the reduction in CSM would be recognised as revenue in the current period which will be offset by negative impact on profit of increase in other liability components.

 

[Lindsay Smitherman]

Hi: the phrase in italics is referring to the 'one-off' impact on profit as a result of the CSM having been adjusted at the year end, due to it being 'unlocked' following a change in non-economic assumptions. It isn't referring to the gradual write-down of the CSM over time: that won't change until the following year (based on the amended CSM level).