Document Properties
- Type of Publication: Guideline
- Category: Accounting
- Date: December 2004
- Revised: July 2010
- No: D-9
- Audiences: Life
This Guideline, which applies to life insurance companies and life
insurance holding companies incorporated under the Insurance Companies
Act, establishes the Office of
the Superintendent of Financial Institutions’ (OSFI) expectations for the
disclosure of a company’s source of earnings (SOE). The methodology for
the calculation of an SOE analysis was developed in co- operation with the
Canadian Institute of Actuaries (CIA).
The revised Guideline is effective for annual financial reporting periods
in fiscal years beginning on or after January 1, 2011.
Introduction
This Guideline outlines OSFI’s expectations regarding the methodology,
content and form of the SOE disclosure, which is intended to be a
supplement to the disclosure required by International Financial Reporting
Standards (IFRSs). The Guideline should be used in combination with other
OSFI guidelines applicable to life insurance companies.
Public disclosure of reliable and timely information facilitates the
understanding of the financial position of companies by both existing and
prospective stakeholders, including shareholders, policyholders, analysts,
directors, management and regulators. Because of the complexities and
inherent uncertainties in the insurance industry, this SOE disclosure
should enhance the ability of a company’s stakeholders to better form a
view as to the quality, potential volatility and sustainability of
earnings.
OSFI expects SOE disclosure to appear in either the notes to the annual
public financial statements or as part of other disclosures within or
accompanying the company’s public annual report (for example, as a part of
a management discussion and analysis (MD&A) section, a supplementary
disclosure section or another form of management commentary accompanying
the company’s annual report). Where a company does not issue annual public
financial statements or an annual report, OSFI expects SOE disclosure to
be publicly available, e.g. upon request or on an internet web site. It is
expected that the company will include some commentary explaining the SOE
analysis methodology and results, and not just present the numbers in
isolation.
Description
of the Methodology
Source of earnings analysis is a methodology for identifying and
quantifying the various sources of IFRSs income of a life insurance
company. It is a presentation of net income in a different format from the
traditional income statement form. It provides an analysis of the
difference between actual income and the income that would have been
reported had all assumptions at the start of the reporting period been
realized during the reporting period.
For blocks of business that have life insurance contract liabilities
valued according to the CIA Standards of Practice, the best-estimate
assumptions referred to in this Guideline are those that were used in the
valuation of insurance contract liabilities at the end of the previous
reporting period. For blocks of business that are not valued in this
manner (e.g. annual group life and health), the best-estimate assumptions
used should be those that were used in the most recent business plan or
pricing.
The income that is to be analyzed is the consolidated net income that
appears in the company’s financial statements. For stock companies, this
includes any transfers from the participating accounts to the shareholder
account, but does not include an analysis of earnings of the participating
accounts. For mutual insurance companies, it includes all income.
Where it is not in conflict with this Guideline, the methodology used
should be consistent with any SOE material promulgated by the CIA.
Form of
Disclosure
OSFI expects the following SOE format would be the minimum disclosure to
be shown. Additional detail can be added at the discretion of the company.
OSFI expects the disclosure to show at least two years’ results, including
when IFRS is introduced.
Source of Earnings Analysis
|
YYYY
|
YYYY-1
|
Expected Profit on In-Force Business
|
|
|
Impact of New Business
|
|
|
Experience Gains & Losses
|
|
|
Management Actions and Changes in Assumptions
|
|
|
Other
|
|
|
Earnings on Operations (pre-income tax)
|
|
|
Earnings on Surplus
|
|
|
Income before Income Tax
|
|
|
Income Taxes
|
|
|
Net Income
|
|
|
a)
Expected Profit on In-Force Business
This component of the SOE represents the portion of the consolidated net
income on business in-force at the start of the reporting period that was
expected to be realized based on the achievement of its best-estimate
assumptions. It includes, but is not limited to, the following.
-
Release of provisions for adverse deviations (PfAD).
-
Expected net management fees.
-
Expected net earnings on deposits.
-
Scheduled amortization of balance sheet allowances for acquisition or
other capitalized expenses.
b)
Impact of New Business
This component of the SOE represents the point-of-sale impact on net
income of writing new business during the year. This is the difference
between the premium received and the sum of the expenses incurred as a
result of the sale and the new liabilities established at the point of
sale. The definition of what constitutes new business should be consistent
with other metrics in the financial statements that refer to new business.
c)
Experience Gains and Losses
This component of the SOE represents gains and losses that are due to
differences between the actual experience during the reporting period and
the best-estimate assumptions at the start of the reporting period. This
component should also include the impact of currency changes. It should
not include the effect on net income of management actions or changes in
assumptions during the year. See the Appendix for further explanation of
what is included under management actions and changes in assumptions.
For non-insurance contracts (e.g. investment contracts) backed by assets
classified as available for sale (AFS), the change in the liability will
be included in net income but any changes in assets that are AFS will
appear in other comprehensive income (OCI). If this is material to a
company, the effect of this is expected to be disclosed in commentary or
in a footnote to the above SOE table.
d)
Management Actions and Changes in Assumptions
This component of the SOE includes the following.
-
Management actions.
-
Changes in best-estimate assumptions.
-
Changes in the assumptions for margins for adverse deviations (MfAD).
-
Changes in the methodology for valuation of policy liabilities, due
either to new standards or the refinement of valuation methods.
-
Correction of errors.
Refer to the Appendix for further explanation of what is included under
Management Actions and Changes in Assumptions.
e) Other
This component of the SOE represents the result of any source of earnings
not addressed under the previous categories. Any such additional source of
earnings should be disclosed separately if they are material, given the
materiality level used in producing the financial statements.
This component of the SOE can also reflect situations where a company is
not able to identify fully all components of the SOE. Where this part of
the component is large, the company should endeavor to refine its analysis
methods.
f)
Earnings on Surplus
This component of the SOE represents the net income earned on the
company’s surplus funds.
All companies are expected to disclose the above components to allow for
consistent comparisons between companies. Companies may consider it
appropriate to show further detail as subcomponents. This is especially
important where such amounts are material, and is encouraged where it does
not conflict with this Guideline and would better allow the stakeholders
to understand the SOE analysis. The additional disclosure could take the
form of expanding the table shown above, or it could be included in a
commentary accompanying the SOE analysis.
Level of
Disclosure Required
While IFRS 8 only applies to certain entities, OSFI expects, at a minimum,
the SOE analysis to be disclosed at the same level as that required in
respect of the segmented information reported in the notes under IFRS 8,
whether or not the company is required to apply IFRS 8 for financial
reporting purposes.
OSFI encourages companies to exercise the option of disclosing SOE
information at a more detailed level of segmentation if this would give
more meaningful information to the company’s stakeholders, or if a more
detailed level is consistent with other disclosure in the public financial
statements. For instance, if a more detailed level of disclosure of
financial information is used in the MD&A to explain the company’s
operations, the company should consider disclosing the SOE on a consistent
basis.
APPENDIX: Definition of Management Actions and Changes in Assumptions
This appendix provides further explanation of the components to be
included under the category of Management Actions and Changes in
Assumptions.
Any material amounts or transactions included in this category of the SOE
analysis should be disclosed as separate items within this category. For
instance, if in the same segment there is a material increase in income
due to a new reinsurance contract and a decrease in income due to a
valuation basis change, the two amounts should be shown separately.
Materiality in this case should be based on a level that is appropriate
for the size of the segment, and not based on the materiality level used
for the total company.
Management actions should include the following. These are examples and
are not meant to be all-inclusive.
-
Changes in the price of a product.
-
Changes in fees or fee structure.
-
Changes in asset mix, whether in category of asset, quality of asset,
duration, etc. This would include the impact of investment management
changes that are material and either change the previous investment
policy or are outside of the existing investment policy. This category
would not include changes due to normal trading activity within an
established investment policy, or changes in the asset mix due to the
aging of the assets, new business, etc.
-
New or revised reinsurance deals on in-force business.
-
Acquisition or sale of a block of business or company.
Basis changes should include the following. These are examples and are not
meant to be all-inclusive.
-
Changes in any best-estimate assumptions for in-force business. This
includes changes in mortality, morbidity, lapse, policyholder
dividends, expenses, ultimate interest rates, equity returns, real
estate returns, default rates, etc. This also includes changes in
PfADs where the MfADs are a function of the best-estimate actuarial
liabilities.
-
Changes in MfAD levels, including changes in the conditional tail
expectation (CTE) level.
-
Changes due to refinements in valuation calculation systems.
-
Changes due to new actuarial or accounting standards.
-
Correction of errors. This category is for any errors that are not
material to the total, but could be regarded as material in a
particular segment shown in the SOE analysis.
-
Changes in non-formula bulk actuarial or other liabilities. This
category does not include actuarial liabilities that are consistently
calculated using an aggregate level methodology, as opposed to a
policy-by-policy level calculation. An example is the C-3 PfAD. This
category includes any amounts that the actuary has set up that 1) are
not calculated using a direct link to the underlying policies and
contingencies, 2) are not required by CIA standards or 3) which can be
changed at the actuary’s discretion. This category would include, for
example, general contingency reserves, general data integrity
reserves, experience fluctuation reserves, non-formulaic cyclical
reserves, etc.
-
New economic scenario for Canadian Asset Liability Method. When
deterministic scenarios are used, any changes in the interest scenario
results from one year to the next, if the same scenarios are run, is
not a basis change. Cases where the scenarios are unchanged, but a
different scenario from the same set of scenarios is the most adverse,
would be considered an experience gain or loss. However, a basis
change would occur in cases where the use of a new scenario, or the
removal of a previous scenario, causes a reserve to increase or
decrease relative to the previous set of scenarios. If a company uses
stochastic modeling, it should consider any changes from one year to
the next to be experience gains or losses, unless the methodology has
been materially changed.