The determination of Coverage Units in IFRS 17 under the VFA approach by using a product of Swiss Life (Luxembourg) S.A.

After several years of work, the IFRS Foundation published a new accounting standard for insurance companies, IFRS 17, which will be applicable from 2023 on. One of the most important introductions is the Contractual Service Margin, in short CSM, which represents the future expected profits from these contracts. The CSM is amortized over the term of the contracts using Coverage Units. However, the Standard does not provide specific guidelines on how the Coverage Units should be defined but leaves this to the judgment of the entities. Especially for VFA products, the choice of the right Coverage Units is not straightforward. In this thesis, a modified version of the VFA portfolio of Swiss Life (Luxembourg) S.A. is analyzed and different Coverage Units approaches are examined on it. In the first part of this thesis, the new Standard is presented and summarized. In the second part, the different approaches on Coverage Units are presented with a simplified example and the results for the product of Swiss Life Luxembourg are given. As the Swiss Life Luxembourg product has been in place for some time, an artificial transition date is included and set to 2018. This means that there are three main parts to analyze, the period before the transition date, the transition year with a first CSM calculation and the years after the transition date. In total, 4 different approaches on Coverage Units are analyzed: - The first approach is an approach based on a constant Coverage Unit. This approach also tests the impact of discounting the Coverage Units. - The next approach is based on the number of existing affiliates. - The third approach is based on the mathematical reserve. At this point, the effect of using deflated or non-deflated reserves is also tested. - The last one is based on a profit-by-source approach. Some past and future statutory results of the product are used and again the use of deflated or non-deflated reserves is tested. More precisely, it is a parameterisation approach that is intended to combine the various services provided by the product. The main analysis is performed using 4 different elements, each of which could be a focus point of an entity depending on its goals. First, there are the past releases under IFRS 17 that can be compared. Next is the transition delta, a measure that can be used to compare past statutory results with past releases under IFRS 17. Then the opening CSM for all approaches can be weighed against, and lastly the future releases under IFRS 17. Thus, depending on an entity’s preference, the choice of the best Coverage Units may vary. After analyzing the figures, a qualitative analysis is made by comparing the different approaches with the definition of the standard. Two main elements need to be considered in the calculation of the Coverage Units: The coverage period and the services provided during the coverage period. In conclusion, it is very difficult to determine Coverage Units for Swiss Life Luxembourg's VFA product and for modern VFA products in general, as almost nothing is predefined, leading to a lot of assumptions in order to project the different cash flows. Moreover, the lifetime is virtually infinite, which does not ease the problem and makes all approaches at some point controversial. The issue of Coverage Units for modern VFA products, such as Swiss Life Luxembourg's, presents a lot of questions that are not straightforward to answer. In general, each individual case will probably have to be discussed with the auditors in order to find the most appropriate measure for Coverage Units.