NTUC Income AR 2017

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2017 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (CONTINUED) Fair value of financial instruments and investment properties The majority of the Group’s financial instruments reported at fair value are based on quoted and observable market prices or on service providers’ internally developed models that are based on independently sourced market parameters, including interest rate yield curves, option volatilities and currency rates. Investment properties are carried at fair values as determined by independent professional valuers. The Group’s fair value policies are approved by the Investment Committee with oversight by the Board. Management exercise judgement in determining the risk characteristics of various financial instruments, discount rates, estimates of future cash flows and other factors used in the valuation process. Judgement may also be applied when less readily observable external parameters are used in fair value estimation. The valuation techniques and unobservable inputs used by management in the valuation process are detailed in Note 4(f). Impairment assessment of investment in associated company At the reporting date, the Group’s investment in associated company, NTUC Choice Homes Co-operative Ltd (“Choice Homes”) has a carrying amount of $117,673,000 (2016: $117,892,000) which is above its share redemption value of $20,000,000 (2016: $20,000,000). As Choice Homes is a co-operative, its By-laws state that the redemption value of its share shall not be more than the nominal value of the shares or the net asset value of the shares based on the last audited financial position, whichever is lower. The Group is of the view that the value of Choice Homes will be returned in the long term. This position will be reviewed from time to time and the Group will consider, among other factors, regular dividend payout made and the future plans of Choice Homes. 4. MANAGEMENT OF INSURANCE AND FINANCIAL RISKS (a) Life Insurance Contracts Risk Management Insurance Risk The Group is exposed to life insurance risk when it signs a contract with the insured party for a premium amount and in return promises to pay a sum of money if a specified event occurs within the time frame stipulated in the contract. The terms of acceptance of the risks by the Group are generally long term in nature (except when they are group or health insurance plans, which are usually on an annual basis). These risks accepted by the Group are mortality risk, morbidity risk, longevity risk and persistency risk. In general, payment occurs upon death, occurrence of specific morbidity, surrender, or survival of the policyholder, depending on the type of policy. For Participating policies, the eventual payment to the policyholders typically consists of a guaranteed amount (the sum assured) and a non-guaranteed component distributed via annual reversionary (if any) and final terminal bonuses (if any). Once declared, annual bonuses become a fully guaranteed liability, although the Group has the discretion to reduce future reversionary and terminal bonuses if experience is unfavourable. Objectives of managing life insurance risks and the policies for mitigating risks To manage insurance risk, the Group has implemented underwriting and claims management guidelines and procedures. It also considers its reinsurance coverage to manage its overall risk exposure according to the risk appetite. Mortality risks are selected through underwriting and appropriate premiums are charged based on the level of risks that applicants bring in. The mortality tables used for pricing are based on the Group’s best estimates from its annual experience studies. The levels of mortality risks are determined by age, gender, and underwriting experience. For death and morbidity covers, the Group transfers insurance risk in excess of its retention limit to its appointed reinsurers on a per life basis. In addition, for applicants that have mortality risks higher than the Group’s tolerance level, these risks will also be ceded to the reinsurance companies. ANNUAL REPORT 2017 EVERY DAY MADE DIFFERENT 67