NTUC Income AR 2018

Notes to the Financial Statements For the Financial Year Ended 31 December 2018 3. Critical accounting estimates and judgements Classification of insurance and investment contracts The Group issues contracts that transfer insurance risk or financial risk, or both. Financial risk is the risk of a possible change in one or more of the following: a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of non-financial variable, that the variable is not specific to a party to the contract. Insurance contracts are those contracts that transfer significant insurance risk. An insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. Such contracts may also transfer financial risks. As a general guideline, the Group defines as significant insurance risk the possibility of having to pay benefits on the occurrence of an insured event that are at least 5% more than the benefits payable if the insured event did not occur. Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if the insurance risk reduces significantly during this period. Investment contracts are those contracts that transfer financial risk without significant insurance risk. Insurance contract provisions for Life Insurance The insurance contract provisions for Life insurance are computed in accordance with the applicable regulatory principles using a prospective approach. The provisions comprise the following liabilities: – expected future net payments for guaranteed benefits – expected future net payments for non-guaranteed benefits (if any) – provision for adverse deviation from the expected experience Valuation methodology Assumptions Liabilities are computed using the prospective cash flow method. Assumptions are set by the Group’s Appointed Actuary and the areas where assumptions have been applied are: – Mortality and morbidity (if applicable) – Persistency – Discount rate – Management expenses – Bonuses (for Life Insurance Par Fund only) Mortality and Morbidity A detailed review of the Group’s mortality and morbidity experience by significant risk is conducted annually. Based on the results of the review, the Group’s Appointed Actuary formed an opinion with regard to the expected future mortality and/or morbidity experience. The Group also uses industry/reinsurance mortality and/or morbidity tables for plans that have no historical experience. A provision for adverse deviation (PAD) is also made based on the types of product. Persistency A detailed review of the Group’s persistency experience by plan types is conducted annually. The Group tries to balance past experience and future conditions by setting best-estimate assumptions in line with expected long term average persistency levels. For new plans with no historical experience, the Group uses the experience on similar plan types as a basis to set the best-estimate assumptions. 64 HAND IN HAND