My first Publication ocbc_ar17_fullreport_english | Page 180

NOTES TO THE FINANCIAL STATEMENTS
For the financial year ended 31 December 2017
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
2.24 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
(continued)
2.24.4 Liabilities of insurance business (continued)
For life insurance contracts, estimates are made for future
deaths, morbidity, disabilities, lapses, voluntary terminations,
investment returns and administration expenses. The Group
relies on standard industry reinsurance and national mortality
and morbidity tables which represent historical experience, and
makes appropriate adjustments for its respective risk exposures
and portfolio experience in deriving the mortality and morbidity
estimates. These estimates provide the basis for the valuation
of the future benefits to be paid to policyholders, and to ensure
adequate provisions which are monitored against current
and future premiums. For those contracts that insure risk on
longevity and disability, estimates are made based on recent
past experience and emerging trends. Epidemics and changing
patterns of lifestyle could result in significant changes to the
expected future exposures.
Each year, these estimates are assessed for adequacy and
changes will be reflected as adjustments to the insurance fund
contract liabilities.
For general insurance contracts, estimates have to be made
for both the expected ultimate cost of claims reported at the
balance sheet date and for the expected ultimate cost of claims
incurred but not yet reported at the balance sheet date (“IBNR”).
It can take a significant time before the ultimate claims costs
can be established with certainty and for some type of policies,
IBNR claims form the majority of the insurance subsidiaries’
balance sheet liability. The ultimate cost of outstanding claims
is estimated using a range of standard actuarial claims
projection techniques such as Chain Ladder and Bornhuetter-
Ferguson methods.
The main assumption underlying these techniques is that a
company’s past development experience can be used to project
future claims development and hence, ultimate claim costs.
As such, these methods extrapolate the development of paid
and incurred losses, average costs per claim and claim numbers
based on the observed development of earlier years and
expected loss ratios. Historical claims development is mainly
analysed by accident years but can also be further analysed
by significant business lines and claims type. Large claims are
usually separately addressed, either by being reserved at the
face of loss adjustor estimates or separately projected in
order to reflect their future development. In most cases, no
explicit assumptions are made regarding future rates of claims
inflation or loss ratios. Additional qualitative judgement is
used to assess the extent to which past trends may not apply
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OCBC ANNUAL REPORT 2017
in future (for example, to reflect one-off occurrences, changes
in external or market factors, economic conditions as well
as internal factors such as portfolio mix, policy features and
claims handling procedures) in order to arrive at the estimated
ultimate cost of claims that present the likely outcome from
the range of possible outcomes, taking account of all
uncertainties involved.
2.24.5 Impairment of goodwill and intangible assets
The Group performs an annual review of the carrying
value of its goodwill and intangible assets, against the
recoverable amounts of the CGU to which the goodwill
and intangible assets have been allocated. Recoverable
amounts of CGUs are determined based on the present
value of estimated future cash flows expected to arise from
the respective CGUs’ continuing operations. Management
exercises its judgement in estimating the future cash flows,
growth rates and discount rates used in computing the
recoverable amounts of the CGUs.
2.24.6 Income taxes
The Group is subject to income taxes in several jurisdictions.
Significant judgement is required in determining the capital
allowances and deductibility of certain expenses in estimating
the provision for income taxes. There are many transactions
and calculations for which the ultimate tax determination is
uncertain during the ordinary course of business. The Group
recognises liabilities for anticipated tax issues based on
estimates of whether additional taxes will be due. Where the
final tax outcome of these matters is different from the amounts
that were initially recorded, such differences will impact the
income tax and deferred tax provisions in the period in which the
determination is made.
2.24.7 Insurance contract classification
Contracts are classified as insurance contracts where they
transfer significant insurance risk from the policyholder to
the Group. The Group exercises judgement about the level of
insurance risk transferred. The level of insurance risk is assessed
by considering whether upon the occurrence of the insured
event, the Group is required to pay significant additional
benefits. These additional benefits include claims liability and
assessment costs, but exclude the loss of the ability to charge
the policyholder for future services. The assessment covers
the whole of the expected term of the contract where such
additional benefits could be payable. Some contracts
contain options for the policyholder to purchase insurance
risk protection at a later date; these insurance risks are deemed
not significant.