BIMB Integrated Annual Report 2017

The Group’s AEC is also updated on the status of these large individual financing accounts and the factors taken into account in exercising judgement around the individual impairment provisions. 2. Valuation of Financial Instruments The valuation of the financial instruments was another one of the key focus areas due to the complexity involved in valuing the instruments and the application of valuation techniques which involve the exercise of judgement and the use of assumptions and estimates. Quoted and observable market prices, where applicable, were used as the measure of fair value of financial instruments. These were for valuation of Level 1 instruments. Where such quoted or observable market prices were not available, fair values were estimated based on models that use a significant degree of non-market based unobservable inputs. These valuation techniques were used in the valuation of Level 2 and Level 3 financial instruments. For Level 2 financial instruments, valuation techniques are based on observable inputs for which pricing is obtained from independent sources. Input parameters include pricing from Bond Pricing Agency or BNM indicative yields. However, significant valuation judgement is only used in respect of Level 3 financial instruments. Judgement in relation to the valuation of financial instruments are more subjective, where the value is based on models that use unobservable market data, i.e., reflect the Group’s judgement and assumptions. For the Group, the quantum of Level 3 financial instruments as at 31 December 2017 is not significant. It only represents RM256.4 million or 0.4% of the financial assets held at fair value. As for the Level 3 Sukuk – liabilities, the carrying amount is RM2.280 billion against the fair value of RM2.236 billion. The valuation is undertaken by a unit independent of the business. 3. Valuation of takaful contract liabilities The takaful contract liabilities for family takaful business comprise provision for outstanding claims and participants’ funds, while takaful contract liabilities for general takaful business comprise provision for outstanding claims and provision for unearned contribution and participants’ funds. The two key components in deriving to the takaful contract liabilities are the valuation of actuarial liabilities for the family takaful business and the provision for outstanding claims for both family and general takaful businesses. Reports on valuation of liabilities in respect of family and general business were presented and approved by the Board of Takaful Malaysia on an annual basis based on BNM guidelines. i. Actuarial liabilities – family takaful contract liabilities Actuarial liabilities for long-term family takaful business require actuarial significant judgement over the estimation of future expected benefits payable to participants. Actuarial liabilities for yearly renewal short-term family takaful business is calculated based on the higher of its unexpired risk reserves for expected benefits payable to participants and unearned contribution reserves. These estimations are made through the selection of best estimate assumptions such as mortality rates and morbidity/ loss incidence rates, surrender rates and discount rates. The best estimate assumptions were derived using Takaful Malaysia’s actual past experience. An appropriate allowance for Provision of Risk Margin for Adverse Deviation from best estimate assumption is made in the valuation of liabilities such that the overall level of sufficiency of actuarial liabilities at a 75% confidence level is secured. The methodology used for calculating the actuarial liabilities comprise prospective actuarial valuation, cash flow projection valuation and unearned contribution valuation. Although judgements are made about determining the appropriateness of discount, mortality, morbidity and surrender rate assumptions used in calculation of actuarial liabilities, there is update to the Board on an annual basis to ensure the assumptions used are in line with actual experience and are reasonable. 119 Overview Value Creation Accountability Financial Statements Sustainability Performance Data Shareholders Information 21 st AGM Information Management Discussion & Analysis