Background

The IFRS IC received a submission about how an entity that issues insurance contracts (insurer) accounts for premiums receivable from an intermediary. In the fact pattern described, a policyholder has paid the premiums to an intermediary when the amounts became due under an insurance contract. At this point, the insurer is legally obliged to provide insurance contract services to the policyholder, even if the intermediary does not pay the premiums to the insurer (under the agreement between the insurer and the intermediary, the intermediary is allowed to pay the insurer later). IFRS 17 requires (except for the premium allocation approach) an insurer to include in the measurement of a group of insurance contracts an estimate of all the future cash flows within the boundary of an insurance contract, including premiums from a policyholder. The submission asked, when the policyholder pays the premiums to the intermediary, whether the insurer is required to recognise the premiums receivable from an intermediary as a separate financial asset under IFRS 9 and remove these premiums from the measurement of the group of insurance contracts under IFRS 17.

Staff analysis

The staff sent an information request to members of the Transition Resource Group for IFRS 17 (TRG). All respondents said that the role of the intermediary is common in all jurisdictions and most of the respondents said that either an insurance contract or legal requirements in a jurisdiction require an insurer to start providing insurance contract services before it receives premium in cash.  Most respondents said that the amount of premiums receivable from an intermediary at a reporting date can be substantial, particularly for non-life insurance and reinsurance contracts issued. In addition, many of the respondents commented that the rights and obligations indicate that the intermediary acts and collects premiums on behalf of the insurer. Those respondents believed that the insurer recognises the premiums receivable from an intermediary as a separate financial asset under IFRS 9 because the insurer’s right to receive cash from the intermediary arise under the separate service contract. On the other hand, other respondents said that such receivables or payables from an intermediary are included within the measurement of a group of insurance contracts until recovered or settled in cash because these receivables or payables are covered by the scope exclusion in IFRS 9.

The staff agreed with the respondents' view that IFRS 17 is the starting point for the premium receivable from an intermediary. An insurer should include in the measurement of a group of insurance contracts an estimate of the future premiums. IFRS 17:B65 does not distinguish between premiums collected directly from a policyholder and premiums collected through an intermediary. Therefore, an insurer’s rights to collect premiums from a policyholder through an intermediary are included within the measurement of a group of insurance contracts under IFRS 17.

The next step of analysing the question would be determining when an insurer removes cash flows from the measurement of a group of insurance contracts. However, IFRS 17 is silent on this. By implication, amounts of cash flows are removed from that measurement when they are recovered or settled. The paper gave examples of expected future cash flows included within the measurement of a group of insurance contracts that are also within the scope of another IFRS Accounting Standard and these standards do not include a scope exclusion of IFRS 17. To avoid double accounting, the related cash flows need to be removed from the measurement of a group of insurance contracts when they are recognised as assets or liabilities under another Standard. Therefore, the staff are of the view that an insurer removes expected cash flows from the measurement of a group of insurance contracts: (a) when the cash flows are recovered or settled; or (b) when the cash flows are recognised as an asset or a liability applying another IFRS Accounting Standard.

The staff went on to analyse the scoping of the receivables from the intermediary. Some respondents were of the view that the insurer obtains a right to receive the premium under a contract with the intermediary that is not an insurance contract within the scope of IFRS 17. Therefore, the receivable from the intermediary should be recognised under IFRS 9. However, the staff said that the definition of an insurance contract should not be read in isolation from the rest of that Standard. In particular, IFRS 17:B65 does not distinguish between cash flows from policyholders and from intermediaries. They are all cash flows within the boundary of an insurance contract. Given IFRS 9:2.1(e) excludes from the scope of that Standard the rights and obligations that give rise to cash flows within the boundary of an insurance contract, an insurer’s right to premiums cannot become subject to IFRS 9 after inception of the contract. In addition, there is no mechanism under IFRS 17 nor IFRS 9 to bring cash flows that have already been included within the measurement of a group of insurance contracts back into the scope of IFRS 9. Accordingly, the premiums receivables from the intermediary remain in the measurement of a group of insurance contracts until recovered or settled in cash.

Nonetheless, the staff said there could be an alternative interpretation. IFRS 17 does not restrict the removal of cash flows from the measurement of an insurance group due to their recovery or settlement in cash. After the policyholder has discharged its obligation to pay the premiums, the receivable from the insurance contract has been recovered by the receipt of a different receivable, which arises under a separate contract between the insurer and the intermediary. Such a receivable accordingly would be outside the scope of the exclusion in IFRS 9:2.1(e). If an insurer takes that view, it recognises those receivables applying IFRS 9 when the related rights and obligations arise under the contract that is not an insurance contract; and remove the related expected cash flows from the measurement of a group of insurance contracts. 

Regardless of the view an insurer takes, the staff said that the insurer is required to apply all the requirements, particularly the measurement of credit losses, of the relevant IFRS Accounting Standard to the receivables from an intermediary, being either IFRS 17 or IFRS 9. IFRS 17 and IFRS 9 address expected credit losses from an intermediary differently but both require disclosure of information about credit risk that arises from contracts. The staff considered that both of these result in useful information for users of financial statements.  

Although the matter is common in all jurisdictions, the staff is of the view that the alternative interpretation of the requirements in IFRS 17 and IFRS 9 is not widespread. In addition, it is not expected to have a material effect and the matter is not narrow in scope so that the IASB or the IFRS IC can address it in an efficient manner. Therefore, the matter does not meet the requirement to add a standard-setting project.

Staff recommendation

The staff recommended not to adding a standard-setting project to the work plan but to publish a tentative agenda decision that outlines the applicable requirements in IFRS 17 and IFRS 9, including how an insurer applies them to premiums receivable from an intermediary.

IFRS IC discussion

There was a lively discussion on this agenda item. Some of the IFRS IC members agreed that both views are acceptable. Some of them had their preferred view over another, but they accepted or would not preclude another view. Only a few IFRS IC members said only View 1 (i.e. not removing the premium receivables when the insurer has not received them in cash) is acceptable.

For the IFRS IC members who preferred View 2 (i.e. recognising a separate financial asset applying IFRS 9), they thought that when the policyholders pay the intermediary, these holders had discharged of their obligation for the payment and as a result the insurer has the obligation to provide the service. The nature of the receivables has been changed, a right to receive cash from the intermediary is established, which should be under the scope of IFRS 9. One IFRS IC member made analogy to the conclusion of the agenda decision for electronic transfers to get to the conclusion of recognising a separate financial asset under IFRS 9. Furthermore, these IFRS IC members said that the scope exemption in IFRS 9 does not apply because the risk that the intermediary default is not insurance risk which should not be under IFRS 17.

For those IFRS IC members who preferred View 1, they considered that in the scenario where the insurer is required to perform service when the policyholder pays the intermediary regardless of whether the insurer receives cash from intermediary or not, is within the scope of IFRS 17. The unit of account in IFRS 17 is a boundary of an insurance contract which includes a bundle of cash flows and it is managed on a net basis operationally, thus a single cash flow (for the premium receivable) cannot be pulled out. Moreover, the agenda decision mentioned that it is implied by IFRS 17 that cash flows are removed from that measurement when they are recovered or settled. Some IFRS IC members suggested giving more analysis on how such implication is derived given IFRS 17 is silent on it. These IFRS IC members commented that in order to achieve legal extinguishment, i.e. the policyholders discharging their obligation, the insurer would need to know when each individual policyholder pays the intermediary. These IFRS IC members had concerns over whether it is feasible for the insurer to track when as well as how much is received by the intermediary.

For the above IFRS IC members, although they had a preferred view, they accepted another view based on the analysis made by the staff in the agenda paper.

Given there are differences in measurement requirements under IFRS 17 and IFRS 9, some IFRS IC members were not convinced that there would be no "material effect on the amounts that entities report" as set out in the agenda decision. Particularly, IFRS 17 and IFRS 9 address expected credit losses differently. Also, the presentation would be different because the premium receivables would be presented net in the measurement of a group of insurance contracts under IFRS 17 while it would be presented as a gross receivable under IFRS 9. Therefore, one IFRS IC member suggested twisting the text of the tentative agenda decision to say it would not have a material impact in respect of information provided to readers, with the staff making this amendment subsequently.

For those who supported both views without preference, they said the agenda decision implies a preference of View 1 over View 2 and suggested text to be amended if it intends to deliver the message that both views are acceptable under the fact pattern submitted. The staff agreed with that and had already amended the text in the agenda decision.

After the redrafting by staff to take up the amendments by the IFRS IC members, the IFRS IC continued with the discussion regarding the text in the agenda decision. The IFRS IC still had concerns that the agenda decision mentioned judgement is required in determining which view is to be applied. They said judgement may be required in some scenarios while in this particular fact pattern, both views were determined/assessed to be acceptable, then there would be no judgement. The Chair suggested removing the "judgement" sentence, but the staff explained that judgement is needed to be applied to determine whether the premiums are within the boundary of the contract or not. Moreover, some IFRS IC members were not comfortable with the agenda decision stating that there would be no material effect applying both views and suggested to take that part out. Considering the comments by the IFRS IC members, the staff will further amend the drafting of the agenda decision.

IFRS IC decision

11 out of 14 IFRS IC members agreed with the conclusion of the agenda decision and the recommendation of not adding to a standard-setting project to the work plan. 10 out 14 of the IFRS IC members agreed with existing amended wordings.