Cover note — Agenda paper 2

Three staff papers on insurance contracts were discussed at the February Board meeting, assessing the findings from the external editorial review of a draft of IFRS 17 Insurance Contracts (draft IFRS 17) are addressed.

Paper 2A considers whether to amend the requirements in draft IFRS 17 on changes to the carrying amount of the contractual service margin (CSM). Paper 2B discusses a narrow exemption to the requirements to group insurance contracts when a regulation or law constrains an entity from fully pricing, or offsetting benefits, in a way that reflects the characteristics of a set of policyholders. Paper 2C summarises the findings of the external review and identifies other 38 minor issues together with the Staff’s proposed response.

Changes to the contractual service margin — Agenda paper 2A

Staff recommendation

The Staff included three recommendations in this paper. The first one is that for contracts measured under the general model (i) all changes in estimates of the present value of future cash flows arising from non-financial risks (other than those arising from incurred claims), including those that are directly caused by experience adjustments, are adjusted against the CSM, and (ii) the amount of the CSM recognised in profit or loss is determined by allocating the carrying amount of the CSM to coverage units after all other adjustments have been made to the CSM at the start of the period (this is the only recommendation that would not be a change from draft IFRS 17). The second recommendation is that the definition of an experience adjustment should be amended to exclude any investment components from experience adjustments arising from differences between (i) expected incurred claims and expenses and (ii) actual incurred claims and expenses. The third and final Staff recommendation is that for contracts measured under the variable fee approach (VFA), all changes in estimates of the present value of future cash flows  that do not relate to the underlying items should adjust the CSM (other than those relating to incurred claims). We report on each of these three recommendations below.

Discussion

General model — changes in estimates of future cash flows that are directly caused by experience adjustments

The Staff noted feedback that accounting for the combined effect of an experience adjustment and any directly caused change in the estimate of the present value of the future cash flows in profit or loss would add operational complexity. In addition, the effect of an experience adjustment and the directly caused changes in estimates of the present value of the future cash flows often move in the same direction, therefore there is no offsetting.

There was general support for the Staff recommendation. One Board member noted that there is no perfect solution given past decisions, and another Board member expressed the view that the Staff recommendation provided a simple, easily understood solution.

The Board unanimously approved the Staff recommendation.

General model — determination of the amount recognised in profit or loss to reflect the service provided in the period

The Staff noted that some respondents had questioned why a change in estimates of future cash flows that are only expected to occur in future periods should affect the amount of the CSM recognised in profit or loss in the current period. The Staff commented that it was difficult to identify when the change occurred, so in order to avoid constant re-measuring it was necessary to make an assumption about this in order to determine what simplification should be made.

One Board member disagreed with the Staff recommendation as he felt that this would result in an inconsistent recognition of the amount of insurance revenue, which could have a significant effect on profit. However, another Board member disagreed that this would be the case, and other Board members agreed with the Staff recommendation. One Board member noted the need to be clear about the treatment when changes in estimates are made subsequent to reporting interim results.

The Board unanimously approved the Staff recommendation to not change the text in the draft IFRS 17.

Definition of an experience adjustment

There was general support for the Staff recommendation, but several Board members identified areas where the wording of the amended definition of an experience adjustment could be improved. The Staff will consider these suggestions in the final drafting work that would follow this Board meeting.

The Board unanimously approved the Staff recommendation.

Contracts measured under the VFA

The Staff noted that to be consistent with the IASB tentative decision reached earlier for the general model, the CSM for a group of contracts measured under the VFA should also be adjusted for all changes in estimates of the present value of future cash flows that are not related to underlying items. This change would make the approach much simpler and would be consistent with the principles of the VFA.

There was no Board discussion about this recommendation.

The Board unanimously approved the Staff recommendation.

Narrow exemption for the grouping of regulatory-affected pricing of insurance contracts — Agenda paper 2B

Staff recommendation

If an exemption for grouping contracts is provided, the Staff recommended that it should apply only to contracts that would fall into different groups because law or regulation constrains the entity’s practical ability to set a different price of a different level of benefits for policyholders with different characteristics. When these conditions apply the Staff recommended that contracts with materially different levels of profitability would be allowed to be grouped together in one group.

Discussion

There was general support for the Staff recommendation in the narrow circumstances described. One Board member warned against providing too much detailed guidance, particularly as regulatory requirements often vary in different jurisdictions.

The Board approved the Staff recommendation, with one Board member disagreeing with the recommendation.

Responding to the external editorial review — Agenda paper 2C

Background

There are 14 issues raised by Board members and the external reviewers that have resulted in the Staff proposing changes from draft IFRS 17, 15 clarifications to draft IFRS 17 that the Staff propose in the light of comments received on the draft and 9 further items which the Staff does not propose to address as the Board has already considered these issues. The Staff asked only a general question as to whether the Board agree with the Staff proposals.

Discussion

There was general support for the Staff recommendations, but several Board members identified areas where the proposed wording could be improved, notably for mutualisation and the VFA (scope of the VFA and the meaning of constructive obligations).

The Board unanimously approved the Staff recommendations.

Next steps

It is expected that the February IASB meeting will be the last in which insurance contracts will be discussed and decisions taken. The Staff will continue with the drafting process, reflecting the decisions made at this meeting in the ballot draft of IFRS 17.

The Staff expects to issue IFRS 17 in the first half of 2017, with May being the likely month for the release to the public.