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Insurance contracts

Date recorded:

Insurance Contracts – Cover note - Agenda paper 2

The purpose of this session was to update the Board on the activities undertaken to support implementation of IFRS 17 since it was published in May 2017. The papers for this meeting were as follows:

  • Update on the Transition Resource Group (TRG) for IFRS 17 Meeting – AP 2A
  • Update on investor activities on IFRS 17 – AP 2B

The Board was not asked to make any decisions at this meeting.

Next steps

The next TRG meeting will be held on 2 May. Two more have been scheduled for the second half of 2018 and additional meetings may be held in the first half of 2019. The Staff expect that some amendments will come through the annual improvements process. They also aim to publish further webcasts and articles to support implementation.

Update on the Transition Resource Group for IFRS 17 Meeting – Agenda Paper 2A

Background

The first TRG meeting for IFRS 17 was held on 6 February 2018. This paper provided an overview of the TRG’s discussions at that meeting. The TRG discussed the following topics.

  1. Separation of insurance components of a single insurance contract

    The question relates to whether a single insurance contract could be separated into different insurance components for measurement purposes. Similarly, the submitter asked whether a reinsurance contract held should be separated into components to reflect the underlying contracts covered.

    TRG members observed that the lowest unit of account in IFRS 17 is the contract that includes all insurance components. Generally, the legal form of a single contract reflects its substance. This is so even if the contract covers different risks. Overriding the ‘single contract’ unit of account presumption involves significant judgement and is not an accounting policy choice.

  2. Boundary of contracts with annual repricing mechanisms

    The submitter asked whether insurance contracts with annual repricing mechanisms would have a contract boundary of one year or longer than one year in terms of IFRS 17.34(b). The question centres on whether the entity has a substantive obligation to provide services beyond the first year.

    TRG members noted that the fact patterns submitted are very specific and are not common in practice. They reiterated that all relevant facts and circumstances must be considered in this assessment.

  3. Boundary of reinsurance contracts held

    The submitter asked how the requirements of IFRS 17.34 regarding the boundary of an insurance contract should be applied to reinsurance contracts held.

    IFRS 17.34 provides guidance on determining when a substantive obligation to provide services ends from the insurer’s perspective. On the flip side of the coin, in terms of a reinsurance contract held, a substantive right to receive services from the reinsurer ends when the reinsurer has the practical ability to reassess the risks transferred thereto and can set a price or level of benefits for the contract to reflect fully the reassessed risk, or the reinsurer has a substantive right to terminate the coverage.

    Accordingly, the boundary of a reinsurance contract held could include contracts that are expected to be issued in the future. This is a change from existing practice.

  4. Insurance acquisition cash flows paid and future renewals

    The question relates to how non-refundable acquisition costs should be accounted for when an entity underwrites a new contract with the expectation that the contract will be renewed.

    TRG members observed that IFRS 17 requires acquisition costs paid or received that are directly attributable to future contracts to be recognised as an asset or liability before the group to which those future contracts belong is recognised. These acquisition costs include amounts that were paid or received before those contracts are issued.

  5. Determining the quantity of benefits for identifying coverage units

    This submission considers how the coverage units of a group of insurance contracts with no investment component should be determined. Coverage units establish the amount of the contractual service margin (CSM) to be recognised in profit or loss for services provided in a period.

    TRG members did not reach a view because they wanted to assess this issue together with coverage units for insurance contracts with investment components. The TRG will reconsider these two topics at the next meeting.

  6. Insurance acquisition cash flows when using fair value transition

    The submitter asked whether, in terms of the fair value transition approach to IFRS 17, acquisition cash flows that occurred prior to the transition date are recognised as revenue and expenses for reporting periods subsequent to the transition date.

    TRG members noted that the fair value approach is intended to be a fresh start approach. This means that only acquisition cash flows arising after the transition date are included in the measurement of the CSM. Since acquisition cash flows that occurred prior to the transition date are not included in the CSM at transition date, they will not be included in revenue and expenses for reporting periods subsequent to the transition date.

Several other questions were submitted in addition to these six issues. TRG members observed in particular that the application of IFRS 17 will result in a significant change from existing practice in the following areas:

  • (a) presentation of assets and liabilities on the statement of financial position;
  • (b) premiums received applying the premium allocation approach; and
  • (c) treatment of contracts acquired in their settlement period.

The Staff will conduct outreach to understand these issues in more detail. They will update the Board with the results of their outreach.

Discussion

There was not much substantive discussion on this paper.

Update on investor activities on IFRS 17 – Agenda Paper 2B

Background

This paper provided a high-level overview of investors’ reactions to IFRS 17, which were gathered from outreach activates conducted by the Staff since the publication of the Standard.

Investors generally welcomed the Standard. They thought it will improve transparency of the source of profits for long-term insurance contracts and that it should enhance consistency and comparability between entities for both life and non-life businesses. This is particularly relevant in the following areas:

  • information about contractual service margins;
  • risk adjustments for non-financial risks; and
  • information about future profitability of new insurance contracts.

Virtually all European investors felt that the similarities between IFRS 17 and Solvency II made the measurement requirements of IFRS 17 easier to understand.

On the other hand, investors were mostly concerned with the entity-specific judgements required and accounting options allowed by IFRS 17.

Given its nature, accounting for insurance contracts is heavily reliant on assumptions. Some of the key factors for measuring insurance contracts may be subject to significant judgement, particularly in the areas of discount rates, risk adjustments and the initial contractual service margin. Investors emphasised that it is essential for entities to describe clearly the process for estimating discount rates and risk adjustments in order for them to understand the amounts recognised in the financial statements and the changes in those amounts.

Furthermore, investors thought that the options for presenting the effects of changes in financial assumptions (either in profit or loss or between profit or loss and OCI) may reduce comparability between entities and add complexity when analysing such information. Once again, they emphasised the importance of proper disclosure in relation to these amounts.

Discussion

There was no discussion on this paper.

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