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Insurance contracts [IASB only]

Date recorded:

Cover Note (Agenda Paper 2)

The purpose of this session was to discuss possible minor changes to IFRS 17 Insurance Contracts as part of Board’s Annual Improvements to IFRS Standards Cycle.

Annual Improvements (Agenda Paper 2A)

Background

Since IFRS 17 Insurance Contracts was published in May 2017, as part of the implementation support, the staff have become aware of instances where the drafting of IFRS 17 does not achieve what was intended by the Board. This paper proposed minor changes to reflect the Board’s intentions and explained why the staff think it is appropriate to amend.

The staff recommended the Board propose the following amendments to IFRS 17:

  • a) Terminology in IFRS 17:27 to include insurance acquisition cash flows relating to insurance contracts in the group yet to be issued—the term ‘issued’ was included to identify insurance contracts issued (as opposed to reinsurance contracts held) and was not intended to exclude acquisition cash flows relating to insurance contracts in the group yet to be issued.
  • b) Terminology in IFRS 17:28 to achieve the intended timing of recognition of contracts within a group—the paragraph refers to contracts issued by the end of the reporting period, whereas it should refer to contracts that meet the criteria for recognition set out in IFRS 17:25. A consequential amendment is also needed to IFRS 17:24.
  • c) Removal of potential double-counting of the risk-adjustment for non-financial risk in the insurance contracts reconciliation disclosures and revenue analysis—the proposed amendments remove potential double-counting of risk adjustment for non-financial risk being captured in other components described in paragraphs IFRS 17:104, B121 and B124.
    Paragraph 104 breaks the reconciliation of movements in components of insurance contract balance (with risk adjustment for non-financial risk being a separate component) into changes relating to future, current and past service.
    The proposed wording change would modify IFRS17:104 as follows:

“An entity shall separately disclose in the reconciliations required in paragraph 101 each of the following amounts related to insurance services, if applicable:

  • (a) changes that relate to future service, applying paragraphs B96–B118, showing separately:
    • (i) changes in estimates that adjust the contractual service margin;
    • (ii) changes in estimates that do not adjust the contractual service margin, ie losses on groups of onerous contracts and reversals of such losses; and
    • (iii) the effects of contracts initially recognised in the period.
  • (b) changes that relate to current service, ie:
    • (i) the amount of the contractual service margin recognised in profit or loss to reflect the transfer of services;
    • (ii) the change in the risk adjustment for non-financial risk that does not relate to future service or past service; and
    • (iii) experience adjustments (see paragraphs B97(c) and B113(a)), excluding amounts relating to the risk adjustment included in (ii).”
      IFRS 17:B121 and B124 specify the measurement of the amount of revenue and in doing so comment on the insurance service expense. Insurance service expense is separately defined in IFRS17:84, but its component relating to current service is explained in IFRS 17:104, B121 and B124. Amending these paragraphs both prevents potential double counting of changes in risk adjustment relating to current service and clarifies that these changes form part of the insurance service expense.

The proposed wording change would modify IFRS 17:B121 as follows:

“Paragraph 83 requires the amount of insurance revenue recognised in a period to depict the transfer of promised services at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those services. The total consideration for a group of contracts covers the following amounts:

  • (a) amounts related to the provision of services, comprising:
    • (i) insurance service expenses, excluding any amounts relating to the risk adjustment included in (ii) and any amounts allocated to the loss component of the liability for remaining coverage;
    • (ii) the risk adjustment for non-financial risk, excluding any amounts allocated to the loss component of the liability for remaining coverage; and
    • (iii) the contractual service margin.
  • (b) amounts related to insurance acquisition cash flows.
  • (c) changes that relate to past service, ie changes in fulfilment cash flows relating to incurred claims (see paragraphs B97(b) and B113(a)).”

The proposed wording change would modify IFRS 17:B124 as follows:

“Consequently, insurance revenue for the period can also be analysed as the total of the changes in the liability for remaining coverage in the period that relates to services for which the entity expects to receive consideration. Those changes are:

  • (a) insurance service expenses incurred in the period (measured at the amounts expected at the beginning of the period), excluding:
    • (i) amounts allocated to the loss component of the liability for remaining coverage applying paragraph 51(a);
    • (ii) repayments of investment components;
    • (iii) amounts that relate to transaction-based taxes collected on behalf of third parties (such as premium taxes, value added taxes and goods and services taxes) (see paragraph B65(i)); and
    • (iv) insurance acquisition expenses (see paragraph B125); and
    • (v) the amount related to the risk adjustment (see (b)).
  • (b) the change in the risk adjustment for non-financial risk, excluding:
    • (i) changes included in insurance finance income or expenses applying paragraph 87;
    • (ii) changes that adjust the contractual service margin because they relate to future service applying paragraphs 44(c) and 45(c); and
    • (iii) amounts allocated to the loss component of the liability for remaining coverage applying paragraph 51(b).
  • (c) the amount of the contractual service margin recognised in profit or loss in the period, applying paragraphs 44(e) and 45(e).”
  • (d) Correction of terminology in the sensitivity analysis disclosures—IFRS 17:128 and 129 use the terms ‘risk exposure’ when they should use ‘risk variable’.
  • (e) Exclusion of business combinations under common control from the scope of the requirements for business combinations in IFRS 17—the Board never intended to include such transactions in the scope of the requirements in IFRS 17, the proposed amendments exclude such business combinations.
  • (f) Amendment to IFRS 3 Business Combinations so that the consequential amendment made by IFRS 17 on the classification of insurance contracts apply prospectively—this amendment was intended to apply to business combinations with an acquisition date after the date of the initial application of IFRS 17.
  • (g) Amendments to IFRS 7 Financial Instruments: Disclosures, IFRS 9 Financial Instruments and IAS 32 Financial Instruments: Presentation to achieve the intended interaction between the scopes of these financial instruments standards and the scope of IFRS 17, particularly with respect to insurance contracts held (IFRS 17 amended the scope paragraphs of IFRS 7, IFRS 9 and IAS 32 to refer to IFRS 17 rather than IFRS 4). In doing so, IFRS 17 changed the scope of these financial instruments by mistake.
  • (h) Addition of an explanation that in Example 9 of the Illustrative Examples of IFRS 17 the time value of the guarantee changes over time.

Discussion

There was no significant discussion on this paper

Decision

The Board approved all the staff recommendations in Agenda Paper 2A unanimously.

Annual improvement on coverage units (Agenda Paper 2B)

Background

This paper focuses on clarifications to the definition of the coverage period for insurance contracts with direct participation features. The proposal arises from a submission to the Transition Resource Group for IFRS 17 (TRG). This paper addressed questions raised in the submission related to insurance contracts with investment components, in particular whether the quantity of benefits includes benefits from investment-related services and whether the coverage duration includes periods in which there is no obligation to provide insurance coverage but there is an obligation to provide investment-related services.

IFRS 17 requires an entity to recognise the contractual service margin of a group of insurance contracts over the coverage period of the group. The staff think that IFRS 17 is clear under the general model—the quantity of benefits includes only insurance coverage and the contractual service margin is recognised only over the period during which the entity provides coverage for insured events. The insurer provides this service by standing ready to pay insurance benefits. When that obligation no longer exists, the contractual service margin is expected to be fully released to profit or loss. The Board decided that it is appropriate to have a different approach to reflect the effect of investment-related services for those contracts that fall within the scope of the variable fee approach. At the May 2018 TRG meeting, TRG members agreed that the coverage period and the quantity of benefits for the variable fee approach should include investment-related services in addition to insurance coverage. However, members expressed different views on whether it was necessary to amend the definition of coverage period to achieve the inclusion of investment-related services for both variable fee approach contracts and general model contracts. IFRS 17 refers to contracts that have cash flows, which depend on the fair value of underlying items but do not meet the criteria for the variable fee approach. Several TRG members had highlighted that those contracts also have an obligation to deliver investment-related service and they should be considered in the definition of the coverage period and in the associated calculation of the coverage units. Further details can be found in our IFRS in Focus of the TRG meeting on IAS Plus.

The existing definition of coverage period only refers to a period in which there is no insurance coverage.

The proposed new definition for coverage period is:

“For insurance contracts without direct participation features—the period during which the entity provides coverage for insured events. This period includes the coverage that relates to all premiums within the boundary of the insurance contract.”

“For insurance contracts with direct participation features—the period during which the entity provides coverage for insured events or investment-related services. This period includes the coverage for insured events or investment-related services that relates to all premiums within the boundary of the insurance contract.”

The staff recommend that the Board proposes a change to the definition of the coverage period for the contracts that will be accounted for under the variable fee approach (and not consider any change to the definition of coverage period for any other insurance contracts) as part of the annual improvements cycle. Clarifying the position for variable fee approach contracts will also clarify the position for general model contracts.

Discussion

Almost all of the Board members agreed with the staff recommendation for a need to change the definition of the coverage period for the variable fee approach (VFA). The Board also agreed that the existing proposed amendment as per Agenda Paper 2B was in the nature of an Annual Improvement.

However, one member disagreed with the staff recommendation because the proposed amendment to the definition would result in a counterintuitive outcome for contracts accounted for under the general model where the cash flows are dependent on the fair value of underlying items but without having all of the characteristics to be classified as direct participating insurance contracts. These contracts are described in IFRS 17:B75 and they are often referred to as indirect participating contracts. There are some indirect participating contracts where the insurance coverage period may be short, but the period of investment-related service provision is much longer. In that scenario the amendment would result in the recognition of all revenue and contractual service margin over the shorter insurance coverage period. In other cases, the indirect participating contracts provide investment-related services for several years without the insurer standing ready to pay claims until a future date usually coinciding with the retirement of the policyholder (deferred annuity contracts). This is counterintuitive when the initial estimation of the contractual service margin takes into account future cash flows relating to the provision of investment-related services. In the Board member’s opinion, the creation of two coverage periods for two different populations of contracts (general model and VFA) potentially requires more substantive discussion.

The other IASB members observed that the present proposal was not meant to address the contracts in the general model but only to correct an error in relation to contracts under the variable fee approach, and most of the TRG members agreed with this regarding the direct participating contracts that are accounted for under that approach.

Several IASB members observed that in relation to general model contracts, including the indirect participating contracts, the Board discussion of potential future amendments to the Standard would need to take place after the September TRG meeting. The majority of the TRG members had disagreed with the IASB staff proposal. The discussion would likely be substantive, broader and any amendment would be outside the scope of the Annual Improvements process. This is because the general model consistently separates insurance services from changes in financial effects. Hence, making a change would not be a clarification of the wording in IFRS 17 or the correction of relatively minor unintended consequences, oversights or conflicts between existing requirements. Instead, it would open up some fairly fundamental aspects of IFRS 17 hence would require substantial decision-making of the Board.

Postponing that discussion to after the next TRG meeting would allow consideration of various implementation issues raised.

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