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Amendments to IFRS 17 Insurance Contracts

Date recorded:

Cover note (Agenda Paper 2)

In June 2019 the Board issued ED/2019/4 Amendments to IFRS 17. The ED was open for comments until September 2019.

In this meeting, the Board discussed some of the topics where it had decided to consider the feedback from respondents further.

Scope exclusion from IFRS 17 for some credit card contracts (Agenda Paper 2A)

For some credit cards, the issuer provides customers with protection for purchases within a certain price range. Such protection, arising from legal terms of the contract or regulation, may transfer significant insurance risk, bringing the credit cards contracts into the scope of IFRS 17. The ED proposed to amend the scope of IFRS 17 to exclude from the scope of the Standard credit card contracts that provide insurance coverage for which the entity does not reflect an assessment of the insurance risk associated with an individual customer in setting the price of the contract with that customer. Without the amendment, entities that currently account for a loan or a loan commitment in a credit card applying IFRS 9 would need to change the accounting for those contracts when IFRS 17 is effective, shortly after having incurred costs to develop a new credit impairment model to comply with IFRS 9.

Many respondents to the ED generally agree with this proposal, however, some of the respondents asked the Board to clarify or reconsider the following aspects of the proposal:

  • Applying the proposed amendment, an entity likely would be required to measure the credit card contract at fair value through profit or loss applying IFRS 9 as it would ‘fail’ the solely payments of principal and interest test. Such an accounting treatment was seen as inappropriate by respondents.
  • ‘Similar’ contracts to credit cards would still be within the scope of IFRS 17 under the proposals in the ED.
  • Any type of insurance contract would be captured by the proposal, while it should be only insurance coverage that relates to indemnity for losses arising from the use of the credit card.

The staff analysed these issues and developed the following recommendation on that basis.

Staff recommendation

The staff recommended the Board confirm the proposed scope exclusion from IFRS 17, with some changes, as follows:

An entity is required to exclude from the scope of IFRS 17 credit card contracts that meet the definition of an insurance contract if, and only if, the entity does not reflect an assessment of the insurance risk associated with an individual customer in setting the price of the contract with that customer. If the entity provides the insurance coverage to the customer as part of the contractual terms of such a credit card contract, the entity is required to:

  • (a) separate that insurance coverage component and apply IFRS 17 to it; and
  • (b) apply other applicable IFRS Standards, such as IFRS 9, to the other components of the credit card contract.

The staff also recommended the Board extend this amendment to other contracts that provide credit or payment arrangements that are similar to such credit card contracts if those similar contracts meet the definition of an insurance contract and the entity does not reflect an assessment of the insurance risk associated with an individual customer in setting the price of the contract with that customer.

Board discussion

Some Board members were concerned that if the risk was assessed individually, a bank would have to set up a separate system to account for those contracts applying IFRS 17. This would be very onerous for banks. One Board member suggested to not require IFRS 17 accounting if there would otherwise be no insurance contracts in the group that were in the scope of IFRS 17. The staff responded that in many cases, the credit card issuer acts as an agent and the principal insurance company would apply IFRS 17 anyway. However, if not, insurance becomes part of the commercial activity of the credit card issuer. In those cases the issuer is taking on significant insurance risk and IFRS 17 is the appropriate Standard to account for it.

Board decision

All Board members supported the staff recommendation.

Transition—the prohibition from applying the risk mitigation option retrospectively (Agenda Paper 2B)

When developing the ED, the IASB considered allowing retrospective application of the risk mitigation option, but has decided to retain the prohibition in IFRS 17 of retrospective application to avoid the use of hindsight. Instead, the IASB proposes to extend the use of the fair value approach on transition to groups where the entity has the information to apply IFRS 17 retrospectively and to bring the date forward for the application of the risk mitigation option to the transition date.

The ED proposed to amend the transition requirements in IFRS 17 to permit an entity to apply the risk mitigation option prospectively from the IFRS 17 transition date, as opposed to the date of initial application, provided that the entity designates its risk mitigation relationships to apply the risk mitigation option no later than the IFRS 17 transition date. The date of initial application is the beginning of the annual reporting period in which an entity first applies IFRS 17, whereas the transition date is the beginning of the annual reporting period immediately preceding the date of initial application.

The Board also proposed an amendment of the transition requirements in IFRS 17 to permit an entity to use the fair value transition approach for a group of insurance contracts with direct participating features if, and only if, the entity:

  • a) can apply IFRS 17 retrospectively to the group;
  • b) chooses to apply the risk mitigation option to the group prospectively from the transition date; and
  • c) has used derivatives or reinsurance contracts held to mitigate financial risk arising from the group before the transition date.

In proposing the amendment, the IASB responded to stakeholder concerns about the impact of not applying the option retrospectively, while retaining the principle of not allowing the use of hindsight for hedge accounting.

Respondents to the ED expressed support for the proposed amendments, however, some respondents continue to suggest the Board permit retrospective application of the risk mitigation option.

The staff analysed this issue in light of the comment letter, but decided to recommend to the Board to retain, unchanged, the prohibition from applying the risk mitigation option retrospectively.

Board discussion

The Vice Chair acknowledged the issues raised by respondents, but agreed that not much more could be done. Introducing an “all or nothing” approach would be challenging in terms of assessing completeness.

Board decision

13 Board members supported the staff recommendation, 1 Board member abstained.

Business combinations—contracts acquired in their settlement period (Agenda Paper 2C)

For insurance contracts acquired in a business combination or a portfolio transfer, the liability for settlement of claims incurred before the contracts were acquired/transferred includes a risk of adverse claims development and is a liability for remaining coverage leading to recognition of revenue in the acquiring entity in future periods.

The Board proposed in the ED to amend the transition requirements to add a specified modification to the modified retrospective approach to require an entity to classify the liability for settlement of claims incurred before the contracts were acquired/transferred as liability for incurred claims. The use of this modification is permitted only when the entity does not have reasonable and supportable information to apply a retrospective approach. The Board also proposed an optional relief to the fair value transition approach to classify such a liability as liability for incurred claims.

With that proposal, the Board responded to preparer concerns about the difficulty of estimating the contractual service margin (CSM) on transition related to the claims development coverage for contracts acquired in business combinations and portfolio transfers, using both fair value and modified retrospective approaches.

Not many respondents commented on the proposal, however, a small number of respondents continued to express the view that determining the insured event for contracts acquired in their settlement period is inconsistent with observations made by the Transition Resource Group for IFRS 17. However, to address this, it would require a change to the definition of an insured event, or an exception. This would be a fundamental change to the principles of IFRS 17 and therefore not meet the criteria set by the Board for the Amendments to IFRS 17 project.

Staff recommendation

In the staff view, the Board’s conclusion in developing the ED—that exempting insurance contracts acquired in their settlement period from the general requirements for determining the insured event would create complexity for users of financial statements and reduce comparability with the requirements for other transactions—continues to hold.

The staff therefore recommended the Board retain, unchanged, the requirements in IFRS 17 for insurance contracts acquired in their settlement period in a transfer of insurance contracts that do not form a business or in a business combination within the scope of IFRS 3.

Board discussion

Some Board members agreed with the staff recommendation and mentioned that this issue was not unique to insurers. Banks, for example, have to fair value amortised cost instruments on acquisitions. They would have to perform additional work as well to account for such business combinations. The amendment brings IFRS 17 in line with other industries.

Board decision

All Board members supported the staff recommendation.

Interim Financial Statements (Agenda Paper 2D)

IFRS 17 generally requires changes in estimates of the fulfilment cash flows (i.e. changes related to future periods) to adjust the CSM, whereas experience adjustments (i.e. differences between expected and actual amounts in the current and past period) are recognised in profit or loss immediately—thus the accounting depends on the timing of a reporting date.

IAS 34 states that the frequency of an entity’s reporting should not affect the measurement of its annual results. When developing IFRS 17, the Board developed the requirement in IFRS 17:B137 in response to stakeholder feedback that recalculating the carrying amount of the CSM annually when the entity has prepared interim financial statements applying IAS 34 would be a significant practical burden because of the different treatments of changes in estimates and experience adjustments.

To avoid entities thinking they need to recalculate amounts previously reported in interim financial statements, the Board decided that IFRS 17 should specifically prohibit entities from changing the treatment of accounting estimates made in previous interim financial statements when applying IFRS 17 in subsequent interim financial statements or in the annual reporting period.

When developing the ED, the Board considered the concerns and challenges raised by stakeholders about IFRS 17:B137. The Board concluded there was no compelling reason to make a change and has therefore not proposed a change in the ED.

Most of the respondents to this issue expressed concerns about the application of the requirement.

They suggested:

  • Approach 1—Deleting IFRS 17:B137
  • Approach 2—Introducing an accounting policy choice
  • Approach 3—Permitting a subsidiary to account for its insurance contracts on the basis of the frequency of reporting at the consolidated level

The staff have assessed those approaches against the criteria the Board applied when developing the ED and considered likely effects of the suggested approaches compared to the existing requirements in IFRS 17.

Staff recommendation

The staff recommended the Board amend the requirement relating to interim financial statements in IFRS 17 to require an entity to:

  • (a) make an accounting policy choice as to whether to change the treatment of accounting estimates made in previous interim financial statements when applying IFRS 17 in subsequent interim financial statements or in the annual reporting period; and
  • (b) apply its choice of accounting policy to all insurance contracts issued and reinsurance contracts held (i.e. accounting policy choice at entity level).

Board discussion

A Board member mentioned that the current practice is to make the estimate on a year-to-date figure. An accounting policy choice would not lead to the loss of information. One Board member objected to the amendment, saying it would be very difficult to explain the accounting policy to users. One Board member said that given the Board’s criteria for the amendments, this is the only option, as anything else is likely to disrupt implementation. Interim accounts are not as properly designed as annual accounts and any discussion around this issue might end up challenging the nature of interim reports.

Board decision

13 Board members supported the staff recommendation.

Asset for insurance acquisition cash flows—transition and business combinations (Agenda Paper 2E)

At its December 2019 meeting, the Board tentatively decided to finalise the amendments proposed in the ED relating to the expected recovery of insurance acquisition cash flows. The staff have now performed an analysis and developed recommendations about how those amendments would apply:

  • (a) on transition to IFRS 17; and
  • (b) in a transfer of insurance contracts that do not form a business and in a business combination within the scope of IFRS 3.

Staff recommendations

The staff recommended:

  1. that the Board amend IFRS 17 to require an entity at the transition date to identify, recognise and measure an asset for insurance acquisition cash flows.
  2. that the Board amend IFRS 17 to require an entity if, and only if, it is impracticable for the entity to apply IFRS 17 retrospectively to measure an asset for insurance acquisition cash flows at the transition date applying either the modified retrospective approach or the fair value approach.
  3. that the Board amend the IFRS 17 requirements for the modified retrospective approach:
    • a) in line with the requirement in IFRS 17:C8, to permit an entity to use the modifications in b)-d) below only to the extent that an entity does not have reasonable and supportable information to apply a retrospective approach.
    • b) to the extent permitted by a), to require an entity to measure an asset for insurance acquisition cash flows using information available at the transition date by:
      • i. identifying the amount of insurance acquisition cash flows paid before the transition date (excluding the amount relating to the contracts that ceased to exist before the transition date), and
      • ii. allocating the amount determined in paragraph b) i. using the same systematic and rational allocation method that the entity will apply going forward to:
        1. the groups of insurance contracts that are recognised at the transition date; and
        2. the groups of insurance contracts that are expected to be recognised after the transition date.
    • c) to require an entity to adjust the measurement of the CSM for the groups of insurance contracts that are recognised at the transition date by deducting the amount of insurance acquisition cash flows determined applying b) ii. 1.
    • d) to require an entity to recognise an asset for insurance acquisition cash flows for the groups of insurance contracts that are expected to be recognised after the transition date at the amount determined applying b) ii. 2.
  4. that the Board amend IFRS 17 to require an entity, in the absence of reasonable and supportable information necessary to apply the modification described above, to be able to apply the modified retrospective approach by determining at the transition date:
    • a) an adjustment to the CSM of the groups of insurance contracts that are recognised at the transition date as nil
    • b) an asset for insurance acquisition cash flows for the groups of insurance contracts that are expected to be recognised after the transition date as nil.
  5. that the Board amend IFRS 17 to require an entity applying the fair value approach to recognise an asset for insurance acquisition cash flows measured as the amount of insurance acquisition cash flows that the entity would incur at the transition date if the entity had not already paid insurance acquisition cash flows to obtain the rights to:
    • a) recover insurance acquisition cash flows from premiums of insurance contracts originated before the transition date but not yet recognised at the transition date; or
    • b) obtain future contracts (including the expected renewals) after the transition date without paying again insurance acquisition cash flows the entity has already paid.
  6. that the Board amend IFRS 3 and IFRS 17 to require an entity that acquires insurance contracts in a transfer of insurance contracts that do not form a business or in a business combination within the scope of IFRS 3 to recognise a separate asset for insurance acquisition cash flows measured at fair value at the acquisition date.
  7. that the Board clarify that on transition to IFRS 17 for the assets for insurance acquisition cash flows recognised at the transition date, an entity is not required to apply the requirement in paragraph 28D of the ED retrospectively—i.e. for the periods that occurred earlier than the transition date.

Board discussion

On Recommendation 2, one Board member said that this would only be applicable for groups where the entity had started recognising contracts, but that is not complete yet. This is because if the group has already been recognised, there is no separate asset for insurance acquisition cash flows and if no contract in the group has been recognised yet, there is no transition required. The Board member suggested to reflect this in the drafting of the final amendments.

On Recommendation 3, the Vice Chair noted that 3.b.ii.2. should focus on renewals only and the drafting should be amended to make it consistent. The staff agreed.

On Recommendation 5, one Board member struggled with the words “if the entity had not already paid insurance acquisition cash flows”, as for him, the fair value approach is a forward-looking approach, however, the drafting reads as if there has to be a retrospective proof. The staff acknowledged the concern and said that the drafting would carefully reflect in which cases those words are needed.

Board decision

All Board members supported the staff recommendations.

Correction list for hyphenation

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