Quantity of the benefits provided under a group of annuity contracts (IFRS 17)

Date recorded:

IFRS 17 Insurance Contracts—Quantity of the Benefits Provided under a Group of Annuity contracts (Agenda Paper 2)

Background

The Committee received a submission about how to identify, applying IFRS 17:B119(a), the quantity of the benefits provided under a group of immediate annuity contracts. The policyholder in each contract: (a) pays the premium upfront and has no right to cancel the contract or seek a refund; (b) receives a constant annual benefit starting from inception of the contract for as long as the policyholder survives; and (c) receives no other services under the contract (insurance coverage for survival is the only service). The request also described a group of deferred annuity contracts under which the policyholder receives a constant annual benefit starting from a specified date after the inception of the contract for as long as the policyholder survives. The request sets out two methods of determining the quantity of the benefits provided in each period as: Approach A—the constant annual benefit, that is, the claim amount payable for the period; and Approach B—the present value of the current and future benefits, that is, the balance of all claim amounts expected to be payable over the duration of the contract.

Staff analysis

IFRS 17 does not prescribe a method for determining the quantity of the benefits provided under a contract. Therefore, an entity is required to use a method that meets the principle in IFRS 17:B119 of reflecting the insurance contract services provided in each period.

Under Approach A, the quantity of the benefits is determined by the claim amount payable for the period. In the annuity contracts described in the request, survival of the policyholder (the insured event) in each year obliges the entity to pay the annual benefit for that year but it does not oblige the entity to pay amounts that compensate the policyholder for surviving in future years. The claim amounts payable to policyholders in future years are only contingent on the policyholder surviving in those future years and should not be included. The staff considered Approach A is appropriate in determining the quantity of the benefits of insurance coverage provided because it assigns a quantity of benefits only to periods in which the entity has an obligation to investigate and pay valid claims; and aligns the quantity of benefits with the amount of the valid claim that is a constant amount in each year.

IFRS 17:BC140 and BC141 explain that under an insurance contract, an entity can accept insurance risk before it is obliged to perform the insurance coverage service. In determining the quantity of the benefits of insurance coverage provided under a contract, an entity therefore considers (a) the periods in which it has an obligation to pay a valid claim if an insured event occurs; and (b) the amount of the valid claim if the claim is made. The staff agreed with some stakeholders' view that, for the purpose of recognising the contractual service margin (CSM) in profit or loss, Approach A does not reflect within the quantity of benefits the uncertainty about survival transferred from the policyholder to the entity. However, the staff considered that an entity could recognise a risk adjustment for non-financial risk representing the margin the entity charges for bearing insurance risk applying other requirements in IFRS 17.

The submission puts forward a number of arguments for Approach B including that survival in a period also entitles the policyholder to continued access to insurance coverage in future periods; the service of accepting insurance risk; the pricing of annuity contracts; the benefit lost if the policyholder were to die; the margin the entity charges for investment management expenses; and the view that the insured event in an annuity contract is one continuous event rather than a series of discrete insured events. The staff made analysis on each of the arguments and considered they are not valid. The staff concluded that Approach B—the balance of all claim amounts expected to be payable over the duration of the contract, does not meet the principle in IFRS 17:B119 to reflect insurance coverage provided as described in the fact pattern because it assigns a quantity of the benefits to periods in which the entity has no obligation to investigate and pay valid claims (e.g. to the period before the policyholder is entitled to receive the constant annual benefit of a deferred annuity contract); and misrepresents the quantity of the benefits provided in a period by considering claim amounts the policyholder can access and benefit from only in future periods.

Staff recommendation

The staff concluded that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an issuer of a group of annuity contracts as described in the request to determine for each contract the quantity of the benefits provided under a contract. Consequently, the staff recommended not adding a standard-setting project to the work plan and instead to publish a tentative agenda decision.

Committee discussion

Most of the Committee members agreed with the staff's analysis and conclusion that Approach A is the appropriate approach to achieve the principle in IFRS 17:B119 in determining the quantity of the benefits provided under a group of immediate annuity contracts.

One Committee member considered that IFRS 17:B119 is principle-based and there is judgement in applying it. Therefore, in her view, it is outside the scope of the agenda decision and she disagreed with publishing the tentative agenda decision. Also, she disagreed that Approach A is acceptable given that the additional risk of survival in the future is not taken into account and she considered that the services provided under an insurance contract should be considered in totality. On the other hand, those who agreed with the staff's analysis took the same view that the risk adjustment is a non-financial risk, that CSM is unrelated and that it should be considered in the insurance premium that the insurer charges to the customer. Moreover, the staff explained that Appendix A of IFRS 17 clearly defines the liability for incurred claims and that for remaining coverage separately. It follows that the survival of the customer for the current year only obliges the entity to pay the annual benefit for that year.

One Committee member pointed out that, when referring to IFRS 17:44E, it could be argued that those words  make Approach B acceptable because the paragraph implies that the right to make claims in each of the years in which the beneficiary survives (including the current and remaining coverage period) is the insurance service received by the customers and should be considered in the determination of the CSM for the current period. Nonetheless, he agreed that Approach A is the only acceptable view applying IFRS 17:B119.

A number of Committee members suggested it would be useful to refer to the Agenda Paper 5 of the Transition Resource Group (TRG) for IFRS 17 which discussed "Determining the quantity of benefits for identifying coverage units". The agenda paper is helpful in providing guidance when interpreting the principle in IFRS 17:B119. Some Committee members supported this while others were opposed. Opponents thought that referring to the agenda paper may imply that the TRG has the same level of "authority" as a standard. The staff suggested to use some of the words from the agenda paper in clarifying what could be "validly" claimed under the insurance contract, but recommended not referring to the TRG.

Some Committee members said that the application of the agenda decision could be extended to other annuity contracts for a broader application. However, other Committee members thought the fact pattern is too simplified and different annuity contracts could be far more complex (for example, the deferral annuity contract which have investment and other components). It should instead be emphasised that the analysis is focusing on the simplified fact pattern only. The staff responded that the agenda decision could help readers understand the interpretation of IFRS 17:B119 on a component of annuity contracts but other requirements in IFRS 17 would need to be applied in accounting for the other components of an insurance contract.

Regarding the comments on the drafting in the tentative agenda decision, the major point was the suggestion of adding a simplified numeric example in the tentative agenda decision to illustrate the approach for easier understanding. Despite the comments from some of the members that assumptions would need to be made on an over-simplified insurance contract as example, the staff still considered it useful to add and recommended to emphasise that the example does not include investment risk. Readers should be alerted to be careful in expanding the example to other annuity contracts.

Committee decision

The Committee decided, by a vote of 12 out of 13, not to add the matter to the standard-setting agenda but to publish an tentative agenda decision and to make suggested edits to the tentative agenda decision proposed by the staff.

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