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IASB
®
Agenda ref
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STAFF PAPER
June 2018
IASB Meeting
Insurance Contracts
Cover note
Anne McGeachin
[email protected]
+44 (0) 20 7246 6486
Andrea Pryde
[email protected]
+44 (0) 20 7246 6491
This paper has been prepared for discussion at a public meeting of the International Accounting Standards
Board (Board) and does not represent the views of the Board or any individual member of the Board.
Comments on the application of IFRS
®
Standards do not purport to set out acceptable or unacceptable
application of IFRS Standards. Technical decisions are made in public and reported in IASB
®
Update.
Introduction
1. The papers for this meeting discuss possible minor changes to IFRS 17 Insurance
Contracts as part of the Board’s Annual Improvements to IFRS Standards Cycle.
The papers are:
(a) Agenda Paper 2A—Annual improvements; and
(b) Agenda Paper 2B—Annual improvement on coverage units.
2. Appendix A to this paper reproduces Section 2 of the Effects Analysis on
IFRS 17, which gives an overview of the requirements of IFRS 17.
Papers for this meeting
3. Since IFRS 17 was published in May 2017, the staff have been engaged in
activities to support implementation of the Standard. As a result of those
activities, we have become aware of a number of minor cases where the drafting
of IFRS 17 does not achieve what the Board intended. Agenda Papers 2A and 2B
set out proposals for a number of changes as part of the Board’s Annual
Improvements to IFRS Standards Cycle. Agenda Paper 2B discusses one
proposed change in more detail, because it arose from a question submitted to the
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Insurance Contracts │ Cover note
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Transition Resource Group for IFRS 17 (TRG) and TRG members expressed
different views on the need for, and the scope of, the proposed change.
4. The annual improvements cycle is limited to changes that either clarify the
wording in a Standard or correct relatively minor unintended consequences,
oversights or conflicts between existing requirements of Standards. The staff
think all the proposed changes fall within the scope of the annual improvements
cycle, as explained in Agenda Papers 2A and 2B.
5. The staff have considered whether the Board should propose any changes to IFRS
17 at this time. We think it is inevitable in a Standard as large and comprehensive
as IFRS 17 that some of the drafting will need refinement, and we think it is
appropriate for the Board to act in a responsive and timely manner to correct and
clarify the words to achieve consistency within the Standard. We acknowledge
that some may argue that we are opening up the Standard by making these
changes. However, the changes proposed do not alter the principles or intended
requirements of IFRS 17, and do not have a consequential impact on other parts of
the Standard. They simply ensure that the wording of IFRS 17 is consistent and
reflects the decisions the Board made in its development.
Next steps
6. Agenda papers 2A and 2B recommend the Board proposes annual improvements
to IFRS 17. The timing of publication of the proposed annual improvements
depends on the identification of other matters for inclusion in the next Annual
improvements to IFRS Standards Cycle.
7. IFRS 17 implementation activities are continuing, including future TRG meetings.
We will continue to monitor whether additional action is needed to address
implementation questions.
8. We have also heard about concerns over the timetable for implementing IFRS 17.
We will continue to monitor preparers’ progress in implementing IFRS 17 and to
monitor factors affecting implementation, including the implementation timetable.
2—Overview of IFRS 17 requirements
IFRS 17 establishes the requirements that a company must apply in reporting information about insurance contracts it issues
and reinsurance contracts it holds. As IFRS 4 does not provide specific requirements for most aspects of the accounting for
insurance contracts, companies using IFRS Standards typically have been developing and applying accounting policies for
insurance contracts based on local accounting requirements (national GAAP). In this document, these accounting policies are
referred to as ‘existing insurance accounting practices’.
Section 2—Overview of IFRS 17 requirements discusses the key requirements of IFRS 17, including:
• the definition of contracts to which IFRS 17 applies;
• the separation of non-insurance components;
• the recognition and measurement of insurance contracts issued and reinsurance contracts held, highlighting particular requirements for contracts
with a variable fee;
• reporting performance of insurance contracts; and
• disclosures.
Effects Analysis | IFRS 17 Insurance Contracts | May 2017 | 13
2—Overview of IFRS 17 requirements
IFRS 17 sets out the requirements that a company
must apply in reporting information about insurance
contracts. This new IFRS Standard supersedes IFRS 4
and is effective from 1 January 2021.
What is the scope of IFRS 17?
IFRS 17 substantially retains the scope of IFRS 4, so,
essentially, the new requirements affect the same
population of contracts accounted for when applying
IFRS 4. Like IFRS 4, IFRS 17 does not apply to insurance
contracts in which the company is the policyholder;
the only exception is when those contracts are
reinsurance contracts.
IFRS 17 applies to contracts that are:
(a) insurance contracts issued (ie sold);
(b) reinsurance contracts held (ie acquired); or
(c) investment contracts with discretionary
participation features issued.
IFRS 17 substantially retains the existing definitions
of insurance contracts, reinsurance contracts
and investment contracts with discretionary
participation features.
Appendix A to this document includes an overview
of insurance products commonly issued by insurance
companies throughout the world.
IFRS 17 includes definitions that should be used to
identify the insurance products to which the new
requirements apply.
It is likely that some products regarded as insurance
products (based on local law and regulation) will not be
treated as insurance contracts accounted for applying
IFRS 17.
Insurance and reinsurance contracts
IFRS 17 carries forward from IFRS 4 the definition of an
insurance contract and that of a reinsurance contract,
together with the related guidance that explains how to
apply those definitions.
As in IFRS 4, an insurance contract is defined by the
presence of significant insurance risk—that is, a risk,
other than a financial risk, transferred from the holder
of the contract to the issuer (ie from the policyholder to
the insurer).
The Board expects that IFRS 17 will not change
conclusions about whether contracts are insurance
contracts or reinsurance contracts. Therefore, a
contract that is an insurance contract in applying IFRS4
is expected to be an insurance contract in applying
IFRS17. Companies are unlikely to need to develop
internal new guidance and interpretations relating to
applying the insurance contract definition in IFRS17.
Discretionary investment contracts
IFRS 17 also applies to investment contracts with
discretionary participation features issued by a company,
if the company also issues insurance contracts.
13
These contracts have similar economic characteristics
as insurance contracts (for example, long duration,
recurring premiums, the amount or timing of the return
is contractually determined at the discretion of the
issuer) and they are commonly linked to the same pool
of assets as, or share in the performance of, insurance
contracts. Applying insurance contracts accounting to
these contracts is therefore expected to provide useful
information to users of financial statements.
13 Companies that do not issue insurance contracts apply the requirements in IFRS 9 to account for their investment contracts with discretionary participation features.
14 | Effects Analysis | IFRS 17 Insurance Contracts | May 2017
The definition of an investment contract with
discretionary participation features in IFRS 17 is similar
to the equivalent definition in IFRS 4.
However, unlike IFRS 4, IFRS 17 applies only to
investment contracts with discretionary participation
features that are issued by a company that also
issues insurance contracts. Other companies apply
IFRS 9 to such contracts. Feedback received by the
Board indicated that few investment contracts with
discretionary participation features are issued by
non-insurers. As a result, most of these contracts are
expected to continue to be accounted for as insurance
contracts rather than as financial instruments applying
IFRS 9.
Scope exclusions
Refer to the discussion in Section 3—Companies affected
about the contracts that can be accounted for applying
other IFRS Standards, such as product warranties,
financial guarantee contracts and fixed-fee service
contracts.
Summary of IFRS 17 requirements to
account for non-insurance components
of an insurance contract separately
Non-insurance
component
When they are
accounted for
separately
Applicable
IFRS
Standard
Embedded
derivatives
If required by IFRS 9
14
IFRS 9
Deposits
(investment
components
or deposit
components)
If distinct
15
IFRS 9
Goods and
non-insurance
services
If distinct
15
IFRS 15
IFRS 17 prohibits the separation of non-insurance
components if the specified criteria are not met.
Separate components
An insurance contract typically creates a number of
rights and obligations that together generate a package
of cash inflows and cash outflows. Some insurance
contracts include features in addition to the transfer of
significant insurance risk, such as derivatives, deposits
and asset management services. These features are
known as non-insurance components. Under some
circumstances, IFRS 17 requires a company to:
(a) separate the non-insurance components from an
insurance contract if a separate contract with the
same features would be within the scope of another
IFRS Standard; and
(b) account for those non-insurance components
applying that other IFRS Standard.
IFRS 17 requirements to separate non-insurance
components are summarised in the following table.
14 IFRS 17 requires a company to apply IFRS 9 to determine whether an embedded derivative should be accounted for separately from an insurance contract.
15 In essence, a non-insurance component in a contract is distinct if: (a) it is not highly interrelated with the insurance component; and (b) a contract with equivalent terms could be sold separately in the same market.
Effects Analysis | IFRS 17 Insurance Contracts | May 2017 | 15
16 A company is required to apply IFRS 15 from 1 January 2018. Early application is permitted.
IFRS 17 requirements about the separation of
non-insurance components of contracts differ from
existing practice mainly by requiring separation of
deposits, goods and non-insurance services when
specified requirements are met and by prohibiting
separation when those requirements are not met.
IFRS 4 requires insurers to separate embedded derivatives
and deposits from insurance contracts in some
circumstances. However, IFRS 4 does not require insurers
to separate from the insurance contract any distinct
obligation to provide goods or non-insurance services
that are embedded within the insurance contract.
Although IFRS 4 permits insurers to voluntarily change
their accounting policies to separate contracts with
customers for goods and non-insurance services from
their insurance contracts when first implementing
IFRS15, the Board does not expect that many companies
have done this (or that they will do so).
16
Consequently, the Board expects that, when IFRS 17 is
first applied, a few goods and non-insurance services
embedded within insurance contracts will be accounted
for separately for the first time.
IFRS 17 accounting model
IFRS 17 provides a consistent framework for accounting
for all insurance contracts issued.
A company is allowed to apply the requirements
of IFRS17 to a group of contracts rather than on a
contract-by-contract basis (see Section 5.3—Key cost reliefs).
In grouping insurance contracts, a company is required
to identify portfolios of contracts and to divide each
portfolio into:
(a) a group of contracts that are onerous at initial
recognition, if any;
(b) a group of contracts that at initial recognition
have no significant possibility of becoming onerous
subsequently, if any; and
(c) a group of remaining contracts, if any.
In addition, a group of contracts cannot include
contracts issued more than one year apart.
Recognition
IFRS 17 requires a company to recognise a group of
insurance contracts it issues from the earliest of the
following:
(a) the beginning of the coverage period;
(b) the date on which the first payment from a
policyholder is due; and
(c) for a group of onerous contracts, when the group
becomes onerous.
Explanations of some terms used
Portfolio of contracts
Insurance contracts that are subject to similar risks
and that are managed together.
Onerous contracts
A group of contracts becomes onerous if its estimated
cash outflows exceed its estimated cash inflows.
Discount rates
Discount rates reflect the characteristics of the cash
flows arising from the group of insurance contracts
(for example, the timing, currency and liquidity
of the cash flows). They are based on current
observable interest rates, with adjustments being
made to these observable rates to align them with the
characteristics of the group of insurance contracts.
Risk adjustment
The risk adjustment is an explicit adjustment to
reflect the uncertainty in timing and in amount of
future cash flows.
16 | Effects Analysis | IFRS 17 Insurance Contracts | May 2017
Initial measurement
A company issuing insurance contracts assesses the
rights and obligations arising from groups of contracts
and reflects them net on its balance sheet, on a
discounted basis.
All insurance contracts are initially measured as the
total of:
1
the fulfilment cash flows; and
2
the contractual service margin, unless the
contracts are onerous.
Fulfilment cash flows
The fulfilment cash flows are the current estimates
of the amounts that an insurer expects to collect
from premiums and pay out for claims, benefits
and expenses, adjusted to reflect the timing and the
uncertainty in those amounts. The adjustment for
uncertainty is called the risk adjustment.
The cash flows of a group of contracts may be affected by
cash flows of other groups of contracts as specified in the
terms of the contracts. This factor—sometimes referred
to as ‘mutualisation between contracts’—is considered in
the measurement of the fulfilment cash flows.
Contractual service margin
The contractual service margin represents the profit
that the company expects to earn as it provides
insurance coverage. This profit is recognised in profit or
loss over the coverage period as the company provides
the insurance coverage.
At initial recognition of the contracts, the contractual
service margin is the present value of risk-adjusted
future cash inflows less the present value of
risk-adjusted future cash outflows. In other words, it
is the amount that, when added to the fulfilment cash
flows, prevents the recognition of unearned profit when
a group of contracts is first recognised.
Onerous contracts
If contracts are onerous, losses are recognised
immediately in profit or loss. No contractual
service margin is recognised on the balance sheet
on initial recognition.
Subsequent measurement
The fulfilment cash flows are measured using
current assumptions. Those assumptions are updated
at each reporting date, using current estimates of the
amount, timing and uncertainty of cash flows and of
discount rates.
The way in which changes in estimates of the fulfilment
cash flows are treated depends on which estimate is
being updated:
(a) changes that relate to current or past coverage are
recognised in profit or loss.
(b) changes that relate to future coverage are recognised
by adjusting the contractual service margin.
However, if the contractual service margin is zero,
the changes are recognised in profit or loss.
The contractual service margin is recognised in profit
or loss over the coverage period based on the quantity
of coverage provided by the contracts in the group and
their expected duration.
Interest for the passage of time is accreted on the
contractual service margin, using discount rates at
initial recognition of the contracts.
17
Optional simplified approach
A company can use a simplified approach to measure
some short-term insurance contracts (see Section 5.3—
Key cost reliefs).
17 Except for contracts with a variable fee as discussed in the following pages.
Effects Analysis | IFRS 17 Insurance Contracts | May 2017 | 17
Contracts with a variable fee
IFRS 17 has a specific approach for ‘insurance contracts
with direct participation features’.
Insurance contracts with direct participation features
may be regarded as creating an obligation to pay
policyholders an amount that is equal to the fair
value of the underlying items, less a variable fee
for service. Consequently, these contracts provide
investment-related services which are integrated with
insurance coverage.
Contracts with direct participation features
An insurance contract with direct participation
features is a contract that includes all of the
following features:
(a) the contractual terms specify that the
policyholder participates in a share of a clearly
identified pool of underlying items;
(b) the company expects to pay the policyholder an
amount equal to a substantial share of the fair
value returns on the underlying items; and
(c) the company expects a substantial proportion
of any change in the amounts to be paid to the
policyholder to vary with the change in fair value
of the underlying items.
The variable fee:
(a) represents the consideration a company receives for
providing investment-related services.
(b) is based on a share in the underlying items for
which the value varies over time. Consequently,
the variable fee reflects both the investment
performance of the underlying items and the other
cash flows needed to fulfil the contracts.
The approach for insurance contracts with direct
participation features is referred to as the variable
fee approach. The variable fee approach modifies the
accounting model in IFRS 17 (referred to as the general
accounting model) to reflect that the consideration that
a company receives for the contracts is a variable fee.
The general accounting model and the variable fee
approach measure the fulfilment cash flows in the
same way. At initial recognition, there is no difference
between the contractual service margin determined
applying the general accounting model and that
determined applying the variable fee approach.
Moreover, subsequent changes in estimates of the
fulfilment cash flows that relate to future coverage
adjust the contractual service margin.
18
Other changes,
including those that relate to current or past coverage,
are recognised in profit or loss.
Differences arise for changes in fulfilment cash flows
due to changes in discount rates and other financial
variables. All such changes are reported in the statement
of comprehensive income (profit or loss or other
comprehensive income) for the general accounting
model. However, in the variable fee approach, the
contractual service margin is adjusted to reflect the
changes in the variable fee, which includes some changes
in discount rates and other financial variables.
An option is available when a company mitigates its
financial risks associated with contracts with direct
participation features. If such insurance contracts
contain complex features, such as minimum payments
guaranteed to the policyholder, and the company chooses
to use derivatives to mitigate the financial risk created
by those features, the company may elect to recognise
changes in that financial risk in profit or loss instead of
adjusting the contractual service margin. This partially
offsets the effect of fair value changes of the relevant
derivatives recognised in profit or loss in applying IFRS 9
and reduces potential accounting mismatches.
18 If the contractual service margin became negative, the effect of changes in excess of the contractual service margin would be recognised in profit or loss.
18 | Effects Analysis | IFRS 17 Insurance Contracts | May 2017
When applying the general accounting model, the
interest expense on the contractual service margin is
explicitly accreted using rates at the initial recognition
of the contracts. In contrast, for contracts with direct
participation features, the interest expenses are implicit
in the changes in the insurer’s variable fee (its share of
the underlying items and other cash flows needed to
fulfil the contracts).
The following table summarises the key differences
between the general accounting model and the variable
fee approach.
Differences between the general accounting
model and the variable fee approach
General
accounting
model
The contractual service margin
at initial recognition is updated
to reflect changes in cash flows
related to future coverage and
accreted using interest rates at
initial recognition.
Variable fee
approach
The contractual service margin at
initial recognition is updated to
reflect changes in the amount of
the variable fee, including those
related to changes in discount rates
and other financial variables.
19
19 If a company chooses to use derivatives to mitigate the financial risks reflected in insurance contracts, the company can elect to recognise changes in those financial risks in profit or loss rather than by adjusting the
contractual service margin.
20 However, a company cannot apply the variable fee approach to its reinsurance contracts issued or to its reinsurance contracts held.
Reinsurance contracts held
Insurers typically manage some risks assumed by
issuing insurance contracts by transferring a portion
of the risk on those underlying insurance contracts
to another insurance company, by entering into
reinsurance contracts.
IFRS 17 generally requires a company to account
for reinsurance contracts held using an approach
consistent with that for the underlying insurance
contracts.
20
Reinsurance contracts held are accounted
for using the general accounting model modified for:
(a) recognition date. A group of reinsurance contracts
held is recognised from either the beginning of
the coverage period of the group of reinsurance
contracts or the initial recognition of the underlying
insurance contracts, whichever is the later date, or
from the beginning of the coverage period if the
reinsurance coverage is not for the proportionate
losses of a group of underlying insurance contracts.
(b) estimation of the fulfilment cash flows.
Forreinsurance contracts held, the fulfilment
cash flows reflect the risk of non-performance by
the issuer of the reinsurance contract.
(c) measurement of the contractual service margin
at initial recognition. Any net gain or loss at
initial recognition is recognised as a contractual
service margin, unless the net cost of purchasing
reinsurance relates to past events, in which case
the company is required to recognise the net cost
immediately in profit or loss.
Financial performance
A company recognises in the statement of
comprehensive income:
(a) an insurance service result, comprising:
(i) insurance revenue; less
(ii) insurance service expenses.
(b) insurance finance income or expenses.
Insurance revenue
Revenue from insurance contracts represents the
consideration that a company expects to be entitled to
in exchange for services provided under the contracts.
It includes the consideration that covers the amount of
contractual service margin recognised in profit or loss
for the period and the amount of insurance expenses
incurred in the period.
Many insurance contracts with investment features
include a deposit component—ie an amount paid by
the policyholder that is repaid by the insurer even if
an insured event does not occur. Deposit components
are excluded from profit or loss—ie the collection of
a deposit is not revenue and the repayment of that
deposit is not an expense.
Effects Analysis | IFRS 17 Insurance Contracts | May 2017 | 19
21 This reconciliation is not required for the liability for remaining coverage of contracts accounted for applying the simplified approach discussed in Section 5.3—Key cost reliefs.
Insurance service expenses
Insurance service expenses reflect the costs incurred
in providing services in the period, including incurred
claims, and exclude the repayment of deposit
components.
Insurance finance income or expenses
IFRS 17 requires a company to account for the
fulfilment cash flows and the contractual service
margin on a discounted basis that reflects the timing
of cash flows. As time passes, the effect of the
time value of money reduces and this reduction is
reflected in the statement of comprehensive income
as an insurance finance expense. In effect, the
insurance finance expenses are akin to interest paid
on an advance payment and reflects the fact that
policyholders typically pay premiums up front and
receive benefits only at a later date.
Insurance finance income or expenses also include the
effect on the carrying amount of insurance contracts
of some changes in financial assumptions (ie discount
rates and other financial variables).
A company recognises the effect of those changes in
discount rates and other financial variables in the
period in which the changes occur. The company can
choose where to present this—either in profit or loss,
or disaggregated between profit or loss and other
comprehensive income. This choice is made by portfolio
of contracts (see Section 5.3—Key cost reliefs).
The Board expects that a company is likely to choose
the option that best corresponds to the accounting for
financial assets relating to insurance contracts—iethe
option that is most likely to minimise accounting
mismatches between investment income (from financial
assets) and insurance finance expenses (from insurance
contract liabilities) recognised in profit or loss
(seeSection 7.1—Interaction with IFRS 9).
Disclosures
IFRS 17 requires a number of disclosures. They
provide additional information about the amounts
recognised in the balance sheet and in the statement
of comprehensive income, the significant judgements
made when applying IFRS 17, and the nature and extent
of the risks that arise from issuing insurance contracts.
Explanation of recognised amounts
IFRS 17 requires a company to provide reconciliations
between the opening and closing balances of insurance
contracts issued and reinsurance contracts held, broken
down into the following components:
(a) liabilities for remaining coverage (with separate
identification of amounts immediately recognised in
profit or loss for onerous contracts) and liabilities for
incurred claims; and
(b) the estimates of the present value of future cash
flows, the risk adjustment and the remaining
contractual service margin.
21
20 | Effects Analysis | IFRS 17 Insurance Contracts | May 2017
IFRS 17 also requires a company to provide:
(a) an explanation of when the remaining contractual
service margin is expected to be recognised in profit
or loss; and
(b) an analysis of:
(i) the insurance revenue;
(ii) insurance finance income or expenses; and
(iii) new business (ie contracts initially recognised in
the period).
Significant judgements
The disclosures required by IFRS 17 about significant
judgements made in applying IFRS 17 include:
(a) the methods used to measure insurance contracts
and the processes used for estimating inputs to those
methods, including quantitative information about
those inputs when practicable;
(b) any changes in the above methods and processes,
together with an explanation of the reason for each
change and the type of contracts affected; and
(c) the yield curve (or range of yield curves) used to
discount the cash flows.
If a company uses a technique other than the
confidence-level technique for determining the risk
adjustment, it is required to disclose a translation of the
result of that technique into a confidence level, to allow
users of financial statements to see how the company’s
own assessment of its risk aversion compares to that of
other companies.
23
Nature and extent of risks arising from
insurance contracts
The disclosures about insurance and financial risks
arising from insurance contracts are similar to the
disclosures about financial risks arising from financial
instruments in IFRS 7 Financial Instruments: Disclosures
that are incorporated in IFRS 4 by cross-reference.
These include a sensitivity analysis for insurance
risk and for each type of market risk, together with
disclosures about:
(a) exposures to risks and how they arise;
(b) objectives, policies and processes for managing risks
and the methods used to measure those risks;
(c) concentrations of risk arising from insurance
contracts;
(d) the claims development—ie actual claims compared
with previous estimates of the undiscounted amount
of the claims;
(e) the credit quality of reinsurance contract assets; and
(f) liquidity risk, including a maturity analysis showing
the estimated cash flows arising from insurance
contracts.
IFRS 17 also requires a company that issues insurance
contracts to disclose information about the effect
of the regulatory frameworks in which it operates
(for example, such information might include
minimum capital requirements or required interest
rate guarantees). This is in addition to the disclosure
requirements included in IAS 1 Presentation of Financial
Statements for all companies applying IFRS Standards.
24
23 The confidence-level technique expresses the likelihood that the actual outcome will be within a specified interval. This technique is sometimes referred to as ‘value at risk’.
24 IAS 1 requires a company to disclose: (a) information about externally imposed capital requirements; (b) the nature of those requirements; (c) how the requirements are incorporated into the management of capital; and
(d) whether during the reporting period the company has complied with any externally imposed capital requirements to which it is subject, and if not, the consequences of such non-compliance.