IASB Board Summary January 2019

Insights

IASB Board Summary

January 2019

The IASB met on Wednesday 23 January 2019. The Board continued to assess concerns and implementation challenges raised by stakeholders about the requirements in IFRS 17 Insurance Contracts. At this meeting the Board considered four issues: insurance acquisition cash flows for renewals outside the contract boundary; reinsurance contracts held—onerous underlying insurance contracts; reinsurance contracts held—underlying insurance contracts with direct participation features; and recognition of the contractual service margin in profit or loss in the general model. In all cases the Board decided to propose amendments to IFRS 17.

Insurance acquisition cash flows for renewals outside the contract boundary (Agenda Paper 2A)

Issue:
Some stakeholders have concerns relating to non-refundable commissions paid to agents, where the costs may be high and the entity expects to recover them only if there are future renewals. When future renewals fall outside the contract boundary of the newly issued group, they are ignored in the measurement of the group, whereas the entire agent commission is directly attributable to that group, making the group onerous. Some stakeholders stated that the existing requirements in IFRS 17 would result in inconsistent outcomes compared with other contracts within the scope of IFRS 15 Revenue from Contracts with Customers.

Decision:
The Board discussion has recommended to amend IFRS 17 to require an entity to:

  • Allocate to any anticipated contract renewals the part of the insurance acquisition cash flows that is directly attributable to newly issued contracts
  • Recognise the insurance acquisition cash flows allocated to anticipated contract renewals as an asset applying IFRS 17:27 until the renewed contracts are recognised
  • Test the resulting recognised asset for impairment each period before the related contracts are recognised and perform the impairment test based on the expected FCF of the related group of contracts
  • Recognise in P&L any impairment loss and the reversal of some or all of any such loss previously recognised as soon as the impairment conditions no longer exist or have improved

Impact:
This amendment is a concession to better reflect the economics of the underlying business. It will make the amount of CSM larger on the newly issued contract than it was as per the existing requirements of IFRS 17. One issue with this amendment is that there could be a possibility of errors in developing the ‘anticipated contract renewals’, however that problem is present in all Standards. The differences between IFRS 17 and IFRS 15 models would not imply a ‘read across’ from IFRS 15 however, the amendment will, to some extent, align the requirements in IFRS 17 with IFRS 15.

Reinsurance contracts held—onerous underlying insurance contracts (Agenda Paper 2B-C)

Issue:
Insurance contracts issued and reinsurance contracts held are measured applying a consistent measurement approach based on fulfilment cash flows. However, for reinsurance contracts held, the entity receives insurance services. Therefore, the nature of the contractual service margin (CSM) for a reinsurance contract held is different, as it represents the net cost or net gain from purchasing reinsurance. The IFRS 17 guidance set out how this net cost/gain should be recognised over the period that the entity receives services from the reinsurer. Currently the CSM is allocated over the coverage units, so a mismatch arises where the underlying group of insurance contracts are onerous, as these onerous contracts would be recognised upfront in the P&L.

Decision:
The Board discussion has recommended to amend IFRS 17:66(c)(ii) to expand the scope of the exception to require an entity to recognise a gain in profit or loss when the entity recognises losses on onerous underlying insurance contracts, to the extent that a reinsurance contract held covers the losses of each contract on a proportionate basis. It will also require an entity to apply the expanded scope of the exception when the entity measures contracts applying the premium allocation approach (PAA).

Impact:
This amendment could address accounting mismatches that arise when underlying group of insurance contracts are onerous, however this does not apply to non proportional reinsurance contracts held so there remains potential for a mismatch on these contracts.

Reinsurance contracts held—underlying insurance contracts with direct participation features (Agenda Paper 2D)

Issue:

  • Under IFRS 17:B109, reinsurance contracts held are excluded from the scope of the Variable Fee Approach (“VFA”).
  • The current IFRS 17:B115 exception allows entities not to reflect the mitigation of risks with a derivative in CSM, but to present in profit or loss some or all of the changes in the effect of financial risk on the entity’s share of the underlying items, or the effect of financial risks other than those arising from the underlying items, for example the effect of financial guarantees.

Decision:

  • The Board discussion has confirmed that IFRS 17 does not permit an entity to account for reinsurance contracts it holds applying the VFA when the underlying insurance contracts are insurance contracts with direct participation features.
  • The staff recommended to expand the scope of this existing risk mitigation exception in IFRS 17 relating to the accounting for insurance contracts issued to include not only derivatives, but also reinsurance contracts held, as it would not unduly disrupt the implementation underway. The Board agreed with this recommendation.

Impact:

  • This is consistent with the view that reinsurance contracts held should be accounted for separately from the underlying contracts issued.
  • This amendment could address accounting mismatches that arise when reinsurance contracts that are not underlying items are held to mitigate the financial risks of direct participating contracts.

Recognition of the contractual service margin in profit or loss in the general model (Agenda Paper 2E)

Issue:
Currently, IFRS 17 allows the recognition of the CSM only over the coverage period based on coverage units, as coverage services are provided. For insurance contracts that are not direct participating contracts , the quantity of benefits and contract duration relate only to insurance coverage and do not take into account any investment-related services.

Decision:
The Board agreed that the CSM under the general model should be allocated based on coverage units that are determined by considering both insurance coverage and investment return service.
A couple of key points to note here are as follows:

  • Judgement is required to determine the existence of an investment return service.
  • The assessments of the relative weighting of the benefits provided by insurance coverage and investment return services and their pattern of delivery is to be made on a systematic and rational basis
  • The one-year eligibility criterion for the PAA should be assessed by considering insurance coverage and an investment return service, if any.

Impact:
This amendment impacts the timing of profit recognition and has the potential to impact the qualification for the premium allocation approach, if an investment return service exists. Insurers will need to analyse their insurance contracts to assess whether there is an investment return service, which may impact the determination of coverage units.

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