- Potential further amendments to scope, transition and disclosure requirements
- Level of aggregation discussed but no amendments proposed
- Insurers need to consider all proposed amendments together, assessing the effects on their implementation
- Next steps – Review of all tentative amendments as a whole in April, exposure draft expected mid-2019
A further three tentative amendments to IFRS 17 Insurance Contracts emerged from the International Accounting Standards Board’s (the Board) March 2019 meeting.
In total, four topics were discussed at the meeting, meaning that all 25 of the stakeholder concerns and implementation challenges the Board agreed to explore have now been covered.
The Board tentatively decided to propose amendments to IFRS 17 in three areas.
- Scope exclusion for some credit cards that provide insurance coverage.
- Amending the transition requirements for the risk mitigation option and loans that transfer significant insurance risk.
- Amending the disclosure requirements regarding insurance acquisition cash flows and contractual service margin (CSM) allocation.
The proposal to allow the risk mitigation option to be prospectively applied from the date of transition would eliminate accounting mismatches in the comparative period presented in the initial IFRS 17 financial statements. Insurers would need to plan ahead when deciding whether to take advantage of this option.
Three more proposed amendments
The Board tentatively decided to amend IFRS 17 to exclude certain credit card contracts that provide insurance coverage from the scope of IFRS 17. A credit card contract would be eligible for the exclusion if the contract price set by the card issuer for a customer does not reflect an assessment of the insurance risk associated with that individual customer. Find out more ►
Amendments to transition requirements
Risk mitigation option
The Board tentatively decided to permit an insurer, meeting certain criteria, to:
- apply the risk mitigation option prospectively from the date of transition to IFRS 17 instead of the date of initial application; and
- in this case, use the fair value approach to transition for a group of direct participating insurance contracts (even if the insurer can apply a full retrospective approach).
Loans that transfer significant insurance risk
The Board tentatively proposed adding specific transition requirements for loans that transfer significant insurance risk if the lender:
- elects to apply IFRS 9 Financial Instruments rather than IFRS 17 to these loans; and
- has already adopted IFRS 9 before initially applying IFRS 17.
Amendments to disclosure requirements
Insurance acquisition cash flows that relate to future contract renewals
The Board tentatively decided to amend the disclosure requirements in IFRS 17 to reflect their January 2019 proposal relating to insurance acquisition cash flows not included in measuring recognised groups of insurance contracts. This new proposal would require insurers to:
- reconcile the asset created by these cash flows at the beginning and the end of the reporting period, specifically disclosing changes in any loss for lack of recoverability or reversals recognised; and
- provide quantitative disclosures – in appropriate time bands – of when these cash flows are expected to be included in the measurement of the related insurance contracts.
Allocating the CSM under the general measurement model to investment services
The Board tentatively decided to amend the disclosure requirements in IFRS 17 to reflect their January 2019 proposal that the CSM be allocated to insurance coverage and investment-related services or investment-return services, where relevant. This new proposal would require insurers to provide:
- quantitative disclosures – in appropriate time bands – of the expected recognition in profit or loss of the CSM remaining at the end of the reporting period (under current IFRS 17 insurers have the option to disclose only qualitative information); and
- specific disclosures about their approach to assessing the relative weighting of the benefits provided by insurance coverage and investment-related services or investment return services.
What else did the Board discuss?
Some stakeholders believe that the level of aggregation requirements of IFRS 17 require significant and expensive changes to systems with limited benefits, and question the alignment with insurers’ business models. However, the Board did not propose any amendments in this area.
The Board discussed the purpose and benefits of annual cohorts and profitability buckets, noting that these features work together to provide fundamental information about trends in an insurer’s profits over time by:
- preventing onerous insurance contracts from being offset against profitable ones; and
- ensuring that profits associated with insurance contracts are fully recognised in profit or loss over the coverage period of those contracts.
The Board has confirmed its position and explained its reasoning on the level of aggregation requirements in IFRS 17, with no amendments proposed. Insurers need to consider these discussions and take the next steps towards applying those requirements.
What are the implications?
Those who would like to apply the risk mitigation option prospectively from the date of transition need to identify relevant risk mitigation activities. Insurers should also consider the proposed amendments to transition requirements – assessing which approach would be best suited to their business and provide the most useful information.
With the Board having now discussed all 25 of the issues it agreed to explore, it is a good time for insurers to consider all of the recently proposed amendments together to determine how they may impact their implementation journey.
The Board is expected to review, as a whole, all of the proposed amendments to IFRS 17 at its April 2019 meeting.
This month’s decisions complement the Board’s previous tentative decisions to:
- defer the effective date of IFRS 17 and extend the temporary exemption from applying IFRS 9 to January 2022; and
- propose amendments to IFRS 17’s requirements in several important areas at its December 2018, and January and February 2019 meetings.
All of these actions are subject to the Board’s normal due process, which requires that an exposure draft be published followed by a public comment period, which is typically 120 days but could be shorter. The exposure draft is planned for release in mid-2019.
Stay tuned for our next web article, which will keep you up to date on the progress of these important discussions.
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