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 4 does not address how to measure insurance contracts. Insurers currently use a wide range of insurance accounting practices for reporting on a key aspect of their business. Differences in accounting treatment across jurisdictions and products make it difficult for investors and analysts to understand and compare insurers’ results. Most stakeholders, including insurers, agree on the need for a common global insurance accounting standard even though opinions vary as to what it should be. Insurance contracts often cover difficult to measure long‑term and complex risks. Insurance contracts are not typically traded in markets and may include a significant deposit component, posing further measurement challenges. Some existing insurance accounting practices fail to reflect adequately the true underlying financial positions or performance arising from these insurance contracts. IFRS 17 addresses these issues. IFRS 17 will make:
a) insurers’ financial reports more useful and transparent; And
b) insurance accounting practices consistent across jurisdictions.
Requirements of IFRS 17
IFRS 17 requires a company that issues insurance contracts to report them on the balance sheet as the total of:
a) the fulfilment cash flows—the current estimates of amounts that the company expects to collect from premiums and pay out for claims, benefits and expenses, including an adjustment for the timing and risk of those amounts; and
b) the contractual service margin—the expected profit for providing insurance coverage. The expected profit for providing insurance coverage is recognised in profit or loss over time as the insurance coverage is provided. IFRS 17 requires the company to distinguish between groups of contracts expected to be profit making and groups of contracts expected to be loss making.
Any expected losses arising from loss-making, or onerous, contracts are accounted for in profit or loss as soon as the company determines that losses are expected.
Deviations from IFRS 4
Variable fee contracts: An insurance contract with direct participation features is a contract that includes all 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. 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.
Portfolio split: An entity shall divide a portfolio of insurance contracts issued into a minimum of:
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 the remaining contracts in the portfolio, if any.
Onerous contracts: An insurance contract is onerous at the date of initial recognition if the fulfilment cash flows allocated to the contract, any previously recognized acquisition cash flows and any cash flows arising from the contract at the date of initial recognition in total are a net outflow.
If contracts are onerous, losses are recognized immediately in profit or loss. No contractual service margin is recognised on the balance sheet on initial recognition.
Contractual service margin (CSM): 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.
Discount rate: the discount rate will have to reflect the characteristics of the insurance liabilities. The practice of using the rate of return on the assets is not permitted.
Claims incurred: the estimated future cash flows to settle claims incurred should be discounted.
Risk adjustment: IFRS 17 requires the calculation and disclosure of an explicit risk adjustment, this might be equal to the SII risk margin.
Premium Allocation Approach: for short duration contracts for which the PAA is applied, no significant change is expected. However, the insurer still needs to consider discounting and apply a risk adjustment for incurred claims.
Presentation (Statement of Financial Position): insurance contract assets and liabilities should not be netted. Furthermore, premiums receivable, unearned premiums and claims payable may no longer be presented separately from other insurance assets and liabilities. Rather, they will all be included in the measurement of the insurance liabilities and the reinsurance assets.
Presentation (Statement of Comprehensive Income): ‘insurance revenue’ will replace the current reporting of ‘written premiums’ and ‘earned premiums’.
Disclosure: insurers must provide information about the reported amounts (including detailed reconciliations of opening and closing balances of insurance liabilities/assets), the judgments used, and the risks that arise from insurance contracts.
How is RiAct going to help you?
Undeniably, the transition to IFRS 17 is primarily a major actuarial issue. The Actuarial Function must split the portfolio into indicative categories suggested by the new standard and calculate the present value of future inflows and outflows so that the contractual service margin will occur (if any).
Whether you are a Life or Non-Life insurer you will definitely need a “Business” Actuary to guide you through all those changes.
In our few operating years we are known in the Greek Insurance Market as “Business” Actuaries with extensive Actuarial, Risk Management and Corporate Governance skills. We also have extensive accounting and auditing skills which are critical in implementing new IFRS standards.
We will assist and guide you to implement IFRS 17 within your Internal Control System and in compliance to all regulatory requirements.
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