At the January meeting, the IASB decided to make amendments to IFRS 17 Insurance Contracts, relating to the following topics:

• reinsurance contracts purchased by a primary insurer (reinsurance contracts held); and
• amortisation of the contractual service margin (CSM) in profit or loss for contracts that include an investment return service.These changes are intended to address criticisms raised by stakeholders, and therefore to result in financial statements that more faithfully represent the performance of insurance contracts. Each of these three topics is addressed in more detail below:
• Click here for the official announcement of these decisions on the IASB’s website.

These changes are intended to address criticisms raised by stakeholders, and therefore to result in financial statements that more faithfully represent the performance of insurance contracts. Each of these three topics is addressed in more detail below:

1. Cash flows related to the acquisition of insurance contracts

The IASB has tentatively decided to clarify the accounting treatment of insurance acquisition cash flows attributable to expected future renewals of newly issued contracts:

• On initial recognition of insurance contracts, insurers shall allocate the insurance acquisition cash flows between:(b) the future contracts that are expected to result from the renewal of these contracts.
• (a) the contracts newly entered on the balance sheet; and
• The insurance acquisition cash flows allocated to future contracts shall be recognised as assets, in accordance with IFRS 17.27, until the date of initial recognition of the contracts resulting from the expected renewals. If the insurer expects that the original contract (with, say, an initial term of one year) will be renewed several times consecutively, this portion of the cash flows could continue to be recognised as an asset for several years, depending on how many times the insurer expects to renew the original contract that gave rise to the costs.
• At the end of each reporting period, the insurer shall assess the recoverability of these costs. This assessment shall be based on the fulfilment cash flows of the related group of contracts (i.e. the assessment is performed on a group of insurance contracts basis, rather than for each contract individually).
• If the recoverability assessment shows that any portion of the asset recognised is unrecoverable, it shall be derecognised and an expense shall be recorded in profit or loss.
• Subsequently some, or all, of this expense may be reversed (and a gain recorded in profit or loss) if a subsequent recoverability assessment shows that some, or all, of the costs previously recognised, and then recorded as an expense because they were assessed as non-recoverable, are now recoverable again.

2. Reinsurance contracts held

At its January meeting, the IASB tentatively decided to make amendments to some specific points of IFRS 17 relating to reinsurance contracts held (i.e. the accounting treatment in the financial statements of a primary insurer that is using reinsurance to reduce its risk exposure to the underlying insurance contracts it has underwritten).

The proposed amendments relate to the following two topics:

• onerous underlying contracts; and
• ineligibility for the variable fee approach (VFA) when the underlying contracts are eligible for the VFA.

Topic 1: Onerous underlying contracts

In accordance with IFRS 17.66(c) (ii) (the scope of which will be expanded), insurers will be required to immediately recognise a gain for reinsurance contracts held when they recognise losses on onerous underlying insurance contracts (including at initial recognition).

This gain shall only be recognised to the extent that these reinsurance contracts cover the losses of each contract on a proportionate basis (it is understood that this amendment relates only to proportional reinsurance treaties).

This amendment is intended to address stakeholders’ criticisms of the accounting treatment at initial recognition of reinsurance contracts held, and should reduce accounting mismatches in profit or loss that could have resulted from the existence of onerous underlying insurance contracts.

The IASB has also decided to extend the principle described above to contracts recognised in accordance with the (simpler) premium allocation approach (PPA).

Topic 2: Ineligibility for the variable fee approach (VFA) when the underlying contracts are eligible for the VFA

Reinsurance contracts held will still not be eligible for the VFA[1].

However, stakeholders raised concerns about the potential accounting mismatches that could result from this ineligibility (as insurance contracts issued would be accounted for using the VFA, while reinsurance contracts held to reduce exposure to the underlying contracts would be accounted for using the general model set out in IFRS 17). To address these concerns, the IASB decided to expand the scope of the risk mitigation exception set out in IFRS 17.B115, which is intended to reduce accounting mismatches in profit or loss resulting from the use of different measurement approaches for the underlying insurance contracts issued and the instruments used to mitigate financial risks.

An entity will therefore have the option of applying this exception when the instrument used to mitigate risk is a reinsurance contract held; provided that this reinsurance contract meets the eligibility criteria set out in IFRS 17.B116. IFRS 17 originally stipulated that the risk mitigation exception only applied when an entity used derivatives to manage exposure to insurance contracts issued that were accounted for using the VFA.

As a final point, reinsurance contracts issued were not mentioned in the IASB Update; however, agenda paper 2D, which deals primarily with reinsurance contracts held, also includes a proposal that reinsurance contracts issued should continue to be ineligible for the VFA.

3. Amortisation of the CSM

The IASB has tentatively decided to amend IFRS 17 to modify the pattern of amortisation in profit or loss of the contractual service margin (CSM) for contracts that are accounted for under the general model and that include both insurance coverage and an investment return service:

• in the general model, the CSM shall be recognised in profit or loss on the basis of coverage units that are determined by considering both insurance coverage and any investment return service;
• the standard will also be amended to clarify that an investment return service exists only when an insurance contract includes an investment component. The standard will not include a definition or criteria to help entities identify when an investment return service exists. Insurers must use their judgement, and must do so consistently. However, the IASB has not ruled out the possibility of including an explanation of what such judgements might involve in the IFRS 17 Basis for Conclusions;
• the standard will also stipulate that the period of investment return services should be regarded as ending when the entity has made all investment component payments to the policyholder and should not include any period of payments to future policyholders;
• the amended IFRS 17 will also require assessments of:

(a) the relative weighting of the benefits provided by insurance coverage and investment return services; and

(b) their pattern of delivery to be made on a systematic and rational basis;

• the amendments will confirm that cash flows relating to fulfilling the investment return service (e.g. the costs of managing underlying assets) shall be included in the measurement of the insurance contract;
• no changes will be made to IFRS 17 relating to fulfilment cash flows that adjust the CSM (i.e. the impacts of changes in financial assumptions will continue to be treated differently under the general model and the VFA); and
• finally, the amendments will establish that eligibility for the premium allocation approach (PAA) should be assessed by considering both the insurance coverage period and the period over which any investment return service is provided.

4. What are the next steps?

The other topics identified by the staff in October (of which there were 25), on which the IASB has not yet reached a decision, will continue to be discussed at future Board meetings. Further amendments to IFRS 17 could therefore be proposed. Once all the topics have been discussed, the package of amendments as a whole will be reviewed by the IASB, to ensure that:

• the benefits of amending IFRS 17 outweigh the costs; and
• the proposed amendments would not unduly disrupt implementation processes already under way.

At this point, the IASB will also consider whether the various amendments will require any changes to the disclosure requirements of IFRS 17. The IASB therefore still has some work left to do before it can draw up the final list of proposed amendments. It will, however, need to work fast, as it has already announced the publication of an exposure draft of the amendments in the second quarter of 2019.

[1] The variable fee approach is one of the models that can be used to recognise insurance contracts under IFRS 17. Only insurance contracts with direct participation features are eligible for the variable fee approach.