IFRS 17 Insurance Contracts – Amendments planned at March 2019 meeting

At the March meeting, the IASB continued its discussions on the amendments necessary to IFRS 17 Insurance Contracts, which are looking to address the criticisms raised by stakeholders and thus to more faithfully represent the performance of insurance contracts in financial statements.

At the end of this meeting the IASB tentatively decided to add additional amendments to the provisional list drawn up in January and February (click here for this previous blog article).

The new amendments relate to the following topics:

• credit cards that provide insurance coverage;
• transition requirements for loans that transfer significant insurance risk;
• transition requirements for the risk mitigation option under the variable fee approach;
• disclosure requirements relating to insurance contracts.

It should be noted that the IASB has decided to retain the current requirements of IFRS 17 relating to the level of aggregation of insurance contracts. This will no doubt come as a disappointment to life insurers, given that the annual cohort requirement adds complexity and does not accurately reflect the way in which life insurers monitor the performance of their contracts.

Click here for the official announcement of these decisions on the IASB’s website.
Each of these topics is addressed in more detail below:

1. Credit cards that provide insurance coverage

The IASB has decided to exclude from the scope of IFRS 17 credit card contracts that provide insurance coverage where the price of the contract does not reflect the individual insurance risk of each customer.  The IASB Update does not specify which standard should be used to account for these contracts. Agenda paper 2D, prepared in advance of the meeting by the IASB staff, seems to indicate that IFRS 9 should be used to account for the loan commitment (during the loan commitment phase) or loan (once drawn), while IFRS 15 should be used to account for the insurance component (i.e. the fixed-fee service contract). However, we will need to wait for the exact wording in the Exposure Draft of the proposed amendments before we can be sure of this.

2. Transition requirements for loans that transfer significant insurance risk

From the February meeting, we reported on the IASB’s decision to permit entities to account for loans that transfer significant insurance risk applying either IFRS 9 or IFRS 17.

At its March meeting, the Board clarified the transition requirements for these loans. It covered three different possible situations, which we will address in turn:

• If an entity elects to apply IFRS 17 to these loans, the requirements of IFRS 17 shall apply, with no special exemptions or adaptations for loans that transfer significant insurance risk.
• If an entity elects to apply IFRS 9 to these loans and initially applies IFRS 9 at the same time as IFRS 17, the current transition requirements of IFRS 9 shall apply.
• If an entity elects to apply IFRS 9 to these loans and initially applies IFRS 9 before applying IFRS 17, it shall apply: (a) the current transition requirements of IFRS 9 that are necessary for the proposed amendments on loans that transfer significant insurance risk; and (b) additional requirements for loans that transfer significant insurance risk, to be added to IFRS 9 by means of amendments. The new requirements will be as follows:
• At the date the entity first applies the new amendments, the entity has to review the designations of financial liabilities at fair value through profit or loss (FVPL) under the fair value option. The entity must revoke previous designations at FVPL if the accounting mismatches no longer exist as a result of including loans that transfer significant insurance risk within the scope of IFRS 9, and it may elect to newly designate as measured at FVPL financial liabilities previously measured at amortised cost if this reduces a new accounting mismatch.
  • It should be noted that financial assets are not covered by the IASB’s agenda decision, as IFRS 17.C29 to C33 already permit entities to reassess previous designations of financial assets under the fair value option when IFRS 9 is initially applied before IFRS 17.
  • Entities are permitted, but not required, to restate prior periods, provided that certain conditions are met (these will likely be set out in the forthcoming Exposure Draft, due for publication in June). It should be noted that agenda paper 2F, prepared in advance of the March meeting by the IASB staff, recommends the following conditions for permitting an entity to restate prior periods: (a) it is possible without the use of hindsight; and (b) the restated prior period comparative information reflects all the requirements of IFRS 9 for the affected instruments.The amendments would exempt entities from the requirement to present quantitative information under paragraph 28(f) of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.However, on initial application of the amendments, entities would be required to disclose specific information on these loans in the notes to the financial statements (in particular: their previous classification, their carrying amount immediately before applying the amendments, their new classification under IFRS 9 and their new carrying amount at the start of the period of initial application of the amendments, as well as the carrying amounts relating to any redesignation or dedesignation under the fair value option, and the reasons for any such redesignation or dedesignation). These disclosures are in addition to the existing disclosure requirements under IFRSs, such as the disclosures already required in IFRS 17.C32 and C33 on reassessments of previous designations of financial assets under the fair value option.

As a reminder, the choice between IFRS 9 and IFRS 17 can be made at the portfolio level (as defined in IFRS 17).

3. Transition requirements for the risk mitigation option

In our last blog on the IFRS 17 amendments, we reported the IASB’s decision to retain prohibition of retrospective application of the risk mitigation option on transition. However, the IASB asked the staff in February to continue to explore alternative proposals that would address stakeholders’ concerns about the results of this prohibition.

In March, the IASB made some changes to the way in which the risk mitigation option should be applied on transition to IFRS 17, although it did not reverse its February decision to retain prohibition of retrospective application at the transition date:

• Eligible risk mitigation instruments held at the transition date may be designated prospectively as used for risk mitigation as defined in IFRS 17 no later than the IFRS 17 transition date (i.e. after 1 January 2022 the risk mitigation option may only be applied to risk mitigation instruments acquired after transition to IFRS 17).
• Moreover, entities that apply the risk mitigation option described above prospectively at the transition date may apply the fair value transition approach to groups of insurance contracts with direct participation features to which the risk mitigation option has been applied. Thus, the fair value transition approach is permitted even for entities that can apply IFRS 17 retrospectively, provided they use the risk mitigation option at transition. However, it is only permitted if the designated risk mitigation instruments were already held for the purposes of mitigating the entity’s financial risk before the transition to IFRS 17. This possibility has been added with a view to reducing accounting mismatches that could have arisen if the entity had prospectively applied the risk mitigation option under the full retrospective approach.

4. Disclosure requirements relating to insurance contracts

The IASB has decided to require the following additional disclosures in the notes to the financial statements, to reflect the amendments approved by the Board in January:

• Specific disclosures on the contractual service margin (CSM) recognised in profit or loss for contracts that include investment-related services (under the VFA) or an investment-return service (under the IFRS 17 general model) in addition to insurance coverage, and for which the period over which the CSM is recognised includes the period during which these additional services are provided.
  • In particular, entities must present quantitative disclosures (in appropriate time bands) on when they expect to recognise in profit or loss the CSM remaining at the end of the reporting period (in other words, the IASB has decided to require quantitative disclosures in all cases, removing the option previously permitted under paragraph 109 of providing this information in a qualitative format);
  • They must also present an explanation of their approach to assessing the relative weighting of the benefits provided by insurance coverage and investment-related services or investment-return services when determining the CSM allocation pattern, in line with the existing requirements of paragraph 117 relating to the significant judgements made.
• Specific disclosures on acquisition cash flows recorded as an asset which have not yet been included in the measurement of recognised groups of insurance contracts. In particular:
  • Reconciliation of the carrying amount of this asset at the beginning and the end of the reporting period, specifically noting any changes due to recognition of any impairment loss or reversals. The level of aggregation of this information should be consistent with the aggregation used by the entity when applying paragraph 98 of IFRS 17 to the related group of insurance contracts;
  • Quantitative disclosure, in appropriate time bands, of the expected timing of the inclusion of these acquisition cash flows in the measurement of recognised group of insurance contracts.

The IASB decided to retain all other disclosure and transition requirements of IFRS 17, with the exception of the amendments detailed in agenda paper 2H, prepared in advance of the March meeting by the IASB staff. This paper brings together the new requirements already discussed in our articles on IFRS 17, together with some additional points. For example, this paper states that:

• disclosures on risk mitigation should be presented in the notes, with separate presentation of the effect of applying the risk mitigation exception for the use of derivatives and for the use of reinsurance contracts held, if this is considered useful;
• the gain recognised on reinsurance contracts held to reduce risk exposure to onerous underlying contracts is similar to the loss component on the onerous contracts, and IFRS 17 already requires that the disclosure requirements for insurance contracts issued shall be adapted to reflect the features of reinsurance contracts held.

5. What are the next steps?

The IASB has now officially completed its deliberations on the topics identified by the staff last October. At its April meeting, the IASB plans to review the package of amendments, to ensure that, on the whole:

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

At the April meeting, the IASB staff expect to request the Board’s permission to start the balloting process for the proposed amendments to IFRS 17. The Exposure Draft is still scheduled for publication at the end of June.

By Jessica Howard, Financial Reporting Advisory Director