IFRS 17 Insurance Contracts – Amendments planned at February 2019 meeting

At the February 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 (click here for this previous blog article).

The new amendments relate to:

• loans that transfer significant insurance risk;
• transitional arrangements on the first application of IFRS 17.

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

1. Loans that transfer significant insurance risk

During the meeting, the IASB considered the case of loans that transfer significant insurance risk, where the insurance coverage only refers to the payment obligations of the policyholder/borrower.

The Board proposes to clarify the standard to be applied to contracts of this type by amending the scope of IFRS 17 Insurance contracts and IFRS 9 Financial instruments in order to:

• enable entities issuing such contracts to account for those contracts applying either IFRS 17 or IFRS 9, and
• to clarify that the choice would be made on a portfolio by portfolio basis, using the definition of a portfolio in IFRS 17.

Note that where entities opt to apply IFRS 9 to these instruments, the insurance component may have to be taken into account in the SPPI (Solely Payments of Principal and Interest) analysis.

2. IFRS 17 transitional arrangements

The IASB has tentatively decided to amend some of the transitional arrangements for first application of IFRS 17, but to retain others.

Proposed amendments

The IASB has tentatively decided to amend the transitional requirements in IFRS 17 for liabilities that relate to the settlement of claims incurred before an insurance contract was acquired as follows:

• to add a specified modification to the modified retrospective approach (MRA) so that an entity classifies such liabilities as a liability for incurred claims. Consistent with the other specified modifications in the MRA, an entity would be permitted to use this specified modification only to the extent that it does not have reasonable and supportable information to apply a full retrospective approach (FRA); and
• to permit an entity applying the fair value approach (FVA) to choose to classify such liabilities as a liability for incurred claims.

Requirements not proposed to be amended

The IASB has tentatively decided to retain the transitional requirements in IFRS 17 on the following areas:

• the choice between different approaches to the transition (for example, where the full retrospective method cannot be applied, IFRS 17 allows entities to choose between the modified retrospective approach and the fair value approach);
• the requirement to present restated comparative information (i.e. supposing that the standard comes into effect on 1 January 2022, as voted in November, the 2021 comparative information will have to be restated under IFRS 17; unlike IFRS 9, IFRS 17 does not allow the 2021 comparative information to be retained as originally published, without restatement);
• the prohibition of retrospective application of the risk mitigation option . Note however that one Board member disagreed with this decision, and the IASB has asked the staff to continue to explore alternative proposals that would address stakeholders’ concerns about the results of this prohibition; and
• the transition requirements in IFRS 17 relating to the cumulative amounts included in other comprehensive income (“OCI”).

When an entity chooses to apply the OCI option for the recognition of insurance finance income or expenses , it may in some circumstances be permitted or required to determine the amounts recognised in OCI at the transition date as nil, whereas IFRS 9 provides no analogous options for the financial assets measured at fair value through OCI (FV-OCI) to which these insurance contracts are linked.

This absence of alignment between the transition arrangements for the two standards may create accounting mismatches during the years that follow transition.

• the following aspects of the modified retrospective approach (MRA) are retained:
• the prohibition preventing an entity from using a specified modification to the extent that the entity has reasonable and supportable information to apply the related IFRS 17 requirement retrospectively (i.e. in accordance with the FRA);
• the option for an entity to use a specified modification only when the entity has reasonable and supportable information to apply that modification;
• the prohibition preventing an entity from introducing its own modifications (even those that it regards as consistent with the objective of the MRA) in addition to those specifically set out by IFRS 17 . However, the Board noted that the existence of specified modifications does not preclude the normal use of estimation techniques;
• the specified modification in IFRS 17 paragraph C12, relating to the use of cash flows that are known to have occurred at the transition date, instead of estimating retrospectively cash flows that were expected to occur; and
• the methods for calculating the contractual service margin or loss component at the transition date set out in IFRS 17 paragraph C17 for contracts with direct participation features (subject to the variable fee approach), without an amendment that would permit an entity to apply to such contracts the specified modifications set out in IFRS 17 paragraphs C11 to C16 for contracts subject to the general IFRS 17 model.

3. What next?

The remaining topics identified by the staff in October 2018, and which the IASB has not yet resolved, will continue to be debated at future meetings. These include, in particular, the level of aggregation of contracts and in particular the annual cohorts requirement, along with any amendments to the disclosures to be provided on insurance contracts.

By Jessica Howard, Financial Reporting Advisory Director