IFRS 17 TRG: 2 May 2018

Transcription

1 IFRS 17 TRG: 2 May 2018 Summary Francesc Nagari, Delitte Glbal IFRS Insurance Leader 10/05/2018

2 Agenda Summary f the TRG 2 May papers 1. Cmbinatin f Insurance Cntracts 3 2. Risk adjustment in a grup f entities 5 3. Cverage units 8 4. Cash flws within the cntract bundary Bundary f reinsurance cntracts held with repricing mechanisms Implementatin challenges utreach reprt Reprting n ther questins submitted Fr infrmatin, cntact Delitte China. HKICPA - 10 May

3 1. Cmbinatin f Insurance Cntracts (1/2) Backgrund IFRS 17:9 sets ut requirements n cmbining a set r series f insurance cntracts with the same r related cunterparty that may achieve r be designed t achieve an verall cmmercial effect The discussin cntinues frm the issue raised at the February TRG meeting which cnsidered what circumstances wuld lead t separatin f ne legal cntract int several insurance cntracts fr the purpses f applying IFRS 17 The paper cnsidered the fllwing factrs that culd indicate that a set r series f insurance cntracts are in substance a single cntract the cntracts are priced as a single risk the lapse f ne cntract changes the rights and bligatins f the ther cntract(s) measuring the cntracts separately wuld result in ne/sme f the cntract(s) being nerus whereas when measured as a whle the cntract is prfitable Key questin: When wuld it be necessary t treat a set r series f insurance cntracts as a whle applying IFRS 17:9? Fr infrmatin, cntact Delitte China. HKICPA - 10 May

4 1. Cmbinatin f Insurance Cntracts (2/2) Summary f discussin The staff highlighted the fllwing in their analysis: Entering the cntracts at the same time with the same cunterparty is nt sufficient t cnclude that they shuld be cmbined Presence f a discunt by itself is nt a decisive factr The inability t measure ne cmpnent withut cnsidering the ther is an imprtant cnsideratin e.g. when there is interdependency f risks and cash flws r cntracts lapse tgether Cntractual rights and bligatins are different when cnsidered individually and tgether. This culd be an indicatin f separate cntracts designed t achieve an verall cmmercial effect TRG members generally agreed with the staff analysis and agreed that n single factr is cnsidered t be determinative thus calling fr significant judgement and careful cnsideratin f all relevant facts and circumstances Fr infrmatin, cntact Delitte China. HKICPA - 10 May

5 2. Risk adjustment in a grup f entities (1/3) Backgrund IFRS 17:37 sets uts the requirements that an entity shall reflect the cmpensatin it requires fr bearing uncertainty abut the amunt and timing f cash flws that arises frm nn-financial risk This shuld als reflect the degree f diversificatin benefit the entity includes when determining the cmpensatin it requires fr bearing that risk The submissin lks at the level f aggregatin fr determining the risk adjustment fr nn-financial risk: In the individual financial statements f entities that are part f a cnslidated grup (i.e. parent and subsidiary entities that issue insurance cntracts);and In the cnslidated financial statements f a grup f entities. The submissin asks whether it is pssible t have a different amunt f risk adjustment determined in the individual financial statements f the entity issuing insurance cntracts that is part f the grup and the cnslidated financial statements Key questin: At which level is the risk adjustment fr nn-financial risk is required t be determined? Fr infrmatin, cntact Delitte China. HKICPA - 10 May

6 2. Risk adjustment in a grup f entities (2/3) Summary f Discussin The staff view was that there is nly ne risk adjustment and this amunt reflects the single decisin that is made by the entity that is party t the cntract Individual financial statements Risk diversificatin at the grup level may be taken int accunt, nly if the entity takes this int accunt when determining the cmpensatin required fr bearing nnfinancial risk related t insurance cntracts issued by the entity Vs. Cnslidated financial The RA at the cnslidated level is the statements same as the RA at the individual entity level. The risk adjustment at the cnslidated level is the same as the risk adjustment at the individual entity level Fr infrmatin, cntact Delitte China. HKICPA - 10 May

7 2. Risk adjustment in a grup f entities (3/3) Summary f Discussin The TRG members agreed that the determinatin f risk adjustment is nt an accunting plicy, but reflects the actual cmpensatin the entity requires fr bearing uncertainty Views were split n whether the amunt the entity wuld charge in IFRS 17:B87 refers t pricing f insurance cntracts r t the issuer s cst fr uncertainty, and accrdingly, whether the risk adjustment relates t the single decisin made by the issuer f the cntract at its inceptin TRG members hwever agreed that the fcus is n the cmpensatin the entity requires, which may be evidenced by the capital required t be carried, instead f premiums charged The TRG members were split n the level at which the risk adjustment fr nnfinancial risk is determined in the cnslidated financial statements. Many preferred a mre flexible apprach and were uncmfrtable with the staff view that fr the same grup f insurance cntracts the risk adjustment is always the same, regardless f the level f cnslidatin fr financial reprting purpses References were made t the Australian market where the risk adjustment is already reprted and varies at different reprting levels In particular, the TRG members read differently the reference t the entity in the definitin, with sme taking it t mean reprting entity and thers an issuing entity party t the cntact Fr infrmatin, cntact Delitte China. HKICPA - 10 May

8 3. Cverage units (1/5) Backgrund The estimatin f ttal cverage units (CU s) and their allcatin t each part f the cverage perid is necessary t depict the transfer f insurance service This determines the release f the cntractual service margin (CSM) during the perid and affects the recgnitin f insurance revenue and prfit Fr a grup f insurance cntracts, the ttal number f cverage units depends n each cntract s quantity f benefits prvided and expected duratin f cverage Fllwing n frm the February TRG meeting, the submissins include the fllwing bservatins f the TRG members: CU s reflect the likelihd f insured events ccurring nly t the extent it affects cntracts expected duratin; and CU s d nt reflect the prbability f insured events ccurring t the extent it affects expected claim amunts Key questin: What is the definitin f quantity f benefits in IFRS 17:B119(a)? Fr infrmatin, cntact Delitte China. HKICPA - 10 May

9 3. Cverage units (2/5) Summary f discussin The staff analysis n insurance cntracts with and withut investment cmpnents Surces f prfit are mre than the CSM release. They als include the release f nn-financial risk adjustment and experience adjustments The perid during which an entity bears insurance risk is nt necessarily equal t the insurance cverage perid When cntracts in the grup prvide different types/amunts f benefits, there is a need fr a methd t accunt fr such diversity and hw the benefits change ver the term f the cverage perid Lapse assumptins are cnsidered in determining the CUs because they affect the expected cverage duratin The estimatin f CUs is nt an accunting plicy but invlves judgment in determining the prvisin f service in a systematic and ratinal way Fr infrmatin, cntact Delitte China. HKICPA - 10 May

10 3. Cverage units (3/5) Summary f discussin The staff view n the principles in measuring the quantity f benefits fr insurance cntracts withut investment cmpnents was as fllws: An amunt f CSM has t be recgnised in each perid when insurance cverage services are prvided by cntracts in the grup The benefit is prvided even when the entity stands ready but des nt expect a claim t ccur Pssible methds f estimating quantity f benefits include: Maximum amunt f cver available in each perid; and Amunt entity expects t plicyhlder t be able t validly claim in each perid. The fllwing methds were cnsidered nt t meet the bjective: Methds based n the perfrmance f entity s assets; Methds resulting in n allcatin f CSM t perids when the entity is standing ready t meet a valid claim; Methds based n premiums, unless they can be demnstrated t be a reasnable prxy fr services prvided by the entity in each perid; and Methds based n expected cash flws, unless they can be demnstrated t be a reasnable prxy fr services prvided by the entity in each perid Fr infrmatin, cntact Delitte China. HKICPA - 10 May

11 3. Cverage units (4/5) Summary f discussin The staff view n the principles in measuring the quantity f benefits fr insurance cntracts with investment cmpnents was as fllws: The main cnsideratin is whether any CU s shuld be allcated t the prvisin f investment service The staff view is that fr variable fee apprach (VFA) cntracts, insurance cntracts prvide bth insurance and investment service, hence CSM recgnitin and the CU s shuld reflect the prvisin f bth services Whereas, fr insurance cntracts with investment cmpnents that are nt VFA cntracts, the service prvided t the plicyhlder des nt include investment service and therefre the quantity f benefits prvided shuld exclude the investment cmpnents The TRG members nted the fllwing: The principles prduces by the staff were deemed t be useful in identifying the quantity f benefits prvided by the variety f cntracts Hwever, it was nted that the analysis f examples is very facts-specific and there is a risk in extraplating frm them the applicatin f the principles t similar, but slightly different scenaris Fr infrmatin, cntact Delitte China. HKICPA - 10 May

12 3. Cverage units (5/5) Summary f discussin The methds identified by the staff are nt the nly methds f determining the quantity f benefits. Other methds may als be in line with the principles and meet the bjective The methd f estimatin f the quantity f benefits prvided by the cntract is nt a chice, and different methds may be apprpriate t different facts and circumstances There was a general supprt fr referring the matter t the IASB Bard t cnsider including prvisin f investment services in the definitin f cverage perid and cverage units fr VFA cntracts Several TRG members did nt agree with the IASB staff view that insurance cntracts with investment cmpnents accunted fr under the general mdel (als knwn as indirect participating cntracts) prvide n investment services Many TRG members were cncerned with the different treatment f VFA and nn- VFA indirect participating cntracts, when ecnmically they may be similar The IASB staff will present this issue t the Bard Fr infrmatin, cntact Delitte China. HKICPA - 10 May

13 4. Cash flws within the cntract bundary (1/4) Backgrund IFRS 17:B64 requires that when assessing whether at a renewal date an entity has the practical ability t set a price that fully reflects the risks in the cntract r prtfli, the entity shall cnsider all the risks that it wuld cnsider when underwriting equivalent cntracts n the renewal date fr the remaining cverage The paper raised tw issues: Whether IFRS 17 requires cnstraints r limitatins, ther than thse arising frm the terms f an insurance cntract, t be cnsidered in assessing the entity s practical ability t reassess and reprice the risks/level f benefits fr a particular plicyhlder (r the prtfli f insurance cntracts); and Hw t determine the cntract bundary f insurance cntracts that include an ptin t add insurance cverage at a future date, where the entity is bligated t prvide additinal cverage if the plicy hlder exercises the ptin Key questins: a) What is the practical ability t set a price at a future date that fully reflects the risks f a cntract r prtfli frm that date as described by IFRS 17:34?, and b) Hw d ptins that add insurance cverage affect the cntract bundary? Fr infrmatin, cntact Delitte China. HKICPA - 10 May

14 4. Cash flws within the cntract bundary (2/4) Summary f discussin Surces f cnstraints n an entity's practical ability t reprice risks at the renewal date Examples cnsidered were cmmercial pressures and reputatinal risks. There was als a discussin as t whether market cmpetitin can be cnsidered t be a cnstraint The staff highlighted the fllwing in their analysis: Cnstraints are irrelevant t the cntract bundary assessment if they equally apply t new and existing plicyhlders in the same market; Legal and regulatry cnstraints need t be cnsidered because they affect the entity s substantive rights and bligatins, unless they relate t terms that have n cmmercial substance; and In analysing pricing cnstraints, the entity needs t cnsider whether it is als prevented frm changing the level f benefits, either fr a cntract r a prtfli as a whle. TRG members agreed with the staff view that cnstraints n the entity s practical ability t reprice can nly exist, if they apply slely t existing cntracts. Analysing cmmercial cnsideratins requires the exercise f judgement in determining which f them wuld result in a cnstraint Fr infrmatin, cntact Delitte China. HKICPA - 10 May

15 4. Cash flws within the cntract bundary (3/4) Summary f discussin Impact f ptins t add insurance cverage n the cntract bundary The discussin distinguishes between additinal cverage ptins with the premium agreed at inceptin f the base cntract (withut the ability t change) and ptins with premium nt agreed until such ptins are exercised. The fllwing views were submitted: View A Descriptin The additinal cverage ptin is a feature f the insurance cntract with the resulting cash flws included in the cntract bundary at initial recgnitin The measurement f the grup f insurance cntracts reflects the entity s estimate f plicyhlder behaviur B The ptin is utside the cntract bundary f the riginal cntract until it is exercised When the plicyhlder exercises the ptin the entity wuld either (i) change the estimate f the fulfilment cash flws f the riginal cntract r (ii) treat the entire cntract as a new cntract Fr infrmatin, cntact Delitte China. HKICPA - 10 May

16 4. Cash flws within the cntract bundary (4/4) Summary f discussin Impact f ptins t add insurance cverage n the cntract bundary The staff view was as fllws: The riginal cntract includes the additinal cverage ptin, unless it is required t be separated, frm the date f initial recgnitin The cash flws frm the ptin are within the cntractual bundary f the riginal cntract up t the pint that the entity is able t fully reprice the whle cntract Where the additinal premium frm the ptin is guaranteed by the entity, all the cash flws are within the cntractual bundary f the riginal cntract Hwever, if this ptin premium is determined nly n its exercise, all the subsequent cash flws relating t bth the base cntract and the ptin are utside the riginal cntract s bundary (resulting in a new cntract), if at that pint the entity is able t reprice the whle cntract t fully reflect plicyhlder risks If the entity cannt reprice the whle cntract, then the cash flws frm the ptin wuld be within the bundary f the riginal cntract TRG members emphasized that the fcus f this assessment shuld be the entity s present substantive bligatin, with its end indicating the cntract bundary Sme TRG members argued that future cverage ptin is utside f the cntract bundary and des nt cntain a present substantive bligatin fr the entity if there is n practical cnstraints n its future premium, even if the entity cannt reprice the whle cntract Fr infrmatin, cntact Delitte China. HKICPA - 10 May

17 5. Bundary f reinsurance cntracts held with repricing mechanisms (1/2) Backgrund The measurement f a grup f insurance cntracts includes all the cash flws within the cntract bundary that arise frm the entity s substantive cntractual rights and bligatins In the Feb 2018 TRG meeting, it was bserved that cash flws within the bundary f a reinsurance cntract held arise frm the substantive right t receive services frm the reinsurer and substantive bligatin t pay amunts t the reinsurer This submissin prvides the fllwing fact pattern when the reinsurer has the right t reprice the remaining cverage prspectively: The reinsurer can chse nt t exercise its repricing right and the cedant is cmmitted t cntinue paying premiums t reinsurer; and The reinsurer can chse t exercise the right t reprice and the cedant has the right t terminate. Key questin: Hw shuld the bundary f a reinsurance cntract held be determined when the reinsurer has the right t reprice the remaining cverage prspectively? Fr infrmatin, cntact Delitte China. HKICPA - 10 May

18 5. Bundary f reinsurance cntracts held with repricing mechanisms (2/2) Summary f discussin The submissin presented tw views: A B The cedant has a substantive bligatin t pay premiums t the reinsurer fr the full duratin f the underlying cntracts The cntract bundary shuld end at the first pint at which the reinsurer has the right t change the premium rates The staff supprted view A because in determining the cntractual bundary a cedant needs t cnsider the end f bth its substantive rights and substantive bligatins The reinsurer s right t terminate cverage, being utside the cedant s cntrl, is ignred, and the cedant has an unavidable bligatin t pay premiums cntinuing fr the entire term f the cntract held The cedant reflects its expectatins abut the amunt and timing f future cash flws, including the prbability f the reinsurer repricing the cntract TRG members agreed with IASB s staff view that bth substantive rights and bligatins shuld be cnsidered, hwever nted this paper illustrated a limited scpe example Fr infrmatin, cntact Delitte China. HKICPA - 10 May

19 6. Implementatin challenges utreach reprt (1/4) Backgrund This submissin lks at the implementatin cncerns assciated with the fllwing three tpics, the accunting aspects f which were discussed at the February TRG meeting: Presentatin f grups f insurance cntracts in the statement f financial psitin and the need t present separately grups f cntracts that are assets and grups f cntracts that are liabilities. The need t track premiums received fr a grup f insurance cntracts in rder t recrd the liability fr remaining cverage n applicatin f the PAA Subsequent treatment f insurance cntracts acquired in their settlement perid Fr infrmatin, cntact Delitte China. HKICPA - 10 May

20 6. Implementatin challenges utreach reprt (2/4) Summary f discussin Level f aggregatin fr presentatin in the statement f financial psitin IFRS 17:78 requires separate presentatin f grups f insurance cntracts issued that are assets and thse that are liabilities in the statement f financial psitin The grup verall balance wuld further need t be disaggregated in the ftntes disclsing the balance f the liability fr remaining cverage and that f the liability fr incurred claims This wuld require tracking actual cash mvements at the grup f insurance cntracts level, including the identificatin f premiums received and claims incurred and may present a significant implementatin challenge fr sme entities requiring change t their infrmatin systems It is nted that the challenge f identifying claims incurred at the grup f insurance cntract level maybe mre relevant t nn-life cntracts, which tend t have lng settlement perids Several TRG members frm insurance cmpanies cnfirmed that the issue f aggregating cash flws at a grup level in rder t determine whether it is a net asset r a net liability is ne f the tp three cncerns fr implementatin. The cst invlved in btaining this infrmatin, des nt, in the view f these TRG members, justify the benefit Fr infrmatin, cntact Delitte China. HKICPA - 10 May

21 6. Implementatin challenges utreach reprt (3/4) Summary f discussin Challenges in identifying premium received The challenge f tracking premiums received may be less relevant t life cntracts with investment cmpnents where the cverage des nt typically begin until the premium is received. Fr ther cntracts, whether tracking premiums received fr the purpse f measuring the liability fr remaining cverage under the PAA r fr the purpse f presentatin in the statement f financial psitin, the implementatin challenges are similar The IASB staff prpsed t issue additinal supprting material, but pinted ut that IFRS 17 specifies the amunts t be reprted and nt the methdlgy f determining them Under existing practice, entities present grss amunts f premiums due t be received (smetimes n an accrual, rather than inviced basis) and an amunt f unearned premiums and regard these as imprtant perfrmance metrics that under IFRS 17 may either be lst r becme alternative perfrmance measures Fr infrmatin, cntact Delitte China. HKICPA - 10 May

22 6. Implementatin challenges utreach reprt (4/4) Summary f discussin Treatment f cntracts acquired during the settlement perid Fr cntracts acquired in their settlement perid, the insured event is the determinatin f the ultimate cst f the claim Therefre, the settlement perid fr the issuer becmes the cverage perid fr the acquirer, and the liability fr incurred claims f the issuer becmes the liability fr remaining cverage f the acquirer The implementatin cncerns arise frm having t treat differently insurance cntracts issued directly frm thse acquired, ntably: The acquirer ptentially having t apply the general mdel t acquired cntracts, when had they been the issuer, may have applied the PAA The acquirer having t recgnise revenue fr the acquired cntracts in their settlement perid, when they wuld nt d s fr similar cntracts issued directly Fr perfrmance presentatin, while accepting the need t recrd changes in initial expectatins in the insurance service result, many TRG members questined the validity f recrding insurance revenue fr such cntracts Fr infrmatin, cntact Delitte China. HKICPA - 10 May

23 7. Reprting n ther questins submitted Backgrund and summary f discussin N Categries 1. Can be answered applying nly the wrds in IFRS 17 Number f Questins 2. D nt meet the submissin criteria 0 Nne Remark 11 Mdificatins t retrspective applicatin Prjected return n assets Insurance cntract with direct participatin features adjustment t CSM Discunt rates used in the allcatin f insurance finance incme r expense in P&L Issued adverse lss cver and cntracts acquired in their settlement perid Level f aggregatin n significant pssibility f becming nerus Prjected ecnmic cnditins Reflecting minimum guarantees Discunt rate fr reinsurance cntracts held Cverage units fr reinsurance cntracts held Risk f nn-perfrmance f the issuer f a reinsurance cntract 3. Are being cnsidered thrugh a prcess ther than a TRG discussin (such as a prpsed annual imprvement) 1 The submissin asks whether IFRS 17 applies t certain types f cntracts typically issued by nninsurance entities The staff may cnsider publishing additinal educatinal materials n these tpics Fr infrmatin, cntact Delitte China. HKICPA - 10 May

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