Measurement of Contracts with Direct Participating Features

Transcription

1 Measurement of Contracts with Direct Participating Features

2 Contracts with Direct Participating Features IFRS 17 provides some additional measures for the subsequent measurement of the CSM for contracts with direct participating features compared with the general approach plus a special presentation guidance if the OCI choice is taken. Beside those, the general approach is fully applicable to those contracts. There is no separate approach for those contracts. The wording in IFRS 17 is based on the simplifying assumption that the contract is a unit-linked contract (unusually sharing the insurer in the movement, not periodically in the total amount of the unit fund). Accordingly, occasionally some translation is needed to determine the application to traditional participating contracts, sharing policyholders in the entire surplus of the entity.

3 Definition of Contracts with Direct Participating Features

4 Contracts with Direct Participating Features Contracts within the scope of IFRS 17 (insurance contracts of investment contracts with DPF), but excluding reinsurance hold or issued, are contracts with direct participating features if, at initial recognition: a) the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items; b)the entity expects to pay to the policyholder an amount equal to a substantial share of the returns from the underlying items; and c) a substantial proportion of the cash flows the entity expects to pay to the policyholder should be expected to vary with the cash flows from the underlying items.

5 At initial recognition The criteria need only to be fulfilled from the perspective at initial recognition and is never reviewed. In case of transition, there is a choice to take the perspective as at initial recognition or at the begin of the first reported period (comparative period, January 1, 2020) It would be very unusual if contracts not complying with the criteria at outset could comply with those later. Many contracts, expected at outset to provide in future significant additional benefits, might not do so later, e.g. due to reduced market interest rates.

6 contractual terms participates share There is an enforceable obligation of the insurer to forward a certain share of the returns from the underlying item to the benefit of policyholders by contract, law or other means which result in an enforceable obligation e.g. certain constructive obligations, or possibly even untested regulator s behavior without a requirement to specify which share, i.e. can be a fixed percentage, but as well a qualitatively defined share, e.g. adequate share. It is sufficient that the share is due to be forwarded to third parties as a consequence of the contract to be tested, i.e. be it the same policyholder, another current policyholder or a future policyholder. It is not sufficient that it is the consequence of a future contract (it needs to be a present obligation).

7 clearly identified underlying item Underlying item can be any form of index, e.g. surplus of the entity, or an external index. It can be movement (surplus), in which policyholders share periodically, aggregated over time. It can be a varying amount (fund value), where policyholders share once in its final value. The language in IFRS 17 commingles both, interpretation needed. Can be a combination of indices (e.g. mutual fund units plus surplus from mortality) The basis of the share, the underlying item, needs to be clear to give the enforceable share legal sense, particularly the insurer must not be able to modify it retroactively in a manner that the amount paid to policyholders is in a relevant extent nevertheless at its discretion. Negligible discretion does not matter (e.g. due to allocation of cost by keys).

8 expects to pay substantial share Expectation at outset Considers not only the enforceable share but any share expected to be paid (any payment which is seen to respond to the underlying item) Payment under the rights of the existing contract to third parties, e.g. as well future policyholders (e.g. insurer expects to accept subsequently an obligation under the current contract to pay such amounts to future contracts as found in some jurisdictions) Substantial: I.e. the substance of the (movement/value of) underlying item is paid to policyholders, just a minor part remains for the insurer. Clearly beyond 50%, IASB mentioned 80%. Refers to the ultimate (combined) underlying item, not to parts of the underlying item.

9 substantial proportion of the cash flows expects to pay expected to vary with All comment as in the prior slide Cash flows expected to vary with: Includes the total amount of benefit including any minimum amount, a floor does not disqualify the entire cash flow to vary if the floor is not expected to be mostly in the money, in that case the cash flow would not vary with the underlying item.

10 Special Measurement of Contracts with Direct Participating Features

11 Reminder for General Approach Building block 1 includes policyholder s share in the underlying item. Building block 2 and 3 contain insurer s retained risk from the underlying item, from financial risks (measured market-consistent) respectively from non-financial risks (measured entity-specific) Policyholder s share in the risk from the underlying item is not reflected anywhere. Movements in building block 1, as far as resulting from future services (effects to policyholder s participation in changes in estimate of building block 1) adjust the CSM, other (as far as resulting from experience adjustments, i.e. events in P&L or building block 2) not. Movements in building block 2 do not adjust the CSM at all. Movements in building block 3 (other than releases) adjust the CSM.

12 Additional CSM-Adjustments Movements in building block 2 adjust the CSM as well if policyholder shares in the financial risk (IASB never noted that explicitly). Changes in insurer s expected share in the cash flows from the underlying item adjust the CSM (together with the adjustments from building block 2 and 3, representing insurer s retained share in the risk from the underlying item, insurer s share in the fulfilment value from the underlying item adjusts the CSM) Accordingly, there is no interest accreted on the CSM since interest effects are already covered by the adjustments. Is that generally correct?

13 Presentation Issues So-called Current Period Book Yield Approach: If insurer actually holds the (financial risks of the) underlying item, applying the OCI-option, the insurance finance expense presented in P&L equals the investment returns from the underlying item presented in P&L, the difference to the actual insurance finance expense from building block 2 is presented in OCI. Special care needed to ensure that movements of the building blocks and CSM are presented in P&L as far as the related underlying item is presented there and that those resulting from movements within the liability off-set those movements there.