IFRS 17 Insurance Contracts - Worth the Wait or Wait and See?

Submitted by Cynthia Braman on Thu, 06/01/2017 - 4:38pm

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By Bruce Darling, FSA, MAAA and Booke Instructor

Time passingThe International Accounting Standards Board (IASB) finally met a (self-imposed) deadline by issuing IFRS 17 Insurance Contracts May 18, 2017, ending a decade and a half of deliberations, debate, false starts and divergence rather than convergence with U.S. GAAP in the process of establishing international accounting principles for insurance contracts.

This statement will apply to insurance contracts issued by companies reporting under International Financial Reporting Standards, which includes companies in the European Union and many other parts of the globe, including Canada.  U.S. companies reporting upstream to parents who report under IFRS also will be affected by this guidance.

As previously announced, the effective date will be for financial statements issued following January 1, 2021, allowing more than 3 years for a potentially intensive implementation phase. Early adoption is permitted if the company has also adopted both IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers. The guidance will apply retrospectively, meaning that companies will also have to prepare earlier comparative years’ financial information under the new standard, with the earliest balance sheet reported anchoring the new measurement scheme.  Thankfully, the standard provides some flexibility in establishing that balance sheet.

The contents of the standard are pretty much as expected by those following Board discussions and tentative decisions, not to mention the extensive documentation of research and assessments by IASB staff.  Nonetheless, despite the long buildup, the new IFRS standard is almost audaciously fresh in its perspective on insurance accounting and financial reporting. For the “Building Block Approach” applying to long-duration contracts (primarily life insurance), this is especially so –

  • The basic contract liability will be the Fulfillment Cash Flows consisting of probability-weighted present values of cash outflows less inflows under multiple scenarios using current assumptions and a discount rate that is appropriate to the risk profile of the liabilities, not the asset portfolio.
  • Additional liabilities are required for incurred claims and any unearned profit arising from past cash flows – split into a so-called Risk Adjustment representing a reward for taking on uncertainty of outcomes, and a residual Contractual Service Margin.
  • By the way, any account balances, embedded derivatives, and service elements are carved out and accounted for under other IFRS standards such as IFRS 9 and IFRS 15.
  • Insurance Contract Revenue is defined not as premium, but as the amount needed in each reporting period to provide for expected benefits and expenses (excluding deposits and investment elements), along with an orderly release of unearned profit from the changes in the Risk Adjustment and Contractual Service Margin.
  • The income statement will report revenue, expense and contribution to profits separately for underwriting operations and financing (i.e., interest spread). Optionally, effects of changes in liability discount rates can be pushed into other comprehensive income, providing an opportunity to match such changes with changes in fair value of invested assets also due to interest rate changes.

Companies writing short-duration insurance contracts (primarily P&C insurance) get a bye past some of the more intense provisions via a simplified “Premium Allocation Approach.”  For many, the resulting liability will be traditional unearned premium minus unamortized acquisition costs, revenue will be traditional earned premium and claim liabilities will be undiscounted – unless the term of insurance is greater than a year or the claim lag extends more than a year, in either case triggering discounting of that particular liability.

Additional guidance is provided for reinsurance, participating contracts, modifications of insurance contracts, levels of aggregation, onerous contracts (loss recognition) and presentation and disclosure.

Those who need to know more should attend the Booke seminar on International Financial Reporting Standards for Insurance Companies, next offered in 2018.  This course addresses both current and impending standards affecting insurance company financial statements under IFRS.

Also, watch for a new Booke webinar focusing in more depth on IFRS 17, coming a little later this year.

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