News Letter on INSURANCE CONTRACT (iFRS 17)
Background: IFRS 17 is the first truly international IFRS Standard for insurance contracts. IFRS 17 replaces IFRS 4 Insurance Contracts. When introduced in 2004, IFRS 4—an interim Standard—was meant to limit changes to existing insurance accounting practices. Hence, IFRS 4 has allowed insurers to use different accounting policies to measure similar insurance contracts they write in different countries. Some practices currently used by insurance companies have evolved in tandem with circumstances in particular countries; often the practices address only insurance products most prevalent in a country. In many cases, features of the accounting models used by the insurance industry are inconsistent with the IFRS Standards applied by other industries in the same country—limiting comparisons with other industry sectors. IFRS 17 provides consistent principles for all aspects of accounting for insurance contracts. It removes existing inconsistencies and enables investors, analysts and others to meaningfully compare companies, contracts and industries
Scope: An entity should apply IFRS 17 to the following cases: 1. Insurance contracts including reinsurance contracts issues that it issues;2. Reinsurance contract it holds; and 3. Investment contracts with discretionary participation features (DPF) is issues, provided the entity also issues insurance contracts.Some contracts meet the definition of an insurance contract but have their primary purpose the provision of services for a fixed fee. Such issued contracts are in the scope of the Standard, unless an entity chooses to apply to them IFRS 15 Revenue from Contracts with Customers and provided the following conditions are met i) The entity does not reflect an assessment of the risk associated with an individual ii) Customer in setting the price of the contract with that customer; iii) The contract compensates customers by providing a service, rather than by making cash payments to the customer; and d) the insurance risk transferred by the contract arises primarily from the customer’s use of service rather than fromuncertainty over the cost of those services.
Objectives:IFRS 17 Insurance contracts establishes the principles for the recognition, measurement, presentation and disclosure of Insurance contracts within the scope of the Standard. The objective of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts. This information gives a basis for users of financial statements to assess the effect that insurance contracts have on the entity's financial position, financial performance and cash flows.
Level of Aggregation IFRS 17 requires entities to identify portfolios of insurance contracts, which comprises contracts that are subject to similar risks and are managed together. Contracts within a product line would be expected to have similar risks and hence would be expected to be in the same portfolio if managed together:Each portfolio of insurance contracts issues shall be divided into a minimum of: i) A group of contracts that are onerous at initial recognition, if any; ii) A group of contracts that at initial recognition have no significant possibility of becoming onerous, if any; and iii) A group of the remaining contracts in the portfolio, if any. An entity is not permitted to include contracts issued more than one year apart in the same group. If contracts within a portfolio would fall into different groups only because law or regulation specifically constrains the entity's practical ability to set a different price or level of benefits for policyholders with different characteristics, the entity may include those contracts in the same group.
Recognition: An entity have to recognize a group of insurance contracts it issues from the earliest of the following: i) the beginning of the coverage period; ii) the date when the first payment from a policyholder becomes due; and iii) when the group becomes onerous.
Measurement:On initial recognition, an entity shall measure a group of contracts at the total of: A) the amount of fulfilment cash flows (“FCF”), which comprise: i) Estimates of future cash flows; ii) An adjustment to reflect the time value of money (“TVM”) and the financial risks associated with the future cash flows; and iii) A risk adjustment for non-financial risk.B) The contractual service margin (“CSM”).An entity have to include all the cash flows within the boundary of each contract in the group. The entity may estimate the future cash flows at a higher level of aggregation and then allocate the resulting fulfilment cash flows to individual groups of contracts.The estimates of future cash flows shall be current, explicit, unbiased, and reflect all the information available to the entity without undue cost and effort about the amount, timing and uncertainty of those future cash flows. They should reflect the perspective of the entity, provided that the estimates of any relevant market variables are consistent with observable market prices.Presentation An entity shall present separately in the statement of financial position the carrying amount of groups of: i) Insurance contracts issued that are assets; ii) Insurance contracts issued that are liabilities; iii) Reinsurance contracts held that are assets; and iv) Reinsurance contracts held that are liabilities.An entity shall disaggregate the amounts recognized in the statement(s) of financial performance into: a) An insurance service result, comprising insurance revenue and insurance service expenses; and b) Insurance finance income or expenses. Income or expenses from reinsurance contracts held shall be presented separately from the expenses or income from insurance contracts issued
Disclosure An entity shall disclose qualitative and quantitative information about: i) The amounts recognized in its financial statements that arise from insurance contracts; ii) The significant judgments, and changes in those judgments, made when applying IFRS 17; ii) The nature and extent of the risks that arise from insurance contracts. Effective Date IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2021. Earlier application is permitted if both IFRS 15 'Revenue from Contracts with Customers' and IFRS 9 'financial instruments' have also been applied. Conclusion:Apart from then discussion on above there have some others points of discussion also, If something need to know more clearly need, please visits IFRS website.
Source of Information: IFRS Website, IFRS 17
Prepared by:
Md. Mostafa Kamal Consultant, Tokyo Consulting Firm LimitedEmail: mostafa.kamal@tokyoconsultinggroup.com