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Applying IFRS 17 a Closer Look at the New Insurance Contracts Standard May 2018

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Applying IFRS 17 a Closer Look at the New Insurance Contracts Standard May 2018 Applying IFRS 17 A closer look at the new Insurance Contracts Standard May 2018 1 Contents Introduction .......................................................................................................... 6 1. Overview of IFRS 17 ........................................................................................ 7 2. Scope and definition ........................................................................................ 9 2.1. Definition of an insurance contract .......................................................... 9 2.2. Reinsurance contracts .......................................................................... 10 2.3. Investment contracts with discretionary participation features ................. 11 2.4. Scope exclusions ................................................................................. 12 2.5. Financial guarantee contracts ............................................................... 13 2.6. Fixed-fee service contracts ................................................................... 13 3. Separating components from an insurance contract and combining insurance contracts ..................................................................................................... 15 3.1. Embedded derivatives .......................................................................... 17 3.2. Investment components ....................................................................... 19 3.3. Goods and non-insurance services ......................................................... 21 3.4. Voluntary separation of components of an insurance contract .................. 23 3.5. Combination of insurance contracts ....................................................... 24 4. Level of aggregation ..................................................................................... 25 4.1. Identifying portfolios ............................................................................ 26 4.2. Grouping contracts at initial recognition according to expected profitability 28 4.3. Cohorts .............................................................................................. 31 5. Initial recognition .......................................................................................... 32 6. Measurement — overview ............................................................................... 34 6.1. Overview of the general model .............................................................. 34 6.2. Modification to the general model .......................................................... 35 6.3. Simplification to the general model ........................................................ 35 7. Estimates of future cash flows ........................................................................ 36 7.1. Contract boundary ............................................................................... 36 7.2. Cash flows within the contract boundary ................................................ 39 7.3. Incorporate all reasonable and supportable information available without undue cost or effort ............................................................................. 41 7.4. Market variables and non-market variables ............................................. 43 7.5. Using current estimates........................................................................ 45 7.6. Explicit cash flows ................................................................................ 46 8. Discount rates .............................................................................................. 47 8.1. Discount rates consistent with characteristics of cash flows ..................... 48 8.2. Current discount rates consistent with observable market prices .............. 49 9. Risk adjustment for non-financial risks ............................................................ 54 10. Contractual service margin ............................................................................ 57 2 A closer look at the new Insurance Contracts standard, May 2018 10.1. Initial recognition ................................................................................. 57 10.2. Subsequent measurement .................................................................... 58 11. Onerous contracts......................................................................................... 65 11.1. Initial recognition ................................................................................. 65 11.2. Subsequent measurement .................................................................... 65 12. Premium allocation approach ......................................................................... 68 12.1. Eligibility for the premium allocation approach ........................................ 69 12.2. Measurement of the liability for remaining coverage ................................ 72 13. Reinsurance contracts held ............................................................................ 76 13.1. Level of aggregation ............................................................................ 77 13.2. Recognition ......................................................................................... 77 13.3. Measurement of reinsurance contracts held at initial recognition .............. 79 13.4. Subsequent measure of reinsurance contracts held ................................. 83 13.5. Premium allocation approach for reinsurance contracts held .................... 87 14. Measurement of contracts with participation features ....................................... 88 14.1. Participating insurance contracts without direct participation features ...... 89 14.2. Contracts with direct participation features ............................................ 91 14.3. Contracts with cash flows that can affect, or be affected by, the cash flows to other contracts ....................................................................... 99 14.4. Investment contracts with discretionary participation features ............... 101 15. Contract modification and derecognition ....................................................... 103 15.1. Modifications of insurance contracts .................................................... 103 15.2. Derecognition of insurance contracts ................................................... 104 15.3. Accounting for derecognition .............................................................. 104 16. Acquisition of insurance contracts ................................................................ 108 16.1. Business combinations ....................................................................... 108 16.2. Portfolio transfers ............................................................................. 111 16.3. Customer lists and relationships not connected to insurance contracts .... 113 17. Presentation ............................................................................................... 114 17.1. Statement of financial position ............................................................ 114 17.2. Statement of financial performance ..................................................... 115 17.3. Insurance revenue ............................................................................. 118 17.4. Insurance service expense .................................................................. 121 17.5. Insurance finance income or expenses ................................................. 122 17.6. Disaggregating insurance finance income or expenses between profit or loss and other comprehensive income .................................................. 123 18. Disclosure .................................................................................................. 130 18.1. Explanation of recognised amounts ..................................................... 130 18.2. Significant judgements in applying IFRS 17 ........................................... 137 18.3. Disclosure about the nature and extent of risks ..................................... 138 3 A closer look at the new Insurance Contracts standard, May 2018 19. Effective date and transition ........................................................................ 140 19.1. Alternative transition approaches ........................................................ 141 19.2. Modified retrospective approach ......................................................... 142 19.3. Fair value approach ........................................................................... 153 19.4. Disclosure relief on transition .............................................................. 154 19.5. Redesignation of financial assets ......................................................... 155 Appendix A: IFRS 17: Defined terms .................................................................... 158 Appendix B: Contacts list.................................................................................... 160 4 A closer look at the new Insurance Contracts standard, May 2018 What you need to know • The IASB issued IFRS 17, a comprehensive new accounting standard for insurance contracts in May 2017. • IFRS 17 will become effective for annual reporting periods beginning on or after 1 January 2021, with early application permitted. • The IFRS 17 model combines a current balance sheet measurement of insurance contracts with recognition of profit over the period that services are provided. • The general model in the standard requires insurance contract liabilities to be measured using probability-weighted current estimates of future
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