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First Impressions: IFRS 17 Insurance Contracts

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First Impressions: IFRS 17 Insurance Contracts Insurance Contracts First Impressions: 2020 edition IFRS 17 July 2020 home.kpmg/ifrs ContentsContents Counting down to transition 1 11 Onerous contracts 90 11.1 Initial recognition 90 1 IFRS 17 at a glance 2 11.2 Subsequent measurement 91 1.1 Key facts 2 1.2 Key impacts 4 12 Derecognition and contract modifications 93 12.1 Derecognition 93 2 Overview 5 12.2 Contract modifications 94 3 When to apply IFRS 17 6 13 Presentation 96 3.1 Scope 6 13.1 Statement of financial position 96 3.2 Separating components from an insurance 13.2 Statement(s) of financial performance 97 contract 20 14 Premium allocation approach 115 4 Initial recognition 27 14.1 A simplified model 115 4.1 When to recognise a group of contracts 27 14.2 Eligibility 116 4.2 Insurance acquisition cash flows 28 14.3 Liability for remaining coverage 119 5 The general measurement model – Overview 30 14.4 Liability for incurred claims 127 5.1 Introducing the model 30 15 Direct participating contracts 130 5.2 Initial measurement 31 15.1 Understanding participation features 130 5.3 Subsequent measurement 33 15.2 What are direct participating contracts? 131 5.4 Modifications to the general measurement model 34 15.3 Subsequent measurement 136 6 Level of aggregation 35 16 Investment contracts with DPFs 147 6.1 Aggregating contracts into groups 35 16.1 Modifications to the general measurement model 147 6.2 Identifying portfolios 36 6.3 Grouping onerous contracts 37 17 Reinsurance contracts held 150 6.4 Grouping contracts that have no significant 17.1 What is a reinsurance contract? 150 possibility of becoming onerous subsequently 38 17.2 Modifications to the general measurement model 150 6.5 Regulatory constraints 39 17.3 Recognition 151 6.6 Further disaggregation 40 17.4 Estimating expected cash flows 153 6.7 Level of aggregation used for estimation 43 17.5 Risk adjustment for non-financial risk 153 17.6 CSM on initial recognition 153 7 Expected cash flows 44 17.7 CSM subsequent to initial recognition 158 7.1 Estimating expected cash flows 44 17.8 Subsequent measurement of loss recovery 7.2 Incorporating different possible outcomes 45 components 160 7.3 Cash flows that are included in the estimates 47 17.9 Presentation of reinsurance contracts held 160 7.4 Information used to make the estimates 56 7.5 Using estimates of expected cash flows in 18 Insurance contracts acquired 162 measurement 63 18.1 Acquired insurance contracts 162 8 Discounting 64 19 Disclosures 167 8.1 Adjusting for the time value of money 64 19.1 The general disclosure objective 167 8.2 Determining the discount rate 65 19.2 Level at which to disclose information 167 8.3 Estimation techniques 66 19.3 Disclosures about recognised amounts 168 8.4 Using discount rates in measurement 71 19.4 Disclosures about significant judgements 173 8.5 Presentation of insurance finance income or 19.5 Disclosures about risks 174 expense 72 20 Effective date and transition 175 9 Risk adjustment 73 20.1 Effective date 175 9.1 Adjusting for non-financial risk 73 20.2 Transition to IFRS 17 176 9.2 Entity’s perspective 74 20.3 Transition disclosures 194 9.3 Estimation techniques 76 20.4 Redesignation of financial assets 194 9.4 Using a risk adjustment for non-financial risk in 20.5 Comparative financial information 195 measurement 78 20.6 First-time adopters of IFRS 196 10 Contractual service margin 79 About this publication 197 10.1 Initial recognition 79 Keeping in touch 198 10.2 Subsequent measurement 79 Counting down to transition Embracing change – Seizing opportunity Among the new and updated requirements in the revised version of IFRS 17 Insurance Contracts is the new effective date of 1 January 2023. For many, there is still a lot of work to do. Implementing a major new standard inevitably presents challenges. For insurers, there is the substantial effort of installing and testing new or upgraded systems, processes and controls, and co-ordinating between functions such as finance, actuarial and information technology. For investors and other users of the financial statements, there is the need to understand what is going to change and how it will change. But there are also opportunities. A change of this magnitude is a chance to develop a fresh perspective – to gain new insights from data and how it’s reported and for insurers to enhance the efficiency of their processes. IFRS 17 brings new levels of transparency, giving users more insight into an insurer’s financial health than ever before. Investors will be able to draw on more information on the profitability of new and in-force business: the separate presentation of underwriting and financial results will provide added transparency about sources of profits and quality of earnings. The new standard will drive greater consistency globally, allowing for increased comparability between insurers. With IFRS 17, the temporary exemption from IFRS 9 Financial Instruments will soon expire for insurers. The implementation of IFRS 9 will allow insurers’ investment activities to be compared with other entities’ once again. This First Impressions: 2020 edition provides an overview of the revised standard and how it may affect insurers’ financial statements. The indicates areas that have been amended in the revised version of IFRS 17. We hope it will help you to meet the challenges of implementing this complex standard, and to understand where some potential opportunities might lie to ensure that you and your business will be well prepared for 2023. Joachim Kölschbach Mary Trussell Hagit Keren Chris Spall KPMG’s global IFRS insurance contracts leadership team KPMG International Standards Group © 2020 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 2 | First Impressions: IFRS 17 Insurance Contracts 1 IFRS 17 at a glance IFRS 17 introduces a new measurement model for insurance contracts and becomes effective in 2023. 1.1 Key facts Topic Scope – Similar to IFRS 4 Insurance Contracts with some new requirements, including as to the border with financial instruments accounting The general – On initial recognition, the liability of a group of insurance measurement contracts is made up of the following components. model – Initial - The fulfilment cash flows, which represent the risk-adjusted recognition present value of the entity’s rights and obligations to the policyholders, comprising: – estimates of expected cash flows; – discounting; and – a risk adjustment for non-financial risk. - The contractual service margin (CSM), which represents the unearned profit that the entity will recognise as it provides services over the coverage period. - The CSM includes the effects of cash flows occurring on the date of recognition and the effects of derecognising any assets or liabilities previously recognised before the group of contracts was recognised – e.g. asset for insurance acquisition cash flows paid. – When the above results in a net outflow on initial recognition, the total net outflow is recognised as an immediate loss. The general – Subsequent to initial recognition, the liability of a group of measurement insurance contracts comprises the liability for remaining model – coverage (fulfilment cash flows for future services – e.g. Subsequent insured events that have not occurred – and the CSM) and the measurement liability for incurred claims (fulfilment cash flows for claims and expenses already incurred but not yet paid). – The fulfilment cash flows are remeasured at each reporting date to reflect current estimates. Generally, the changes in the fulfilment cash flows are treated in a number of ways: - changes in the effect of the time value of money and financial risk are reflected in the statement of financial performance; - changes related to past and current service are recognised in profit or loss; and - changes related to future service adjust the CSM. © 2020 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 1 IFRS 17 at a glance 3 1.1 Key facts Topic A simplified – When certain criteria are met, a simplified approach – the approach and premium allocation approach (PAA) – may be used. modifications – The general measurement model is modified when it is to the general applied to: measurement model - reinsurance contracts held; - direct participating contracts; and - investment contracts with discretionary participation features (DPFs). Presentation – Insurance revenue is derived from the changes in the liability requirements for remaining coverage for each reporting period that relate to services for which the entity expects to receive consideration. – Investment components and refunds of premiums are excluded from insurance revenue and insurance service expenses. – The insurance service result is presented separately from insurance finance income or expense. – Entities can choose to disaggregate insurance finance income or expense between profit or loss and other comprehensive income (OCI). Effective date – Accounting periods beginning on or after 1 January 2023 – Early adoption is permitted if IFRS 9 is also applied at the date of adoption or earlier. Transition – Full retrospective application is required to restate prior-year comparatives and to determine the CSM at transition – however, if it is impracticable, then a modified retrospective approach and a fair value approach are available. – There is a limited ability to redesignate some financial assets on initial application of IFRS 17. © 2020 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 4 | First Impressions: IFRS 17 Insurance Contracts 1.2 Key impacts New perspectives for analysts and users. IFRS 17 will change the way analysts interpret and compare companies. Greater global comparability and increased transparency will give users more insight into an insurer’s financial health. Volatility in financial results and equity. The effect of using current market discount rates will vary, but it is likely to be significant, resulting in greater volatility in financial results and equity.
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