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IFRS 17 Insurance Contracts May 2017 IFRS® Standards IFRS 17 Insurance Contracts IFRS 17 Insurance Contracts IFRS 17 Insurance Contracts together with its accompanying documents is issued by the International Accounting Standards Board (the Board). Disclaimer: To the extent permitted by applicable law, the Board and the IFRS Foundation (the Foundation) expressly disclaim all liability howsoever arising from this publication or any translation thereof whether in contract, tort or otherwise to any person in respect of any claims or losses of any nature including direct, indirect, incidental or consequential loss, punitive damages, penalties or costs. Information contained in this publication does not constitute advice and should not be substituted for the services of an appropriately qualified professional. ISBN for this part: 978-1-911040-55-2 ISBN for complete publication (three parts): 978-1-911040-54-5 Copyright © 2017 IFRS Foundation All rights reserved. Reproduction and use rights are strictly limited. Please contact the Foundation for further details at [email protected]. Copies of IASB® publications may be obtained from the Foundation’s Publications Department. Please address publication and copyright matters to [email protected] or visit our webshop at http://shop.ifrs.org. The Foundation has trade marks registered around the world (Marks) including ‘IAS®’, ‘IASB®’, ‘IFRIC®’, ‘IFRS®’, the IFRS® logo, ‘IFRS for SMEs®’, IFRS for SMEs® logo, the ‘Hexagon Device’, ‘International Accounting Standards®’, ‘International Financial Reporting Standards®’, ‘NIIF®’ and ‘SIC®’. Further details of the Foundation’s Marks are available from the Foundation on request. The Foundation is a not-for-profit corporation under the General Corporation Law of the State of Delaware, USA and operates in England and Wales as an overseas company (Company number: FC023235) with its principal office at 30 Cannon Street, London EC4M 6XH. IFRS STANDARDS CONTENTS from paragraph IFRS 17 INSURANCE CONTRACTS INTRODUCTION OBJECTIVE 1 SCOPE 3 Combination of insurance contracts 9 Separating components from an insurance contract 10 LEVEL OF AGGREGATION OF INSURANCE CONTRACTS 14 RECOGNITION 25 MEASUREMENT 29 Measurement on initial recognition 32 Estimates of future cash flows 33 Discount rates 36 Risk adjustment for non-financial risk 37 Contractual service margin 38 Subsequent measurement 40 Contractual service margin 43 Onerous contracts 47 Premium allocation approach 53 Reinsurance contracts held 60 Recognition 62 Measurement 63 Premium allocation approach for reinsurance contracts held 69 Investment contracts with discretionary participation features 71 MODIFICATION AND DERECOGNITION 72 Modification of an insurance contract 72 Derecognition 74 PRESENTATION IN THE STATEMENT OF FINANCIAL POSITION 78 RECOGNITION AND PRESENTATION IN THE STATEMENT(S) OF FINANCIAL PERFORMANCE 80 Insurance service result 83 Insurance finance income or expenses 87 DISCLOSURE 93 Explanation of recognised amounts 97 Insurance finance income or expenses 110 Transition amounts 114 Significant judgements in applying IFRS 17 117 Nature and extent of risks that arise from contracts within the scope of IFRS 17 121 All types of risk—concentrations of risk 127 Insurance and market risks—sensitivity analysis 128 3 ஽ IFRS Foundation IFRS 17 INSURANCE CONTRACTS—MAY 2017 Insurance risk—claims development 130 Credit risk—other information 131 Liquidity risk—other information 132 APPENDICES A Defined terms B Application guidance C Effective date and transition D Amendments to other IFRS Standards APPROVAL BY THE BOARD OF IFRS 17 INSURANCE CONTRACTS BASIS FOR CONCLUSIONS (see separate booklet) ILLUSTRATIVE EXAMPLES (see separate booklet) ஽ IFRS Foundation 4 IFRS STANDARDS IFRS 17 Insurance Contracts is set out in paragraphs 1–132 and appendices A–D. All the paragraphs have equal authority. Paragraphs in bold type state the main principles. Terms defined in Appendix A are in italics the first time that they appear in the Standard. Definitions of other terms are given in the Glossary for IFRS Standards. The Standard should be read in the context of its objective and the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance. 5 ஽ IFRS Foundation IFRS 17 INSURANCE CONTRACTS—MAY 2017 Introduction Overview IN1 IFRS 17 Insurance Contracts establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued. It also requires similar principles to be applied to reinsurance contracts held and investment contracts with discretionary participation features issued. The objective is to ensure that entities provide relevant information in a way that faithfully represents those contracts. This information gives a basis for users of financial statements to assess the effect that contracts within the scope of IFRS 17 have on the financial position, financial performance and cash flows of an entity. IN2 IFRS 17 is effective for annual periods beginning on or after 1 January 2021. Earlier application is permitted. IN3 IFRS 17 supersedes IFRS 4 Insurance Contracts. Reasons for issuing the Standard IN4 The previous IFRS Standard on insurance contracts, IFRS 4, was an interim standard that allowed entities to use a wide variety of accounting practices for insurance contracts, reflecting national accounting requirements and variations of those requirements. The differences in accounting treatment across jurisdictions and products made it difficult for investors and analysts to understand and compare insurers’ results. Most stakeholders, including insurers, agreed on the need for a common global insurance accounting standard even though opinions varied as to what it should be. Long-term and complex insurance risks are difficult to reflect in the measurement of insurance contracts. In addition, insurance contracts are not typically traded in markets and may include a significant investment component, posing further measurement challenges. Some previous insurance accounting practices permitted under IFRS 4 did not adequately reflect the true underlying financial positions or the financial performance of these insurance contracts. To address these issues, the International Accounting Standards Board (the Board) undertook a project to make insurers’ financial statements more useful and insurance accounting practices consistent across jurisdictions. Main features IN5 IFRS 17 reflects the Board’s view that an insurance contract combines features of both a financial instrument and a service contract. In addition, many insurance contracts generate cash flows with substantial variability over a long period. To provide useful information about these features, the Board developed an approach that: ஽ IFRS Foundation 6 IFRS STANDARDS (a) combines current measurement of the future cash flows with the recognition of profit over the period services are provided under the contract; (b) presents insurance service results (including presentation of insurance revenue) separately from insurance finance income or expenses; and (c) requires an entity to make an accounting policy choice portfolio-by-portfolio of whether to recognise all insurance finance income or expenses for the reporting period in profit or loss or to recognise some of that income or expenses in other comprehensive income. IN6 The key principles in IFRS 17 are that an entity: (a) identifies as insurance contracts those contracts under which the entity accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. (b) separates specified embedded derivatives, distinct investment components and distinct performance obligations from the insurance contracts. (c) divides the contracts into groups it will recognise and measure. (d) recognises and measures groups of insurance contracts at: (i) a risk-adjusted present value of the future cash flows (the fulfilment cash flows) that incorporates all of the available information about the fulfilment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset) (ii) an amount representing the unearned profit in the group of contracts (the contractual service margin). (e) recognises the profit from a group of insurance contracts over the period the entity provides insurance coverage, and as the entity is released from risk. If a group of contracts is or becomes loss-making, an entity recognises the loss immediately. (f) presents separately insurance revenue, insurance service expenses and insurance finance income or expenses. (g) discloses information to enable users of financial statements to assess the effect that contracts within the scope of IFRS 17 have on the financial position, financial performance and cash flows of an entity. To do this, an entity discloses qualitative and quantitative information about: (i) the amounts recognised in its financial statements from insurance contracts; (ii) the significant judgements, and changes in those judgements, made when applying the Standard; and (iii) the nature and extent of the risks from contracts within the scope of this Standard. 7 ஽ IFRS Foundation IFRS 17 INSURANCE CONTRACTS—MAY 2017
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