IFRS 17 Insurance Contracts: ICAEW’s correspondence with the IASB
ICAEW’s Insurance Committee has longstanding engagement with technical issues relating to the implementation of IFRS 17, which was originally scheduled for 1 January 2021. We are publishing a series of seven letters written to the IASB on particular points to assist in deliberating possible amendments to the new standard.
Please note: The IASB has not reviewed these papers for accuracy and they do not necessarily agree with the committee’s characterisation of the issues.
Membership of the ICAEW's Insurance committee includes experts from the insurance industry and accounting firms. Committee discussions provide a constructive examination of technical difficulties from different points of views. This makes finding solutions acceptable for most stakeholders somewhat more achievable. The papers below represent the collective thinking of the committee.
1. Coverage period and contractual service margin (CSM) release for deferred annuities
UK insurers underwrite significant volumes of annuity contracts with fixed benefits. Deferred annuities acquired under a pension ‘buy-in’ or ‘buy-out’ (collectively known as
bulk annuity contracts) will be measured under the general measurement model (GMM) under IFRS 17.
The contractual service margin (CSM) for contracts measured under the GMM is recognised over the period during which the entity provides coverage for insured events.
Applying these principles to bulk annuities might result in ‘back-end’ revenue recognition because the CSM could only be released during the payment period of a bulk annuity contract.
2. Accounting for annuities that have vested from with-profits contracts under IFRS 17
It is common for UK with-profits savings contracts to contain a guaranteed annuity option (GAO) that gives the policyholder the option to take out an annuity at a guaranteed rate. On retirement, the policyholder can buy an annuity from any provider but will have a financial incentive to stay with the existing insurer if the guaranteed rate is higher than current market rates. Insurers will have to consider several factors when accounting for these annuities.
3. Deferred annuities and investment components paper
Under a bulk annuity contract the obligations to pay future pension benefits to members of defined benefit pension schemes are transferred from the pension scheme to the insurer. The liabilities assumed typically include obligations to pay future pension benefits to deferred members after they have reached retirement age.
NOTE: This paper refers specifically to the January 2019 CSM allocation paper, which has been superseded by subsequent discussions. The IASB Board decision in May 2019 on when an investment return service may exist is also relevant to the ‘operational complexity’ consideration expressing a concern that the amendment would require entities to revisit analysis and decisions already made about revenue recognition.
4. Non-Profit Business in a With-Profit Fund
This paper considers the treatment under IFRS 17 of non-profit business written in a UK-style participating (with-profits) fund.
5. Equity release mortgages (ERMs)
Subsequent to this paper the IASB agreed to propose an amendment to IFRS 17 to introduce an election to apply IFRS 9 in its entirety rather than IFRS 17 to contracts for which the ony insurance risk in the contract is the settlement of some or all of the obligation created by the contract, for example equity release mortgages.
6. Locked-In CSM Discount Rates
The purpose of this paper is to:
- Set out the ICAEW Insurance Committee’s reservations for using locked in discount rates in the Contractual Service Margin (‘CSM’) used by IFRS 17’s general measurement model.
- Explain why we believe this issues requires further consideration over and above the points that made in the December 2018 staff paper.
- Outline a rationale for use of unlocked discount rates in the CSM for use in the general measurement model.
NOTE: The paper refers to a draft European Financial Reporting Advisory Group’s (EFRAG) Technical Expert Group paper on industry issues analysis. We would like to clarify that this paper was a draft. Its purpose was to seek the views of EFRAG TEG on the issues raised by the insurance industry and how these issues shoudl be raised in the draft endorsement advice to be recommended by EFRAG TEG to the EFRAG Board. For further information please see link to the EFRAG webpage including this paper.
7. Reinsurance of variable fee approach (VFA) business
IFRS 17 prohibits the application of the VFA (Variable Fee Approach) to reinsurance contracts held which, in certain circumstances, creates an accounting mismatch between the underlying VFA compliant contracts and the reinsurance held.
NOTE: The IASB Board decision in January 2019 on extending the risk mitigation option to reinsurance contracts held, which the staff think addresses the concern in this paper.