2. Presentation in Financial Statement
3. Impact on Insurers (Life and General)
REMEASURE CONTRACTS AFTER SUBSEQUENT PERIOD
1. After insurers measures the contracts using the BBA approach, IFRS 17 stipulates a remeasurement of the insurance contract given all newly available information.
2. Changes in the carrying amount or estimates of the respective blocks are to be recognized in either the P/L or the statement of Other Comprehensive Income (OCI).
3. Changes in the estimates of future cash flows or the risk adjustment are recognized according to the outcome of the changing underlying assumptions. If it is favorable, the carrying amount of the contractual service margin (CSM) is increased since the unearned profits increase. If there is an unfavorable outcome, then the CSM is decreased.
4. The changes will have a zero net effect on the total carrying amount of the liability. However, the CSM can only be decreased with the previously reported CSM. Any excess will have to be entered immediately as a loss in the P/L.
PRESENTING IN FINANCIAL STATEMENTS
1. The presentation of the financial statements includes the reporting of the (re)measured carrying amounts of the insurance contract liabilities on the balance sheet. The presentation comprises the reporting of the P/L and OCI statement.
2. The IFRS 17 standard intends to ensure that the presented financial result is consistent for both insurers and non-insurance entitiesby recognizing revenues and expenses as earned or incurred, rather than received and paid.
3. The Standard requires recognition of the unwind of the time value expected over the reporting period as an interest expense on insurance liabilities in line with other liability contracts and offsetting the investment income on the assets.
4. The changes in the expected (future) time value due to changing discount curves are recognized in the OCI statement comparable to the Fair Value Through OCI (FVTOCI) option for debt instruments under IFRS 9. The proposal for reporting the financial result incorporating these aspects, is laid down in the ‘earned premium approach’ (EPA).
1. Entries in the statement of total comprehensive income for insurance contracts are made as part of the underwriting result, the investment result and the OCI.
2. Underwriting results (Insurance contract revenue) - The insurance contract revenue is allocated to each reporting period in proportion to the reduction of the liability. The premium income is not captured explicitly as revenue on ‘day one’ given that upon the receipt, the full insurance coverage has not yet been provided. The insurance contract revenue reported in a given period is computed as follow:
3. Underwriting result (Insurance contract expenses) - The insurance contract expenses comprise both the expenses incurred while providing insurance coverage as well as losses realized on new or existing insurance contracts. The insurance contract expense reported in a given period is calculated as follow:
4. Investment result (Interest expenses) - Two types of interest expenses (Ins liability and CSM) on the insurance liability are included in the investment result entry offsetting the investment income on the assets. The total insurance contract interest expense is calculated as follow:
5. Other comprehensive income (Discount curve changes) - The changes in the time value of money for future cash flows due to changes in the discount curve is presented in the OCI section of the P/L statement. The solution avoids market interest rate volatility impacting the entity’s profit or loss as the time value will unwind over the life of the contract if held to maturity. The change in the total OCI because of the changes in the discount is determined from the difference between the following:
IMPACT
1. This new requirement reduces insurer's reported capital base and liquidity issues. Capital strain from writing new business will reduce. Liabilities are determined on a "current best-estimate" basis taking into account all eligible expected future cash flows. During POS, the profit margin is priced into contract will be reflected by CSM after accounting for contract's risk.
2. Capital strains such as overhead expenses (product dev, training costs) cannot be reflected in the insurance contract liability and need to be expensed as incurred. The CSM while deferring directly attributable expenses also defers recognition of profits creating cash strain. IASB's survey indicated that capital strain would be highest for insurers with large agency networks.
3. Product strategies may make changes to influence the accounting classification from insurance to investment. If unit-linked contracts are classified as insurance contracts rather than investment, the timing of profit recognition can be brought forward. Life insurers may use the "variable fee for service" model for direct participating contracts for smoother profits. Changes will be made to adjust cash flows to either shorten or extend scope of cash flows included within the "contract boundary" of current best estimate to affect the the timing of profit or CSM when new business is sold.
4. IFRS 17 will expose weak balance sheets as liabilities value including cost of options and guarantees are more transparent on current best-estimate basis.
5. IFRS 17's new measurement of the insurance contract liabilities will change asset allocation matching asset and liabilities according to cash flow behavior and duration. Emerging markets have a "duration gap" due to insufficient long duration assets to match long term liabilities increasing volatility.
6. It is important to consider how the presentation of hedging instruments under IFRS 9 coresponding to changes in insurance contract liabilities. Insurers will need to align between presentation of liability movements under IFRS 17 and asset movements under IFRS 9 to minimise effect of interest rate volatility on insurance profits.
IMPACT ON GENERAL INSURERS
1. General insurers writing multi-year contracts with greater variability in expected future cash flows are expected to be required to use the BBA throughout a contract’s life cycle.
2. those who write contracts which are eligible for the PAA may choose to use the BBA instead to seek consistency with discounted cash flow measures used elsewhere or to provide richer financial information and insights.
3. A simplified model is available for pre-claims coverage on short duration contracts but the standard model (based on discounted cash flows) is required to be applied to all incurred claims and is more likely to be required for all aspects of more complex longer duration contracts (for instance Engineering, Construction and D&O contracts).
4. Decisions around whether the PAA option would be utilised when available should be considered. It is possible that operational, communication or consistency concerns may undermine the perceived benefits of its simplicity resulting in wider scale use of the BBA than initially anticipated.
