18 May 2017, new accounting standards known as IFRS 17 were published. Some of the key aspects of it are referred to in this note. The purpose of the standard is to establish a number of principles in relation the recognition, presentation, measurement and disclosure of Insurance Contracts in IFRS jurisdictions. The introduction of IFRS 17 will have an impact on all insurers who use the IFRS accounting standard.
So when is the IFRS 17 effective?
IFRS 17 replaces the IFRS 4 Insurance Contracts standard and is effective on or after 1 January 2021. However, there is nothing to stop companies implementing it earlier if they also apply:
- IFRS 9- Financial Instruments; and
- IFRS 15- Revenue from Contracts with Customers.
What is the scope of IFRS 17?
A company can apply IFRS 17 to the following contracts:
- Insurance Contracts, including reinsurance contracts it issues;
- Reinsurance contracts it holds; and
- Investment contracts with discretionary participation features it issues, provided that the entity also issues insurance contracts.
- IFRS 17 requires an entity to measure insurance contracts by using updated estimates and assumptions that reflect the timing of cash flows and any uncertainty in relation to insurance contracts. The key is transparent reporting.
- Companies are now required to recognise profits as they deliver insurance services as opposed to when they receive premiums. Companies also need to provide information about insurance contract profits that they expect to recognise in the future. The aim is to provide metric that can be used to evaluate insurers’ performance and any changes in their performance over time.
Requirements under IFRS 17
There are various requirements that are stipulated by the IFRS 17, some of these are detailed below.
Level of Aggregation
There is a requirement for entities to identify portfolios of insurance contacts, these are essentially contracts that are subject to similar risks and managed together. Each portfolio of insurance contracts issued should be divided into a minimum of three groups along the following lines:
- A group of contracts that are onerous at initial recognition, if any;
- A group of contracts that at initial recognition have no significant possibility of becoming onerous subsequently, if any; and
- A group of the remaining contracts in the portfolio, if any.
There are restrictions insofar as the entity is not permitted to include insurance contracts issued more than one year apart in the same group.
Guidance on IFRS 17 outlines that an entity should recognise a group of insurance contracts it issues from the earliest of the following:
- The beginning of the coverage period of the group of contracts;
- The date when the first payment from a policyholder in the group becomes due; and
- For a group of onerous contracts when the group becomes onerous.
Modification of an insurance contract
- The IFRS 17 guidance states that if the terms of an insurance contract are modified, an entity shall “derecognise” the original contract and recognise the modified contract as a new contract if there is a substantive modification, based on meeting any of the specified criteria.
In summary IFRS 17 is a technical document which has come about following a series of consultations, proposals and feedback from the public about accounting standards in Insurance Contracts. The overall aim is to provide consistent international accounting principles for insurance contracts.