IASB decides not to change annual cohort requirement for mutualised contracts

The IASB continued its re-deliberations on the Exposure Draft Amendments to IFRS 17 (the ED) issued in June 2019. At its meeting on 25 February 2020, the IASB tentatively decided to:

1. Retain unchanged the annual cohort requirement in IFRS 17 for all types of contracts, including contracts with intergenerational sharing of risks between policyholders (mutualised contracts)

2. For insurance contracts without direct participation features, confirm the revised investment-return service proposals included in the ED and require that an entity should include costs related to investment activities as cash flows within the contract boundary if it performs investment activities to enhance benefits from insurance coverage for the policyholder (even if the contract does not provide an investment return service)

3. Extend the risk mitigation option under the Variable Fee Approach (VFA) to permit an entity to apply the option when it mitigates the effects of financial risk using non-derivative financial instruments carried at fair value through profit or loss (FVPL)

4. Amend Paragraph B66(f) to clarify that applying Paragraph B65(m) an entity should include in fulfilment cash flows income tax amounts that are specifically chargeable to the policyholder

5. Add three further specific transition modifications and reliefs that should be provided for when an entity cannot apply the full retrospective approach

The Board will decide on the effective date of IFRS 17, and any extension of the temporary exemption from IFRS 9 for qualifying insurers, at its March 2020 meeting when it will also review the complete package of proposed amendments to IFRS 17.

How we see it

·  The Standard now requires entities to include, in the measurement of insurance contracts, costs related to investment activities to the extent the entity performs such activities to enhance benefits from insurance coverage for the policyholder. Determining whether, and to what extent, an activity enhances policyholder benefits adds further judgement to IFRS 17. This could impact on the comparability of information between insurers.

·  Some stakeholders will be very disappointed by the fact that the IASB decided to maintain the annual cohort requirement for mutualised contracts.

· The decision to extend the risk mitigation option for VFA contracts to instances where an entity holds non-derivative financial instruments measured at FVPL to mitigate financial risks will be welcomed by preparers. This decision addresses, to some extent, the concerns raised about the way changes in the measurement of cash flows that do not vary based on returns from underlying items adjust the CSM of VFA contracts (whereas corresponding changes in assets are recognised immediately in the income statement).

Look out for our February 2020 Insurance Accounting Alert for further details of the insurance contracts discussions at the January IASB meeting