IFRS 17 updates

Yesterday the IASB Interpretations Committee decided to issue a tentative agenda decision focusing on the treatment of insurance premiums paid to intermediaries under IFRS 17 and IFRS 9. I include some details below.

IFRS Interpretations Committee to issue tentative agenda decision on premiums receivable from an intermediary (IFRS 17 and IFRS 9)

• On 14 and 15 March, the IFRS Interpretations Committee (the Committee) discussed two related submissions regarding the application, by an entity that issues insurance contracts, of IFRS 17 Insurance Contracts (IFRS 17) and IFRS 9 Financial Instruments (IFRS 9) to premiums receivable from an intermediary.
• The submissions consider a fact pattern where the policyholder has paid in cash the premiums that are due under an insurance contract to an intermediary. The insurer has not yet received in cash the premiums from the intermediary, but is legally obliged to provide insurance contract services from this point as the policyholder discharged its obligation under the insurance contract.
• In this scenario, the submissions ask whether, at the point the policyholder pays the premium to the intermediary, an insurer should remove the premiums receivable from measurement under IFRS 17 and recognise a separate financial asset under IFRS 9.
• The Committee agreed to publish a tentative agenda decision (TAD) for public comment that sets out the applicable requirements in IFRS 17 and IFRS 9, which it considers could accommodate two views with regard to the fact pattern in the submissions.

Background

The Committee is the interpretative body of the International Accounting Standards Board (IASB or the Board). It works with the Board in supporting application of IFRS standards and responds to questions about the application of standards. ?

Submissions

The submissions, available on the Committee’s website, seek the views of the Committee regarding the application of IFRS 17 and IFRS 9 to premiums receivable by an insurer from an intermediary in the fact pattern outlined above.

?The submissions present two possible views, which are presented in the TAD, as follows:

?View 1

The insurer determines that the premiums receivable from the intermediary are future cash flows within the boundary of an insurance contract. When the policyholder pays the premiums to the intermediary, the insurer continues to treat the premiums receivable from the intermediary as future cash flows within the boundary of an insurance contract and, applying IFRS 17, by including them in the measurement of a group of insurance contracts until recovered in cash.

When applying View 1 to a group of contracts to which the insurer applies the premium allocation approach, the insurer increases the liability for remaining coverage in IFRS 17 only when the premiums are recovered in cash.

?View 2

The insurer considers the right to receive premiums from the policyholder to be settled by the right to receive premiums from the intermediary and determines that the premiums receivable from the intermediary are not future cash flows within the boundary of an insurance contract but rather a separate financial asset. When the policyholder pays the premiums to the intermediary, the insurer removes the premiums from the measurement of a group of insurance contracts and, applying IFRS 9, recognises a separate financial asset.

?When applying View 2 to a group of contracts to which the insurer applies the premium allocation approach, the insurer increases the liability for remaining coverage in IFRS 17 when the policyholder pays the premiums to the intermediary and recognises a separate financial asset applying IFRS 9.

Staff analysis

The IASB staff analysis, revised after an initial discussion to consider the application of judgment in deciding between the two views, discussed by the Committee is outlined below:?

?Future cash flows within the boundary of an insurance contract under IFRS 17

The measurement of a group of insurance contracts includes all future cash flows within the boundary of the contracts in the group. IFRS 17 states these include premiums from a policyholder and it does not make a distinction between premiums that are to be collected directly or through an intermediary. In applying IFRS 17, the insurer therefore includes in the measurement of a group of insurance contracts the estimate of future premiums from a policyholder to be collected through an intermediary. Therefore, at inception of a contract, the starting point for these expected cash flows is IFRS 17. ?

?Removing cash flows from the measurement of a group of insurance contracts

In the fact pattern described in the submissions, the insurer has not recovered the premiums in cash. The staff observed that IFRS 17 is silent on when cash flows are removed from the measurement of a group of insurance contracts under IFRS 17.

?The staff therefore proposed that in accounting for premiums receivable from an intermediary when payment by the policyholder discharges the policyholder’s obligation under the insurance contract, an insurer should apply judgement to determine whether the right to receive premiums from the intermediary is a substantive right that gives rise to cash flows that are within the boundary of an insurance contract.

Information about credit risk

Considering both View 1 and View 2 as possible outcomes, the implications of both views for information about credit risk were discussed.

?The staff noted that IFRS 17 and IFRS 9 deal differently with expected credit losses from an intermediary. Regardless of which of the two views an insurer applies, the insurer would be required to apply all the applicable requirements in either IFRS 17 (including the required disclosure of information about credit risk that arises from contracts within the scope of IFRS 17) or IFRS 9 (and the requirements in IFRS 7 Financial Instruments: Disclosures) to the premiums receivable from an intermediary.

?Conclusion

The staff proposed in the TAD that, subject to an insurer’s judgement about whether premiums receivable from an intermediary is a substantive right that gives rise to cash flows that are within the boundary of an insurance contract, the requirements in IFRS 17 and IFRS 9 could accommodate both View 1 and View 2 and, therefore, result in an insurer recognising premiums receivable from an intermediary applying either IFRS 17 or IFRS 9.?

Furthermore, an insurer needs to determine whether this is a significant judgement that requires disclosure under IAS 1 Presentation of Financial Statements.

The staff recommended not to add a standard-setting project to the work plan, also considering that any such project would involve assessing whether any changes to the Standards have unintended consequences.

?Observations from the meeting

Some Committee members expressed a strong preference for View 1, and believed that IFRS 17 should apply until the insurer has received the premium payment in cash from the intermediary. Some also referred to the practical and operational challenges that view 2 could create, given the complex nature and scale of insurance intermediaries involved, and the challenges in knowing what premiums have been received by intermediaries.

?Other Committee members had a similarly strong leaning towards View 2, based on the rights and obligations set out in the specific fact pattern, considering the intermediary to be acting on behalf of the insurer in this scenario. The policyholder has settled their obligation to the insurer on making a payment to the intermediary, and the insurer is required to provide services to the policyholder. A separate receivable from an intermediary should be recognised at this point, as the risk is now the risk of intermediary default, and an IFRS 9 receivable should be recognised with the applicable measurement and disclosure requirements.

?Most Committee members agreed that, on balance, they could see merits in both views, or at least could not prohibit either view based on the wording in the standards for the fact pattern described in the submissions. However, a number of Committee members expressed difficulty with the way the notion of judgement was used in the TAD. Following the feedback by the Committee, the staff suggested replacing the reference to judgement in the proposed TAD with an explanation that focuses on the determination of what the standards require. As a consequence, the staff also suggested taking out the reference to the specific disclosure about significant judgement under IAS 1.

?Based on these proposed changes, 10 of the 14 Committee members (1 absent) agreed with the staff analysis and conclusions in the updated TAD.

?The Committee also agreed not to add a standard-setting project to its work plan.

?How we see it:?

• As indicated by the responses to the staff’s outreach to TRG members, this issue can be significant to insurers in many jurisdictions, with different approaches emerging. As such, the Committee addressing this matter will provide clarity on how insurers can apply IFRS 17 and the link with IFRS 9 for the fact pattern included in the submissions.?
• The discussion by the Committee highlights that this would be an important choice to be disclosed by reporting entities as well as a material disclosure on credit risk if there are credit risk concentrations in relation to intermediaries.
• While the proposed interpretation in the TAD looks at the scoping of IFRS 17 and IFRS 9 for a specific fact pattern (i.e., that which is set out in the submissions), it does not consider how the views could be applied to other fact patterns. It is, therefore, important that preparers consider the guidance in the TAD and consider how it would apply to their arrangements with intermediaries.

Next steps:

The Committee intends to publish its tentative agenda decision for public comment, after updating for the proposed adjustments. After considering comments received, the Interpretations Committee will decide at a future meeting, whether to confirm its decision and publish a final agenda decision (subject to the IASB not objecting).

?For further details of the discussion, watch out for our March Insurance Accounting Alert.