International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 884
For contracts to which the entity does not apply the premium allocation approach, an
entity should assess whether contracts that are not onerous at initial recognition or have
no significant possibility of becoming onerous: [IFRS 17.19]
Insurance contracts (IFRS 17) 4467
• based on the likelihood of changes in assumptions which, if they occurred, would
result in the contract becoming onerous;
• using information about estimates prepared by the entity’s internal reporting.
Hence, in assessing whether contracts that are not onerous at initial recognition
have no significant possibility of becoming onerous:
• an entity should not disregard information provided by its internal reporting
about the effect of changes in assumptions on different contracts on the
possibility of their becoming onerous; but
• an entity is not required to gather additional information beyond that
provided by the entity’s internal reporting about the effect of changes in
assumptions on different contracts.
The objective of the requirement to identify contracts that are onerous at initial
recognition is to identify contracts that are onerous measured as individual
contracts. An entity typically issues individual contracts and it is the characteristics
of the individual contracts that determine how they should be grouped. However,
the Board concluded this does not mean that the contracts must be measured
individually. If an entity can determine, using reasonable and supportable
information, that a set of contracts will all be in the same group, then the entity can
measure that set to determine whether the contracts are onerous or not, because
there will be no offsetting effects in the measurement of the set. The same principle
applies to the identification of contracts that are not onerous at initial recognition
and that have no significant possibility of becoming onerous subsequently – the
objective is to identify such contracts at an individual contract level, but this
objective can be achieved by assessing a set of contracts if the entity can conclude
using reasonable and supportable information that the contracts in the set will all be
in the same group. [IFRS 17.BC129].
In a paper submitted to the TRG in May 2018, the IASB staff observed that the term
‘no significant possibility’ (of becoming onerous) should be interpreted in the
context of the objective of the requirement. The objective is to identify contracts
with no significant possibility of becoming onerous at initial recognition in order to
group such contracts separately from contracts that are onerous at initial recognition
and any remaining contracts in the portfolio that are not onerous at initial
recognition. ‘No significant possibility of becoming onerous’ is different from
‘significant insurance risk’ and the concept of significant insurance risk should not
be used by analogy.3
4468 Chapter 52
If contracts within a portfolio would fall into different groups only because law or
regulation specifically constrains the entity’s practical ability to set a different price or
level of benefits for policyholders with different characteristics, the entity may include
these contracts in the same group. [IFRS 17.20]. This expedient has been provided because
the Board concluded that it would not provide useful information to group separately
contracts that an entity is required by law or regulation to group together for determining
the pricing or level of benefits. In the Board’s opinion, all market participants will be
constrained in the same way, particularly if such entities are unable to provide insurance
coverage solely on the basis of differences in that characteristic. [IFRS 17.BC132]. However,
the expedient should not be applied by analogy to other items. [IFRS 17.20]. For example, an
entity might set the price for contracts without considering differences in a specific
characteristic because it thinks using that characteristic in pricing may result in a law or
regulation prohibiting its use in the future or because doing so is likely to fulfil a public
policy objective. These practices, sometimes referred to as ‘self-regulatory practices’, do
not qualify for grouping exception caused by regulatory constraints. [IFRS 17.BC133].
An entity is permitted, but not required, to subdivide the above groups into further
groups based on information from its internal reporting, if that information meets
certain criteria. For example, an entity may choose to divide portfolios into more groups
that are not onerous at initial recognition if the entity’s internal reporting provides
information that distinguishes different levels of profitability or different possibilities of
contracts becoming onerous after initial recognition. [IFRS 17.21].
This can be illustrated as follows:
Portfolio X
Portfolio Y
Group B1
Group B2
Group B
No significant
No significant
No significant
Group A
Group C
Group A
Group C
possibility of
possibility of
possibility of
Onerous
All remaining
Onerous
All remaining
becoming
becoming
becoming
onerous
onerous
onerous
Each group (or sub-group) of insurance contracts is measured separately (whether under
the general model discussed at 8 below, the premium allocation approach discussed at 9
below, reinsurance contracts held discussed at 10 below or the variable fee approach
discussed at 11.2 below).
5.2.1 ‘Cohorts’
An entity is prohibited from grouping contracts issued more than one year apart (except
in certain circumstances when grouping insurance contracts on transition using either
the modified retrospective approach or the fair value approach – see 17.3 and 17.4
below, respectively). To achieve this, the entity should, if necessary, further divide the
minimum groups based on profitability. [IFRS 17.22]. One way to divide the groups is to
use an annual period that coincides with an entity’s financial reporting period (e.g.
contracts issued between 1 January and 31 December comprise a group for an entity
with an annual reporting period ending 31 December). This is illustrated below.
Insurance contracts (IFRS 17) 4469
However, IFRS 17 does not require any particular approach and entities are also not
required to use a twelve month period when grouping insurance contracts.
Portfolio A
Portfolio B
...
Portfolio A
Portfolio B
...
Portfolio A
Portfolio B
...
2120
22
No significant possibility No significant possibility No significant possibility
20
of becoming onerous
of becoming onerous
of becoming onerous
2320
Other profitable
Other profitable
Other profitable
Onerous at inception
Onerous at inception
; Onerous at inception
The prohibition on grouping together contracts issued more than one year apart was
included because the Board was concerned that, without it, entities could have
perpetually open portfolios and this could lead to a loss of information about the
development of profitability over time, could result in the contractual service margin
persisting beyond the duration of contracts in the group, and consequently could result
in profits not being recognised in the correct periods. [IFRS 17.BC136].
To measure a group of contracts, an entity may estimate the fulfilment cash flows
(see 8.1 below) at a higher level of aggregation than the group or portfolio provided the
entity is able to include the appropriate fulfilment cash flows in the measurement of the
group by allocating such estimates to groups of contracts. [IFRS 17.24].
5.3
Identifying groups for contracts applying the premium
allocation approach
For a group of insurance contracts to which the premium allocation approach applies
(see 9 below), an entity assesses aggregation of insurance contracts as discussed at 5.2
above except that the entity should assume that no contracts in the portfolio are
onerous at initial recognition unless facts and circumstances indicate otherwise.
[IFRS 17.18].
An entity should assess whether contracts that are not onerous at initial recognition
have no significant possibility of becoming onerous subsequently by assessing the
likelihood of changes in applicable facts and circumstances.
4470 Chapter 52
6 INITIAL
RECOGNITION
An entity should recognise a group of insurance contracts (and reinsurance contracts) it
issues from the earliest of the following: [IFRS 17.25]
• the beginning of the coverage period of the group of contracts;
• the date when the first payment from a policyholder in the group is due; and
• for a group of onerous contracts, when the group becomes onerous.
If there is no contractual due date, the first payment from the policyholder is deemed
to be due when it is received. An entity is required to determine whether any contracts
form a group of onerous contracts before the earlier of the first two dates above (i.e.
before the earlier of the beginning of the coverage period and the date when the first
payment from a policyholder in the group is due) if facts and circumstances indicate
there is such a group. [IFRS 17.26].
In recognising a group of insurance contracts in a reporting period, an entity should
include only those contracts issued by the end of the reporting period. An entity may
issue more contracts in the group after the end of a reporting period (subject to the
constraint that contracts within a group cannot be issued more than a year apart –
see 5.2.1 above). These contracts should be added to the group in the period in which
the contracts are issued. [IFRS 17.28]. For reinsurance contracts issued and held, the group
consists of the reinsurance contracts, not the underlying direct contracts which are
subject to the reinsurance.
This can be illustrated by the following examples.
Example 52.17: Determining the date of recognition of a group of insurance
contracts (1)
An entity issues a group of insurance contracts to policyholders beginning on 25 December 2020. The
coverage period of the group begins on 1 January 2021 and the first premium from a policyholder in the group
is due on 5 January 2021. The group of insurance contracts is not onerous.
The group of insurance contracts is recognised on 1 January 2021 (i.e. the start of the coverage period of the
group) which is earlier than the date that the first premium is due.
Example 52.18: Determining the date of recognition of a group of insurance
contracts (2)
An entity issues a group of insurance contracts to policyholders beginning on 25 December 2021. The
coverage period of the group begins on 1 January 2022 and the first premium from a policyholder in the group
is due on 30 December 2021. The group of insurance contracts is not onerous.
The group of insurance contracts is recognised on 30 December 2021 (i.e. the date that the first premium is
due) which is earlier than the date of the beginning of the coverage period. However, if the entity has a
reporting date of 31 December 2021, only those contracts within the group issued as at the reporting date will
be recognised in the financial statements for the period ending 31 December 2021.
Insurance contracts (IFRS 17) 4471
Example 52.19: Determining the date of recognition of a group of insurance
contracts (3)
An entity issues a group of insurance contracts to policyholders beginning on 25 December 2022. On
25 December 2022 the entity determines that the group of insurance contracts is onerous. The coverage period of
the group begins on 1 January 2023 and the first premium from a policyholder in the group is due on 5 January 2023.
The group of insurance contracts is recognised on 25 December 2022 which is when the group of insurance
contracts is determined to be onerous. However, if the entity has a reporting date of 31 December 2022, only
those contracts within the group that are issued as at the reporting date will be recognised in the financial
statements for the period ending 31 December 2022.
Examples 52.17 to 52.19 above demonstrate how the period of a group of insurance
contracts may differ from year to year depending on whether the group is onerous and
when the first contract premium is due. This is important because contracts issued more
than one year apart cannot be in the same group (see 5.2.1 above). This means that
groups of insurance contracts (which, in substance, contain the same policyholders
being insured for the same risk) may have slightly different coverage periods from year
to year in case of a change in facts and circumstances.
In some cases, an entity will pay or receive insurance acquisition cash flows for
contracts issued or expected to be issued prior to the date of recognition of the group
of insurance contracts to which those insurance acquisition cash flows are attributable
(unless the insurer chooses to recognise these as expenses or income under the
premium allocation approach – see 9.1 below). In these circumstances an insurer should
recognise an asset or a liability for these cash flows (i.e. a prepayment or an accrual).
When the group of insurance contracts to which the insurance acquisition cash flows
are allocated is recognised the prepayment or accrual should be derecognised (because
the insurance acquisition cash flows are now recognised as part of the cash flows of the
group of insurance contracts). [IFRS 17.27]. The original wording in paragraph 27 refers
only to ‘issued’ contracts but, in June 2018, the IASB tentatively agreed to a proposed
narrow scope amendment to add the words ‘expected to be issued’ to correct any
inadvertent consequences of using the word ‘issued’ – see 18 below.
When contracts are added to a group in a subsequent reporting period, this may result
in a change to the determination of the discount rates at the date of initial recognition
as discount rates may be determined using weighted average rates over the period that
contracts in the group are issued (see 8.3 bel
ow). When this happens, an entity should
apply the revised discount rates from the start of the reporting period in which the new
contracts are added to the group. There is no retrospective ‘catch-up’ adjustment.
[IFRS 17.28].
7 MEASUREMENT
–
OVERVIEW
IFRS 17 has a default approach to measuring groups of insurance contracts (which is the
unit of account for measurement as discussed at 5 above) described in this publication
as the ‘general model’. The general model does not distinguish between so-called short
duration and long duration (or life and non-life) insurance contracts. It also does not
distinguish between insurance products.
4472 Chapter 52
IFRS 17 also includes modifications and a simplification to the general model that are
applicable in specified circumstances.
The basic revenue recognition principle under IFRS 17 is that no profit is recognised on
initial recognition of a group of insurance contracts but that a loss must be recognised if
the group of contracts is onerous (see 6 above for the timing of initial recognition).
Subsequently, profit is recognised as services are performed under the contract.
7.1
Overview of the general model
The general model measures a group of insurance contracts as the sum of the following
components, or ‘building blocks’, for each group of insurance contracts: [IFRS 17.32]
• fulfilment cash flows, which comprise:
• estimates of expected future cash flows over the life of the contract;
• an adjustment to reflect the time value of money and the financial risks related
to the future cash flows to the extent that the financial risks are not included
in the estimates of the future cash flows; and
• a risk adjustment for non-financial risk;
• a contractual service margin (CSM), representing the unearned profit on the group
of contracts.
This can be illustrated in the diagram below.
Contractual service margin
Risk adjustment
Present value of estimated
cash inflows
Present value of
estimated cash outflows
After initial recognition of a group of insurance contracts, the carrying amount of the
group at each reporting date is the sum of:
• the liability for remaining coverage, comprising: