as follows:
• by adjusting the CSM of the reinsurance contract for the equivalent of the change in the fulfilment cash
flows that adjusts the CSM of the underlying contracts. This results in a reduction of the CSM of $30m
(i.e. 30% of $100m) and represents a CSM ‘asset’; and
• recognising the remaining change in the fulfilment cash flows of the reinsurance contract held, $18m
(i.e. 48m – 30m) immediately in profit or loss.
Therefore, at the end of Year 1, using these alternative estimates, the entity measures the insurance contracts
liabilities and the reinsurance contract asset as follows:
Insurance
Reinsurance
contract
contract
liability
asset
$m
$m
Fulfilment cash flows (including the effect of any change in
460 (138)
estimates)
Contractual service margin (CSM)
–
5
Insurance contract liability/(reinsurance contract asset) at the
460 (133)
end of Year 1
The effect on profit or loss will be:
Profit/(loss) at the end of Year 1
60
18
10.6 Allocation of the contractual service margin to profit or loss
The principles for release of the contractual service margin for reinsurance contracts
held follows the same principles as for insurance and reinsurance contracts issued, i.e.
the contractual service margin is released to revenue as the reinsurer renders service.
For a reinsurance contract held, the period that the reinsurer renders services is the
coverage period of the reinsurance contract.
The coverage period of a reinsurance contract held ends when the coverage periods of
all underlying contracts are expected to end. This could be up to two years for
reinsurance contracts written on a twelve months ‘risks attaching’ basis where
underlying insurance contracts incepting in a twelve month period are covered by a
single reinsurance contract.
For retroactive reinsurance contracts held, the coverage period of the underlying insurance
contracts may have expired prior to the inception of the reinsurance contract held. In
respect of these contracts, the coverage is provided against an adverse development of an
event that has already occurred. [IFRS 17.B5]. This means that the contractual service margin
should be released over the expected settlement period of the claim of the underlying
insurance contract (since that is, in effect, the coverage period for the reinsurance contract).
In May 2018, the IASB staff confirmed that, applying the requirements of the general model
(see 8.7 above), the coverage units in a group of reinsurance contracts held is the coverage
received by the insurer from those reinsurance contracts held and not the coverage provided
by the insurer to its policyholders through the underlying insurance contracts. When
determining the quantity of benefits received from a reinsurance contract, an entity may
consider relevant facts and circumstances related to the underlying insurance contracts.33
Insurance contracts (IFRS 17) 4541
10.7 Premium allocation approach for reinsurance contracts held
An entity may use the premium allocation approach discussed at 9 above (adapted to
reflect the features of reinsurance contracts held that differ from insurance contracts
issued, for example the generation of expenses or reduction in expenses rather than
revenue) to simplify the measurement of a group of reinsurance contracts held, if at the
inception of the group: [IFRS 17.69]
• the entity reasonably expects the resulting measurement would not differ
materially from the result of applying the requirements in the general model for
reinsurance contracts held discussed above; or
• the coverage period of each contract in the group of reinsurance contracts held
(including coverage from all premiums within the contract boundary determined
at that date applying the definition in the general model) is one year or less.
Assessment of eligibility for groups of reinsurance contracts held to be able to use the
premium allocation approach is independent of whether the entity applies the premium
allocation approach to the underlying groups of insurance contracts issued by an entity.
Therefore, for example, reinsurance contracts which are written on a twelve months
risks attaching basis (i.e. the underlying insurance contracts subject to the reinsurance
contract incept over a twelve month period) will have a contract boundary of up to two
years if each of the underlying insurance contracts have a coverage period of one year.
Our provisional view is that the two year contract boundary means that those
reinsurance contracts held will not meet the twelve month criterion for use of the
premium allocation approach and would have to qualify for the premium allocation
approach on the basis that the resulting measurement would not differ materially from
the result of applying the requirements in the general model. As a consequence, a
mismatch in measurement models may arise if the underlying contracts are accounted
for under the premium allocation approach.
IFRS 17 confirms that an entity cannot meet the first condition above if, at the inception
of the group, an entity expects significant variability in the fulfilment cash flows that
would affect the measurement of the asset for remaining coverage during the period
before a claim is incurred. Variability in the fulfilment cash flows increases with, for
example: [IFRS 17.70]
• the extent of future cash flows relating to any derivatives embedded in the
contracts; and
• the length of the coverage period of the group of reinsurance contracts held.
10.8 Reinsurance contracts held and the variable fee approach
An entity is not permitted to use the variable fee approach for reinsurance contracts
held. The variable fee approach also cannot be applied to reinsurance contracts issued.
[IFRS 17.B109]. This will therefore cause an accounting mismatch when an entity has
reinsured contracts subject to the variable fee approach discussed at 11 below. It is stated
in the Basis for Conclusions that the IASB considers that the entity and the reinsurer do
not share in the returns on underlying items and therefore the criteria for the variable
fee approach are not met, even if the underlying insurance contracts issued are
insurance contracts with direct participation features. The IASB therefore decided not
4542 Chapter 52
to modify the scope of the variable fee approach to include reinsurance contracts held
as it was considered that such an approach would be inconsistent with the Board’s view
that a reinsurance contract held should be accounted for separately from the underlying
contracts issued. [IFRS 17.BC248].
11
MEASUREMENT – CONTRACTS WITH PARTICIPATION
FEATURES
Many entities issue participating contracts (referred to in IFRS 17 as contracts with
participation features) that is, to say, contracts in which both the policyholder and the
entity benefit from the financial return on the premiums paid by sharing the
performance of the underlying items over the contract period. Partic
ipating contracts
can include cash flows with different characteristics, for example:
• cash flows that do not vary with returns from underlying items, e.g. death benefits
and financial guarantees;
• cash flows that vary with returns on underlying items, either through a contractual
link to the returns on underlying items or through an entity’s right to exercise
discretion in determining payments made to policyholders.
Insurance companies in many countries have issued contracts with participation
features. For example, in some countries, insurance companies must return to the
policyholders at least a specified proportion of the investment profits on certain
contracts, but may give more. In other countries, bonuses are added to the policyholder
account at the discretion of the insurer. In a third example, insurance companies
distribute realised investment gains to the policyholder, but the companies have
discretion over the timing of realising the gains. These gains are normally based on the
investment return generated by the underlying assets but sometimes include allowance
for profits made on other contracts.
IFRS 17 includes:
• a mandatory adaptation to the general model (the variable fee approach) for
insurance contracts with direct participation features (see 11.2 below). In addition,
within the variable fee approach, contracts with certain features are permitted to
use a different method to calculate the finance income and expense through profit
or loss when finance income is disaggregated between profit or loss and other
comprehensive income(see 11.2.4 below; and
• modifications to the general model for investment contracts with discretionary
participation features (see 11.3 below).
Insurance contracts without direct participation features are not permitted to apply the
variable fee approach even if such contracts contain participation features. IFRS 17
assumes that contracts with participation features ineligible for the variable fee
approach will apply the general model; contracts with participating features that are not
eligible for the variable fee approach are not excluded from applying the premium
allocation approach but IFRS 17 appears to assume that they will not meet the eligibility
criteria (as, usually, the contract boundary will be significantly in excess of one year).
Consequently, there will be a difference between the recognition of insurance revenue
Insurance contracts (IFRS 17) 4543
for insurance contracts without direct participation features but that have some asset
dependent cash flows and for insurance contracts with direct participation features
accounted for using the variable fee approach, not least because different discount rates
should be used for re-measuring the contractual service margin (see 8.3 above).
The following diagram compares accounting for direct participating contracts to other
insurance contracts.
Continuum of Insurance Contracts
Type of
Direct
Non-participating
Indirect participating
contract
participating
Variable fee
Measurement
General Model
model
Reinsurance contracts issued and held cannot be insurance contracts with direct
participation features for the purposes of IFRS 17. [IFRS 17.B109]. Reinsurance contracts
held are also not eligible to use the variable fee approach permitted for insurance
contracts with direct participation features (see 10.6 above).
Many participation contracts also contain an element of discretion which means that
the entity can choose whether or not to pay additional benefits to policyholders.
However, contracts without participation features may also contain discretion. As
discussed at 8 above, the expected cash outflows of an insurance contract should
include outflows over which the entity has discretion. IFRS 4 permitted the
discretionary component of an insurance contract with participation features to be
classified in its entirety as either a liability or as equity. [IFRS 4.34(b)]. As a result, under
IFRS 4, many insurers classified the entire contract (including amounts potentially due
to shareholders) as a liability. Under IFRS 17, entities must make a best estimate of the
liability due to policyholders under the contracts.
The following are two examples of contracts with a participation feature.
Example 52.43: Unitised with-profits policy
Premiums paid by the policyholder are used to purchase units in a ‘with-profits’ fund at the current unit price.
The insurer guarantees that each unit added to the fund will have a minimum value which is the bid price of
the unit. This is the guaranteed amount. In addition, the insurer may add two types of bonus to the with-profits
units. These are a regular bonus, which may be added daily as a permanent increase to the guaranteed amount,
and a final bonus that may be added on top of those guaranteed amounts when the with-profits units are
cashed in. Levels of regular and final bonuses are adjusted twice per year. Both regular and final bonuses are
discretionary amounts and are generally set based on expected future returns generated by the funds.
Example 52.44: Participation policy with minimum interest rates
An insurance contract provides that the insurer must annually credit each policyholder’s ‘account’ with a
minimum interest rate (3%). This is the guaranteed amount. The insurer then has discretion with regard to
whether and what amount of the remaining undistributed realised investment returns from the assets backing
the participating policies are distributed to policyholders in addition to the minimum. The contract states that
4544 Chapter 52
the insurer’s shareholders are only entitled to share up to 10% in the underlying investment results associated
with the participating policies. As that entitlement is up to 10%, the insurer can decide to credit the
policyholders with more than the minimum sharing rate of 90%. Once any additional interest above the
minimum interest rate of 3% is credited to the policyholder it becomes a guaranteed liability.
11.1 Contracts with cash flows that affect or are affected by cash
flows to policyholders of other contracts (mutualisation)
Entities should consider whether the cash flows of insurance contracts in one group
affect the cash flows to policyholders of contracts in another group. In practice, this
effect is referred to as ‘mutualisation’. Contracts are ‘mutualised’ if they result in
policyholders subordinating their claims or cash flows to those of other policyholders,
thereby reducing the direct exposure of the entity to a collective risk.
Some insurance contracts affect the cash flows to policyholders of other contracts by
requiring: [IFRS 17.B67]
• the policyholder to share with policyholders of other contracts the returns on the
same specified pool of underlying items; and
• either:
• the policyholder to bear a reduction in their share of the returns on the
underlying items because of payments to policyholders of other contracts that
share in that pool, including payments arising under guarantees made to
policyholders of those other contracts; or
• policyho
lders of other contracts to bear a reduction in their share of returns
on the underlying items because of payments to the policyholder, including
payments arising from guarantees made to the policyholder.
Sometimes, such contracts will affect the cash flows to policyholders of contracts in
other groups. The fulfilment cash flows of each group reflect the extent to which the
contracts in the group cause the entity to be affected by expected cash flows, whether
to policyholders in that group or to policyholders in another group. Hence the fulfilment
cash flows for a group: [IFRS 17.B68]
• include payments arising from the terms of existing contracts to policyholders of
contracts in other groups, regardless of whether those payments are expected to
be made to current or future policyholders; and
• exclude payments to policyholders in the group that, applying the above, have
been included in the fulfilment cash flows of another group.
It is observed in the Basis for Conclusions that the reference to future policyholders is
necessary because sometimes the terms of an existing contract are such that the entity
is obliged to pay to policyholders amounts based on underlying items, but with
discretion over the timing of the payments. That means that some of the amounts based
on underlying items may be paid to policyholders of contracts that will be issued in the
future that share in the returns on the same underlying items, rather than to existing
policyholders. From the entity’s perspective, the terms of the existing contract require
it to pay the amounts, even though it does not yet know when or to whom it will make
the payments. [IFRS 17.BC172].
Insurance contracts (IFRS 17) 4545
For example, to the extent that payments to policyholders in one group are reduced from
a share in the returns on underlying items of €350 to €250 because of payments of a
guaranteed amount to policyholders in another group, the fulfilment cash flows of the first
group would include the payments of €100 (i.e. would be €350) and the fulfilment cash
flows of the second group would exclude €100 of the guaranteed amount. [IFRS 17.B69].
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 898
