AASB 17 Information Note: Insurance Contract Update

On Thursday 8 March 2018, the Institute released a draft version of the AASB17 – Insurance Contracts Information Note (IN) for discussion. Subsequently, the Taskforce has worked to address feedback received and reflect clarification on various aspects.

Version 1.1 is the first operating version, which has now been released.

The Institute would like to formally recognise the incredible amount of work put in by the Taskforce to get this operating version (V1.1) of the IN for the membership, particularly Ian Laughlin (Convenor) and the editorial team (Grant Robinson, Brett Pickett and David Rush) who have remained committed to keeping the document up to date and relevant. The interpretations of this accounting standard are still changing, and the Taskforce will continue to work to keep the Membership updated. Further version releases are planned, depending on the extent of the developments globally and locally.

Changes reflected in this new version 1.1 include:

• more clarity on premium received rather than accrued – unlike under AASB 1023 and AASB 1038 (where premiums are recognised on accruals basis and a receivable held for premiums due but not received), AASB 17 requires premium received to be used;
• revision of treatment of expense cash flows, including allocation of fixed and variable overheads and acquisition costs – in considering what expenses are included in FCF, distinction is made between (i) expenses clearly directly attributable at the individual contract level, (ii) expenses that are incremental at the portfolio level, and (iii) other expenses. Items (i) and (ii) are considered directly attributable and included in FCF; while (iii) are recognised in profit or loss when incurred;
• more detail on the level at which diversification benefits apply for risk adjustment purposes – an entity should only reflect diversification benefits in the risk adjustment to the extent that the diversification benefit has been included when determining the compensation the entity would require for bearing non-financial risk. At the May 2018 TRG, the IASB staff held the view that the risk adjustment for a specified group of insurance contracts is set by the issuing entity and could not differ upon consolidation in a group structure, even if the group had different appetite for non-financial risk. However, TRG members generally did not agree with the view and thought that basing it on the view of the reporting entity is valid under IFRS 17. There remain two valid views and it is likely to be further debated at a subsequent TRG meeting or be taken up by the IASB Board;
• more detail on coverage units – AASB 17 establishes principle on how CSM is to be released. However, on the more contentious issues, TRG members have observed that (i) lapse expectations are included to the extent they affect expected duration of coverage, (ii) a policyholder benefits from the insurer standing ready to meet valid claims should the insured event occur, and (iii) methods such as straight line allocation over time but reflecting the number of contracts in the group, use of maximum contract cover in each period, use of expected claim amounts each period should the insured event occur, use of premiums, or use of expected cash flows (but not if they result in no allocation of CSM to periods in which the insurer is standing ready), may be reasonable proxies depending on the facts and circumstances. The May 18 TRG also considered the question of whether coverage units are based on pure insurance risk excluding any investment, and the staff analysis concluded that the investment component could also be used as the basis for coverage units for contracts eligible to use the VFA – however, TRG members did not agree with this view, and argued that investment service was also present for non-VFA;
• more clarity on treatment of contractual options – a contractual right (not requiring agreement of the insurer) within the contract boundary (even though it gives rise to cash flows outside the contract boundary) must be appropriately modelled, and the exercise of such options is treated like other experience. The Staff view at the May 2018 TRG was that as the contract boundary applies to the contract as whole, repricing needed to apply to contract as a whole, not just the option, otherwise the exercise of the option was inside the contract boundary. A number of TRG members disagreed and it remains an open question; and
• more detail on derecognition – the section on derecognition was restructured to make it more obvious as to what practitioners are required to do in certain circumstances.

Further feedback is encouraged by using the feedback form and should be forwarded to Tony Burke at Tony.Burke@actuaries.asn.au.

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