In October 2018 the IASB identified 25 concerns and implementation challenges raised by stakeholders about the requirements of the standard since it was issued in May 2017. Two of these, relating to the one-year deferral of the mandatory effective date to 2022 and a related exemption from IFRS 9, were discussed and provisionally agreed at November’s Board meeting. Thirteen issues, grouped into six broad topics, were included on the agenda for this month’s Board meeting with the remainder scheduled for deliberation in early 2019.
IASB clearly unwilling to re-open previous conclusions
Though sympathetic to concerns about some of the implementation challenges, the IASB made clear that the arguments put forward by proponents of the amendments were insufficiently strong to justify revising previously reached conclusions. As a result, with the exception of an amendment to the presentational requirements of contracts in the balance sheet, the IASB Board rejected any amendment to the requirements of IFRS 17 in respect of the other 12 topics addressed.
The amendment that was agreed is intended to provide a practical relief by requiring entities to present insurance contracts at a higher level of aggregation than the group level. Despite expressing some concerns about the potential loss of valuable information, the Board concluded that by allowing entities to offset assets and liabilities at the level of the portfolio the significant cost relief for companies would outweigh this loss.
“The ability to offset insurance contract assets and liabilities at a portfolio level potentially represents a significant simplification, particularly for contracts measured using the Premium Allocation Approach (“PAA”)” commented Roger Gascoigne, Senior Director at Willis Towers Watson. “It will alleviate the concerns raised by P&C insurers around the need to produce incurred claims estimates at a group and, particularly, a cohort level, which would have represented a major change from current reserving practice”.
Decisions on other amendments will disappoint insurance industry
Insurers must surely have expected, or at least hoped for, a more positive response to the first set of technical topics relating to measurement and presentational concerns.
Topics discussed included proposals to change the basis of recognition of premiums in the PAA from “received” to “due”; to use current discount rates to measure adjustments to the CSM; to align the cash flows to be considered in measuring reinsurance contracts with those of the underlying contracts; to broaden the applicability of the Variable Fee Approach and to reduce the complexity of contracts acquired in a business combination.
However, there was very little support from Board members for these potential amendments to IFRS 17 and the decision was taken not to re-open the standard.
In addition, the Board decided to defer discussion of the transitional aspects of the risk mitigation option for variable fee contracts until future meetings, so that it can be considered alongside other transition issues.
Commitment to principle-based approach reaffirmed
Though many of the issues raised would have provided relief to preparers, some of the potential changes were intended to enhance consistency through mandating a single treatment where the standard currently provides either specific options or a strong degree of flexibility within the parameters of the overall principles to be followed. These include the presentation of insurance finance income and expense, the determination of discount rates used to measure insurance contracts and the variety of risk adjustment techniques that an entity could use. While investors have expressed concern about the loss of comparability and consistency created by the subjectivity of the range of possible approaches, preparers will largely be relieved that these options remain in place.
Insurers should not delay implementation activities pending significant changes
As David Patton, Director with Willis Towers Watson, notes “the December meeting clearly sets the tone for future discussions and illustrates the line the IASB plan to take in assessing the need for further amendments. Based on the evidence so far, we do not expect to see wholesale changes and, therefore, we advise insurers to press ahead with their implementation programmes”.
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