Podcast transcript: How insurers can respond to IFRS 17 amendments and not lose momentum

Kevin Griffith 

Hello everyone and welcome to EY’s IFRS 17 podcast series! A series that brings you all the news and views on IFRS 17, the new International Accounting Standard on Insurance Contracts. 

My name is Kevin Griffith and I’m EY’s Global Insurance IFRS Lead based in London working with many clients around the globe on IFRS 17 implementation. I also represent EY in the IASB’s Transition Resource Group for IFRS 17. This so-called TRG is one of the ways how the IASB board is supporting implementation of IFRS 17. 

Throughout this podcast series we’ll be talking to a number of EY’s global insurance professionals to discuss key topics and interpretative issues in IFRS 17, and to consider the implementation approaches and challenges the new standard presents. In today’s episode we will discuss some of the tentative amendments to IFRS 17 with Conor Geraghty. Conor is a Director in our Insurance Accounting division and has previously been seconded to the IASB to support the development of IFRS 17. 

Hello Conor and welcome!

Conor Geraghty 

Thanks Kevin for the introduction. It is great to be here with you today.

Kevin Griffith 

Conor, in October 2018, the IASB board discussed whether it might be appropriate to consider amendments to IFRS 17 as a result of 25 concerns and implementation challenges raised by various stakeholders. At the same time, the IASB agreed with the IASB staff on criteria that the IASB board should apply when assessing whether an issue could potentially give rise to a change in The Standard. What happened since then?

Conor Geraghty 

That’s a good question Kevin! Over the past few months, the IASB staff presented a more detailed analysis of the 25 topics and gave recommendations whether each of them meet the agreed criteria for an amendment. The IASB board has already discussed most of the topics during past IASB board meetings.

Kevin Griffith 

Thanks Conor. Which are the topics where the IASB board tentatively agreed to limited changes to the Standard so far? Are the topics covered of pure accounting technical nature?

Conor Geraghty 

Actually not, Kevin. The 25 topics originally raised in the IASB staff papers in October 2018 covered many aspects of IFRS 17 including scope, measurement, presentation, the effective date, and transition; but also potential changes to fundamental aspects of The Standard. Over the past few months, we have seen that the IASB board has tentatively agreed to make changes on nine of the twenty-five topics initially raised. Not all of those topics are of accounting technical nature.

In fact, one of the first topics that was discussed in November 2018 was the effective date of IFRS 17. At its IASB board meeting in November 2018, the IASB board tentatively decided to amend the effective date of IFRS 17 reporting periods beginning on or after 1 January 2022. In other words, this is a deferral of one year. At the same time, and conditional on the IFRS 17 deferral, the IASB board also decided to propose an amendment to IFRS 4 to allow insurers qualifying for deferral of IFRS 9 Financial Instruments one additional year of deferral. This would mean that qualifying insurers could apply both standards for the first time in reporting periods beginning on or after 1 January 2022.

Kevin Griffith 

Thank you Conor, that is very interesting. Did the IASB board explain why it tentatively decided to defer the effective date of IFRS 17 by one year before concluding on the extent and nature of other changes to IFRS 17 yet to be deliberated? 

Conor Geraghty 

Yes Kevin. The IASB staff provided a long list of arguments in favor and against a delay. One rationale behind the tentative decision to defer the effective date of IFRS 17 was that the process of developing changes to The Standard, exposure to public comment and redeliberation by the IASB board could take at least a year. 

IASB board members acknowledged that pragmatically a delay of a year is necessary because of uncertainty arising from the IASB board’s decision to explore potential changes to The Standard. They recognized that planning and budgeting processes within companies require certainty before allocating scarce resources between competing projects. In the end, uncertainty over the IFRS 17 timelines could cause them to pause their preparations for IFRS 17 implementation.

Kevin Griffith 

Thank you Conor. In other words, is the decision to delay IFRS 17 by a year consistent with the IASB board’s requirement that any changes to The Standard would not risk undue delay to its implementation?

Conor Geraghty 

That is absolutely right Kevin. The board members noted that limiting the deferral to one year should serve as a signal to the market not to stop with implementation plans.

Kevin Griffith 

You raise a good point Conor. We have seen that insurers responded differently to this deferral announcement. Many insurers decided to keep going in accordance with current plans as the delay is limited to one year only which may allow preparers the time to complete work that otherwise would not have been possible, and without losing momentum and buy in.

Some other insurers decided to re-phase activities. For example, an extra year may allow them more time to build their solutions and to perform proper dry runs, and give more scope to use more internal resources. At the same time, we have also observed that some insurers take the risky path and started to slow down or even pause their IFRS 17 project. In cases that we have observed, companies take this approach because they are particularly resource constrained or distracted by other important projects.

Conor Geraghty 

Very interesting Kevin – thanks for sharing those observations. Shall I move on and explain to the audience which other topics the IASB board discussed so far? 

Kevin Griffith 

Yes Connor. 

Conor Geraghty 

Sure Kevin. At its IASB board meeting in December 2018, the IASB board considered potential changes to IFRS on thirteen of the twenty-five topics. These topics were all of accounting technical nature. In summary, the IASB board rejected twelve potential changes to the Standard while it tentatively decided to make one change to IFRS 17.

Kevin Griffith 

Can you provide some more details what this change entails Conor?

Conor Geraghty 

Yes, of course Kevin. The IASB board tentatively decided to amend the existing provision in IFRS 17 that requires an entity to present separately on the face of the balance sheet groups of contracts that are assets from groups of contracts that are liabilities. 

The change will actually allow the separate presentation to be done at a higher level of aggregation — namely at the portfolio level. I would like to remind here that a portfolio of insurance contracts is defined in IFRS 17 as insurance contracts subject to similar risks and managed together.

Kevin Griffith 

Thanks Conor. What was the rationale for this change that the IASB staff presented?

Conor Geraghty 

That is an interesting question Kevin. If we look at how IFRS 17 is drafted today, then you see that IFRS 17 currently requires separate presentation of groups of contracts in an asset or liability position at the reporting date.

The asset or liability position is determined by the cash flows received and paid, and revenue and expenses recognized by group of contracts. Providing this information therefore requires the identification of premium receipts, claims and expense payments, and revenue earned by IFRS 17 group.

Kevin Griffith 

But this seems to create some operational complexity. I think that not many insurers manage and record the receipt of premiums and payment of claims and expenses on systems that are separate from their policy administration systems. Would you agree Conor?

Conor Geraghty 

Yes Kevin. That is the point here.

Kevin Griffith 

I can see that policy administration systems maintain records by insurance contract, and are likely to generate the information necessary to determine the liability for remaining coverage by groups of contracts. At the same time, cash management systems operate at a higher level of aggregation and are disconnect to the policy administration systems for instance.

Conor Geraghty 

That is exactly right Kevin. As a result, insurers have commented that developing cash management systems to enable linkage to groups of contracts would be very expensive and the cost far outweighs any benefit to users of financial statements.

As a consequence, the IASB has acknowledged this cost/benefit trade-off by proposing to amend IFRS 17 as explained before. The IASB actually considers that it will be easier for insurers to associate premium debtors and outstanding claims to portfolios of contracts than to groups. At the same time, the IASB acknowledged that in its view any potential loss of information arising from netting of groups in an asset and liability position is acceptable when balanced against the significant cost relief.

Kevin Griffith 

That looks sensible to me Conor and shows that the IASB board considered the implementation challenges raised by stakeholders carefully. What about the IASB board meeting in January? I think that this was an important meeting where the IASB board tentatively decided to make quite a few changes to IFRS 17. Is that right Conor?

Conor Geraghty 

That’s right Kevin. At the January 2019 meeting, the IASB board considered a further five issues and tentatively decided to amend the Standard to reflect four of these. In summary, the IASB board made decision with respect to:

• The deferral of insurance acquisition cash flows for renewals outside the contract boundary. 
• The Accounting for reinsurance contracts held when underlying insurance contracts are onerous 
• Extending the scope of the risk mitigation exception in the Variable Fee Approach to include financial risk mitigation through reinsurance contracts
• The Recognition of the contractual service margin in profit or loss under the general model for contracts containing investment components

Kevin Griffith 

Thank you Conor for providing this overview. It sounds like that the first point around deferral of insurance acquisition cash flows enters the field of contract boundary discussions. 

Conor Geraghty 

That is absolutely right Kevin. This topic was the number one topic discussed in some markets including Australia where the accounting of stepped premium yearly renewable term insurance contracts was the focus of industry discussions for many months. 

Kevin Griffith 

Ah that is right Conor, I remember those discussions. So where did the IASB board tentatively land during its January 2019 meeting with this topic?

Conor Geraghty 

In essence, the IASB board agreed with the IASB staff recommendations to require an entity to allocate to anticipated contract renewals, parts of insurance acquisition cash flows that are directly attributable to newly issued contracts and to recognize an asset until the renewed contracts are recognized. 

Kevin Griffith 

What about the recoverability of such an asset? Did the IASB staff propose any test to be performed?

Conor Geraghty 

Yes, the IASB board agreed to require an entity to assess the recoverability of the asset recognized in each reporting period before the related contracts are recognized. Consequently, an entity also has to recognize a loss in profit or loss for any unrecoverable amounts, and reversals of such losses in subsequent periods if the impairment conditions no longer exist or have improved.

Kevin Griffith 

This change might have quite substantial impacts to the application of IFRS 17 by insurers couldn’t it Conor? How did the IASB board members comment on the IASB staff recommendation that we just discussed? 

Conor Geraghty 

However, in the end, there was broad agreement amongst the IASB board members that the proposal better reflects the economics of an insurer paying commissions in expectation of renewals, and acknowledgment that estimating cash flows and allocation of cash flows to groups of contracts are integral parts of the Standard.

Kevin Griffith 

Thank you Conor. Unfortunately we have run out of time today. But can I suggest that we catch up over another episode to discuss the remaining amendments that the IASB board tentatively agreed to so far?

Conor Geraghty 

Yes Kevin. Absolutely! Thanks for having me today.

Kevin Griffith 

Thank you Conor. And thank you everyone for listening today. As always, we’d welcome feedback and suggested topics for future IFRS 17 podcasts. You can email us at financialservices@au.ey.com.

Disclaimer: The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.