1. Group insurance policies
Under a group insurance policy an entity provides insurance coverage to members of an association or to customers of a bank (members or customers that purchase insurance coverage are referred to as ‘certificate holders’). Some of those policies give the entity the right to terminate the coverage for all certificate holders at any time with a fixed notice period e.g. 90 days. The following three-step approach was found to be helpful in identifying the right accounting treatment for the specified policies:
Identify the policyholder: it may not be clear whether the policyholder is the association/bank or each certificate holder for a group creditor policy. Does it matter if the claims are paid directly to the association/bank rather than to each certificate shareholder?
- Insight: The certificate holder is likely to be the policyholder, because the certificate holder’s debt is paid, i.e. the certificate holder is ultimately compensated for a loss event even if the association/bank received the claims on its behalf.
Identify the insurance contract: is it a single insurance contract or multiple contracts with each certificate holder? Is it a single contract because the bank can terminate the coverage for all certificate holders?
Insight: It depends on the following factors:
Whether the insurance coverage is priced and sold separately;
Whether the certificate holders are related to one another (other than by virtue of being members/customers of the same association/bank); and
Whether purchasing the insurance coverage is optional for each individual.
Determine the contract boundary: is it the fixed notice period (e.g. 90 days) or should it be based on the expectation of the certificate holder’s that the group policy will not be terminated early by the association/bank?
- Insight: The initial contract boundary is likely to be the fixed notice period (e.g. 90 days) because the entity’s substantive obligation ends there.
Practical aspect: Many TRG members discussed what it means for insurance coverage to be priced and sold separately (‘separate pricing factor’). One TRG member noted that in assessing the separate pricing factor, the price of the individual arrangement should be compared when sold on a standalone basis or as part of the group policy.
2. Industry pools managed by an association
In specific jurisdictions, automobile insurance contracts must be issued by members of an association by law, so that coverage may be provided to the contract holders in the event that the risk cannot be covered in the voluntary market. The association mentioned in the agenda paper comprises two pools: one with members that issue contracts and one with members that hold contracts. In this form of the association, the issuer can be a) the association or 2) the individual member or 3) each member entity for its respective share in the pool. The following topics were discussed:
Is such an arrangement an insurance contract even if it issued by more than one entity?
- Insight: Yes, if it meets the definition of an insurance contract. However, IFRS 11 may apply if the arrangement meets the definition of a joint arrangement. Even if the arrangement does not meet the IFRS 11 definition of a joint arrangement, an accounting policy should be developed in the absence of specific requirements in IFRS 17 for insurance contracts issued by more than one entities. One TRG member also noted that some of the arrangements may need to be considered under IFRS 15’s principal vs agent requirements.
Contracts that are transferred amongst members could be accounted for in two ways depending on the circumstances: either as reinsurance contracts issued if they meet the reinsurance contract definition or as an extinguishment of the obligation towards the policyholder-members.
The risk adjustment could be determined at an appropriate level that reflects the diversification benefits achieved within the association. However, some TRG members interpret the risk adjustment as being determined at an individual member level rather at an association level on the basis that different reporting entities (association vs individual members) should reflect different diversification benefits.
Practical aspect: the risk adjustment could be determined at an association level (one risk adjustment) if the issuer is the association and the compensation charged for the uncertainty reflects the diversification benefits achieved by all the members together (‘togetherness’). However ‘togetherness’ could be interpreted either way, ie one risk adjustment for the association and each member or risk adjustment based on the joint information gathered from individual member-to-member assessment.
3. Annual cohorts for contracts that share in the return of a specified pool of underlying items
By annual cohorts the Standard requires IFRS 17 groups to include insurance contracts written no more than a year apart. Annual cohort requirement shall be applied unless the same accounting outcome can be achieved based on a different methodology, including aggregation at a higher level.
Practical aspect: Where another methodology is applied, it should be demonstrated how the same accounting outcome has been achieved with and without annual cohorts.
The challenges brought about by IFRS 17 are significant and many insurers are looking for solutions that capitalise on existing practice. The extent to which these solutions and implementation approaches will reflect IFRS 17’s new principles is an area of much interest. It is expected that many of these views and approaches will be deliberated and positions clarified through discussion forums and as implementation experience develops.
With the application date of IFRS 17 approaching, insurers are trying to understand what changes need to be made in order to be IFRS 17-ready. If you would like to discuss your transition to IFRS 17, please feel free to contact Maria Karamanou or any other member of the Mazars Financial Reporting Advisory team.
Blog author: Maria Karamanou, Insurance specialist, Mazars Financial Reporting Advisory