IFRS 17, Insurance Contracts: An Illustration
IFRS 17, Insurance Contracts:An illustrationFinancial statements presentation and disclosureswww.pwc.com/insurance
(All amounts in CU thousands unless otherwise stated)2 IFRS 17, Insurance Contracts: An illustrationPwC
(All amounts in CU thousands unless otherwise stated)IntroductionThis publication (the Illustration) demonstrates the presentation and disclosurerequirements of IFRS 17, Insurance Contracts (IFRS 17), as issued by theInternational Accounting Standards Board (IASB) in May 2017, as well as the newdisclosures introduced or modified by IFRS 9, Financial Instruments (IFRS 9), throughconsequential amendments to IFRS 7, Financial Instruments: Disclosures (IFRS 7).In compiling the Illustration, we have made a number ofchoices and assumptions. In particular: We designed the illustrative consolidated financialstatements and selected disclosures around a fictitiousmulti-line insurance group, Value Insurance Plc and itssubsidiaries (the Group). The Group operates in onegeographical area, Oneland, and offers its products todomestic and foreign markets. The parent company andeach of its subsidiaries share the same functional currency(CU), and this currency is used for the presentation of theconsolidated financial statements of the Group. ValueInsurance Plc is a publicly listed entity. We have used a simplified set of insurance products,basic investment transactions and a hypothetical set ofassumptions, with the objective of illustrating the resultsof the application of different measurement models inIFRS 17 and IFRS 9/IFRS 15, Revenue from Contractswith Customers (IFRS 15). We have not intended to builda realistic insurance or investment operation existing in arealistic market. The amounts disclosed in the Illustrationhave been modeled purely for illustrative purposes toprovide a user with a basis from which to assess theeffect of the illustrated measurement models, transactionsand assumptions on the Group’s consolidated financialstatements. A summary of the Group’s insurance productsis included in the description of reportable segments innote 1. As the Illustration is a reference tool, we have not removedany disclosures based on materiality. Consequently,some of the disclosures in the Illustration would likelybe immaterial if the Group were a real life entity. Inaddition, some of the specific IFRS 17, IFRS 9 andIFRS 7 requirements were not relevant to the Group’scircumstances and have not been illustrated. Suchomitted disclosures are outlined in Appendix B. Financial statement line items and disclosures required byother IFRS are kept to a minimum with extracts includedwhere necessary only; therefore, the Illustration does notrepresent a full set of IFRS-compliant financial statements.PwC Further examples of accounting policies and otherdisclosures required by IFRS that may be relevant to aninsurer are available in the following PwC publications:– I llustrative IFRS consolidated financial statements for2018 year-ends; and– IFRS 9 for banks - Illustrative disclosures. The quantitative and qualitative disclosure requirementsin IFRS 17 are more extensive than the current reportingframeworks in many jurisdictions under IFRS 4, InsuranceContracts (IFRS 4), an interim standard effective priorto the adoption of IFRS 17. Appendix A includes asummary highlighting what is new and different in IFRS 17compared to the disclosure requirements in IFRS 4. To illustrate a level of disclosures for insurance andinvestment contracts that will be required on a recurringbasis post-transition, the Illustration assumes that theGroup has already adopted IFRS 17 and IFRS 9 in thepreceding year (fiscal 20X2, using the date conventionin the Illustration). We have not illustrated quantitativeimpacts of the transition on the Group, as there willlikely be a significant diversity in transition methodsand impacts, resulting in limited use of such pro formainformation. Given the optionality available on transition,the effect on the statement of financial position and futurerevenue for similar types of insurance contracts issued bydifferent entities may vary considerably. IFRS 17 includes specific disclosure requirements forgroups of insurance contracts in force on transition, wheresimplifications on transition affect the measurements inthe financial statements. The effect on insurance revenueand the contractual service margin (CSM) and judgementsapplied in determining the transition amounts should beseparately disclosed and explained in the subsequentperiods, until the insurance contracts written beforethe transition date are derecognised. Such recurringdisclosures illustrated in note 2.2.2 of the Illustration arealso indicative of the type of information that would berequired in the year of adoption, among other transitiondisclosures.IFRS 17, Insurance Contracts: An illustration 3
(All amounts in CU thousands unless otherwise stated)IFRS 17, IFRS 9 and IFRS 7 allow a variety of measurement,presentation and disclosure options, and industry viewsof them continue to evolve. In addition, at the time of thispublication, the IASB continues to discuss IFRS 17 concernsand implementation challenges raised by stakeholdersand is undertaking a number of activities to support theimplementation of IFRS 17, including establishing theTransition Resource Group (TRG). In October 2018, the IASBcommenced a process of evaluating the need for makingpossible amendments to IFRS 17 to address certain reportedconcerns. The Illustration does not take into account anyamendments to IFRS 17 that are proposed as a result of thisprocess.The publication is current as of February 2019 and is basedon IFRS 17 as issued by the International AccountingStandards Board in May 2017. It is prepared for illustrativepurposes only and should be used in conjunction with therelevant financial reporting standards and any other reportingpronouncements and legislation applicable in specificjurisdictions.Insurers will need to closely monitor the developments andtake account of their individual circumstances in determiningthe manner of providing material information required by IFRS17 in the way that most faithfully represents their insurancecontracts and transactions. The approaches illustrated in thispublication are one possible way the requirements of IFRS17, IFRS 9 and IFRS 7 may be met but are not intended toprovide any view on the type of approach that should beapplied.Abbreviations used in the IllustrationAC Amortised costAOCI Accumulated other comprehensive incomeCSM Contractual service marginDPF Discretionary participation featuresEAD Exposure at defaultECL Expected credit lossEIR Effective interest rateFCF Fulfilment cash flowsFVOCI Fair value through other comprehensive incomeFVTPL Fair value through profit or lossGMM General measurement modelIFRS International Financial Reporting StandardsLIC Liability for incurred claimsLGD Loss given defaultLRC Liability for remaining coverageOCI Other comprehensive incomePAA Premium allocation approachPD Probability of defaultSPPI Solely payments of principal and interestSICR Significant increase in credit riskTRG Transition Resource GroupVFA Variable fee approach4 IFRS 17, Insurance Contracts: An illustrationPwC
(All amounts in CU thousands unless otherwise stated)ContentsConsolidated statement of profit or lossConsolidated statement of comprehensive incomeConsolidated balance sheetConsolidated statement of changes in equityConsolidated statement of cash flows811121415Notes to the consolidated financial statements1. Segment reporting (an extract)182. Insurance operations222.1. Summary of significant accounting policies for insurance contracts222.2. Significant judgements and estimates in applying IFRS 17392.2.1. Judgements402.2.2. Methods used and judgements applied in determining the IFRS 17 transition amounts432.2.3. Estimates and assumptions462.2.3.1. Discount rates472.2.3.2. Investment assets returns482.2.3.3. Estimates of future cash flows to fulfil insurance contracts482.2.3.4. Mortality - Life Risk, Savings and Participating contracts (excluding investment contracts without DPF)492.2.3.5. Persistency - Life Risk, Savings and Participating contracts (excluding investment contracts without DPF)492.2.3.6. Expenses - Life Risk, Savings and Participating contracts (excluding investment contracts without DPF)and Property and Casualty contracts502.2.3.7. Methods used to measure Property and Casualty contracts502.2.3.8. Methods used to measure the risk adjustment for non-financial risk512.2.4. Sensitivity analysis to underwriting risk variables512.2.4.1. Life Risk, Savings and Participating contracts (excluding investment contracts without DPF)512.2.4.2. Property and Casualty contracts542.3. Composition of the balance sheet552.4. Insurance revenue and expenses562.4.1. Insurance revenue and insurance service result562.4.2. Amounts determined on transition to IFRS 17592.4.3. Expected recognition of the contractual service margin612.5. Life Risk622.5.1. Life Risk - Insurance contracts issued622.5.1.1. Reconciliation of the liability for remaining coverage and the liability for incurred claims622.5.1.2. Reconciliation of the measurement components of insurance contract balances642.5.1.3. Impact of contracts recognised in the year662.5.1.4. Amounts determined on transition to IFRS 17672.5.2. Life Risk - Reinsurance contracts heldPwC682.5.2.1. Reconciliation of the remaining coverage and incurred claims682.5.2.2. Reconciliation of the measurement components of reinsurance contract balances702.5.2.3. Impact of contracts recognised in the year712.5.2.4. Amounts determined on transition to IFRS 1771IFRS 17, Insurance Contracts: An illustration 5
(All amounts in CU thousands unless otherwise stated)2.6. Savings2.6.1. Savings - Insurance contracts issued72722.6.1.1. Reconciliation of the liability for remaining coverage and the liability for incurred claims722.6.1.2. Reconciliation of the measurement components of insurance contract balances742.6.1.3. Impact of contracts recognised in the year752.6.1.4. Amounts determined on transition to IFRS 17752.7. Participating2.7.1. Participating - Contracts issued76762.7.1.1. Reconciliation of the liability for remaining coverage and the liability for incurred claims762.7.1.2. Reconciliation of the measurement components of contract balances792.7.1.3. Impact of contracts recognised in the year812.7.1.4. Amounts determined on transition to IFRS 17822.8. Property and Casualty2.8.1. Property and Casualty - Insurance contracts issued83832.8.1.1. Reconciliation of the liability for remaining coverage and the liability for incurred claims832.8.1.2. Reconciliation of the measurement components of insurance contract balances862.8.1.3. Impact of contracts recognised in the year872.8.2. Property and Casualty - Reinsurance contracts held2.8.2.1. Reconciliation of the remaining coverage and incurred claims components2.8.3. Claims development8888892.8.3.1. Gross claims development892.8.3.2. Net claims development903. Financial operations913.1. Summary of significant accounting policies for financial instruments913.1.1. Financial assets and liabilities913.1.2. Financial assets923.1.3. Financial liabilities943.1.4. Derivatives953.2. Significant judgements and estimates in applying IFRS 9953.2.1. Judgements953.2.2. Estimates963.2.2.1. Fair value of financial instruments963.2.2.2. Expected credit loss963.3. Financial assets and liabilities973.4. Reconciliation of investment contract liabilities1003.5. Investment income and insurance finance expenses1003.6. Fair value measurement1053.6.1. Fair value hierarchy1053.6.2. Recognised fair value measurement1073.6.3. Financial instruments not measured at fair value1073.7. Credit risk for financial instruments1074. Business combinations1145. Expenses by nature1156 IFRS 17, Insurance Contracts: An illustrationPwC
(All amounts in CU thousands unless otherwise stated)6. Risk and capital management (an extract)1166.1. Underwriting and financial risk management1166.1.1. Underwriting risk management1186.1.2. Financial risk management1206.2. Life Risk and Savings1226.3. Participating1256.4. Property and Casualty1266.5. Other financial assets and liabilities1286.6. Sensitivity analysis to market risk variables1296.6.1. Interest rate risk sensitivityPwC1296.6.2. Equity price risk sensitivity1306.6.3. Currency risk sensitivity1316.7. Capital management132Appendix A: Comparison of the disclosure requirements in IFRS 4 and IFRS 17133Appendix B: Summary of IFRS 17 and IFRS 7 disclosures not included in the Illustration140IFRS 17, Insurance Contracts: An illustration 7
(All amounts in CU thousands unless otherwise stated)Consolidated statement of profit or lossYear ended 31 DecemberIAS 1(10)(b),(10A),(51)(c),(113)Note20X420X3IFRS 17(80)(a),(83)IAS 1(82)(a)Insurance revenue2.4.1114,84593,252IFRS 17(80)(a),(84)IAS 1(99)Insurance service expenses2.4.1(101,256)(81,959)IFRS 17(82),(86)Net expenses from reinsurance contracts held2.4.1(5,849)(3,859)IFRS 17(80)(a)Insurance service result7,7407,434IFRS 7(20)(b)IAS 1(82)(a)Interest revenue from financial assets not measured at FVTPL3.52,6962,321Net gains on FVTPL investments3.511,1298,214IFRS 7(20)(a)(viii)Net gains on investments in debt securities measured at FVOCI reclassified to profit orloss on disposal3.57851IFRS 7(20)(a)(i)Net change in investment contract liabilities(756)(672)IFRS 7(20A)IAS 1(82)(aa)Net gains from the derecognition of financial assets measured at AC3.52213IAS 40(76)(d)Net gains from fair value adjustments to investment properties3.5157552IAS 1(82)(ba)Net credit impairment losses3.5, 3.7(40)(31)13,28610,4483.4, 3.5Net investment incomeIFRS 17(80)(b)Finance expenses from insurance contracts issued3.5(7,228)(3,804)IFRS 17(80)(b),(82)Finance income from reinsurance contracts held3.51,610501Net insurance finance expenses(5,618)(3,303)Net insurance and investment 099)46336510,77210,771IAS 1(82)(a)Asset management services revenueIAS 1(82)(b)Other finance costsIAS 1(99),(103)Other operating expensesIAS 1(82)(c)Share of profit of associates and joint ventures accounted for using the equity methodProfit before income tax5IAS 1(82)(d)IAS 12(77)Income tax expense3,1553,087IAS 1(81A)(a)Profit for the year7,6177,684IAS 1(81B)(a)Profit attributable to7,4517,480166204Basic earnings per share0.350.39Diluted earnings per share0.320.36Owners of Value Insurance PlcNon-controlling interestsIAS 33(66)Earnings per share for profit attributable to the ordinary shareholders(in CU per share)The above consolidated statement of profit or loss should be read in conjunction with the accompanying notes.8 IFRS 17, Insurance Contracts: An illustrationPwC
(All amounts in CU thousands unless otherwise stated)PwC commentaryPresentation of insurance service resultIFRS 17(83),(85),(B120)-(B127)Insurance revenue reflects the consideration to which the insurer expects to be entitled in exchange for the servicesprovided on an earned basis. Insurance revenue under IFRS 17 is no longer equal to the premium received inthe period. IFRS 17 makes it clear that an insurer should not present premium information in profit or loss if thatinformation is not in line with the definition of insurance revenue.IFRS 17(85),(B123)(a)(ii),(B124)(a)(ii)Many insurance premiums include an investment (i.e. deposit) component - an amount that will be paid topolicyholders or their beneficiaries regardless of whether an insured event occurs. The receipt and repaymentof these non-distinct investment components do not relate to the provision of insurance service; therefore, suchamounts are not presented as part of the insurer’s revenue or insurance service expenses.IFRS 17(11)(b)Entities apply IFRS 9 to account for distinct investment components (not interrelated with insurance and able tobe sold separately). That is, the related net investment income is excluded from the insurance service result andpresented separately.IFRS 17(42)(a),(B120),(B123),(B124)(a)Insurance revenue includes insurance claims and other directly attributable expenses as expected at the beginningof the reporting period and does not include experience adjustments relating to these amounts (insurance serviceexpenses) that arise during the year. Experience adjustments related to premium receipts for current and pastperiods are included in insurance revenue, however.IFRS 17(32),(38),(B125)Under IFRS 4, many insurers recognise deferred acquisition cash flows separately as assets. Under IFRS 17, forinsurance contracts measured under the general measurement model (GMM) and the variable fee approach (VFA),insurance acquisition cash flows decrease the CSM and are thus implicitly deferred within the CSM, leading toa lower amount of CSM amortisation recognised in revenue in future reporting periods as services are rendered.However, for presentation purposes, directly attributable acquisition costs are amortised as an insurance serviceexpense in a systematic way on the basis of the passage of time with an equal amount recognised as insurancerevenue.IFRS 17(55),(59)(a)Under the premium allocation approach (PAA), an entity should recognise insurance acquisition cash flows in theliability for remaining coverage (LRC) and amortise insurance acquisition cash flows as insurance service expenses.Alternatively, an entity can choose to recognise insurance acquisition cash flows as an expense when incurred ifeach insurance contract in a group has a coverage period of one year or less.When applying IFRS 17, any lack of recoverability of the acquisition cash flows is reflected in the measurement ofthe insurance contracts, eliminating complex mechanisms that exist under IFRS 4 to deal with amortisation andimpairment of the separate asset.IFRS 17(37),(41)(a),(42)(a)-(b),(81)The risk adjustment in the insurance liability reflects the compensation that an insurer requires for bearing theuncertainty arising from non-financial risk. For insurance contracts issued, a portion of the risk adjustment for nonfinancial risk relating to the LRC is recognised in insurance revenue as the risk is released, while a portion relating tothe liability for incurred claims (LIC) is recognised in insurance service expenses. An insurer is not required to includethe entire change in the risk adjustment for non-financial risk in the insurance service result. Instead, it can chooseto split the amount between the insurance service result and insurance finance income or expenses. Among otherimpacts, disaggregation would result in higher insurance revenue and higher finance expenses, though it representsa more complex option operationally.IFRS 17(84)-(85)Only items that reflect insurance service expenses (i.e. incurred claims and other insurance service expenses arisingfrom insurance contracts the Group issues) are reported as insurance expenses. As a result, when applying IFRS17, repayment of non-distinct investment components is not presented as an insurance expense but rather as asettlement of an insurance liability.IFRS 17(82),(86)IFRS 17 allows options in presenting income or expenses from reinsurance contracts held, other than insurancefinance income or expenses. The Group elected to present a single net amount in net expenses from reinsurancecontracts held. An alternative would be to gross up this single amount and present separately the amountsrecovered from the reinsurer (as income) and an allocation of the premiums paid (as reinsurance expenses) in lineitems separate from insurance revenue and insurance service expenses.PwCIFRS 17, Insurance Contracts: An illustration 9
(All amounts in CU thousands unless otherwise stated)IFRS 7(20)IAS 1(82)Presentation of net investment incomePost-adoption of IFRS 9, the line item ‘Interest revenue’ can contain only interest income on assets that aremeasured at amor
International Accounting Standards Board (IASB) in May 2017, as well as the new . statements and selected disclosures around a fictitious multi-line insurance group, Value Insurance Plc and its subsidiaries (the Group). . of the application of different measurement models in IFRS 17 and IFRS 9/IFRS 15, Revenue from Contracts .
(a) IFRS 9 Financial Instruments (Part A); and (b) IFRS 15 Revenue from Contracts with Customers (Part B). Introduction 2 IFRS 17 is effective from 1 January 2021. An insurer can choose to apply IFRS 17 before that date but only if it also applies IFRS 9. 3 The paper considers components of IFRS 9 and IFRS 15 that are relevant to the
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New IFRS Standards—IFRS 16 Leases Page 1 of 26 . Agenda ref 30E STAFF PAPER June 2019 IASB Meeting Project Comprehensive review of the IFRS for SMEs Standard Paper topic New IFRS Standards—IFRS 16 Leases CONTACT(S) Yousouf Hansye ykhansye@ifrs.org 44 (0) 20 7246 6470
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