What’s the issue?
The CSM of a group of insurance contracts is recognised in profit or loss based on identifying the coverage units in the group. These are determined by considering, for each contract, the quantity of benefits provided and its expected coverage duration.
Due to the variety and complexity of insurance products that exist, determining the quantity of benefits provided for each contract in a group of insurance contracts is an area of judgment that needs careful consideration.
The question that arises is what factors should be considered in determining the quantity of benefits provided.
What did the TRG discuss?
TRG members appeared to agree that, for the purposes of allocating the CSM, the coverage units should reflect the likelihood of an insured event occurring to the extent that events would affect the expected duration of contracts in the group (e.g. lapses and cancellations). However, the quantity of benefits provided in a period does not reflect the likelihood of an insured event occurring because the quantity of benefits provided is not the same as the amount expected to be claimed in a period.
TRG members appeared to support the observation that the quantity of benefits provided should, in principle, reflect any variability across periods in the level of cover provided by contracts in the group. However, they raised concerns about whether the use of a contractual maximum level of cover for each reporting period is appropriate. Some members suggested that the quantity of benefits provided should reflect the insurer’s expectations of the possible maximum level of cover at each reporting date.
What’s the impact?
Determining the quantity of benefits will be a key factor in considering the release pattern of the CSM and could require significant effort, cost and upgrades to systems, processes and controls. Insurers should therefore follow the substance of these discussions closely.
The TRG will continue this discussion at its May meeting, when it discusses contracts with investment components.
This topic page is part of our Insurance – Transition to IFRS 17 series, which covers the discussions of the IASB's Transition Resource Group (TRG) for Insurance Contracts.
You can also find more insight and analysis on the new insurance contracts standard at kpmg.com/ifrs17.