May and February 2018 TRG meetings
May 2018 TRG meeting
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, determining the quantity of benefits provided under each contract in a group of insurance contracts is an area of judgement.
The question that arises is what factors should be considered in determining the coverage units in a group of contracts, considering both the contracts’ expected duration and quantity of benefits.
What did the TRG discuss?
The objective of the release of the CSM is to reflect services provided in each period. Since IFRS 17 does not specify how to determine the coverage units in a group, TRG members agreed that an insurer needs to apply judgement to determine a systematic and rational method for estimating the services provided for each group of contracts.
TRG members observed that coverage units should reflect:
Depending on the facts and circumstances, methods that may achieve the objective include:
It was noted that methods based on premiums would not be appropriate if the premiums:
TRG members also appeared to agree that methods that result in no CSM allocation to periods in which the insurer stands ready to meet valid claims would not meet the objective.
What’s the impact?
Many groups of insurance contracts will contain contracts with similar risks and levels of cover provided.
For groups like these, a method primarily based on the passage of time that reflects the number of contracts in the group may be a reasonable proxy for services provided in each period.
For other, more complex groups of insurance contracts (e.g. groups that contain contracts with different or multiple risks, or contracts with different levels of cover provided over different periods), other methods would need to be developed to achieve the objective of the CSM release.
Identifying a practical and systematic approach for determining the quantity of benefits provided by these contracts using information available to the insurer may ease the operational challenges of this new requirement.
What's the issue?
A variety of insurance contracts contain investment components. A key question is whether their coverage period and coverage units should be determined by reference to insurance coverage only, or by reference to insurance coverage and some aspect of the investment component. Answering this question is necessary for determining the CSM recognised in profit or loss in each period.
What did the TRG discuss?
IFRS 17 identifies direct participating contracts as contracts that provide both insurance services and investment-related services. Based on this, TRG members agreed that, for direct participating contracts determining the quantity of benefits provided and the expected coverage duration – and hence, the CSM recognised in profit or loss in each period – should reflect both insurance and investment-related services provided under the contract.
The staff and some TRG members believed that the standard would need to be clarified to achieve this, while other TRG members believed that this may not be necessary.
For contracts with investment components that are not direct participating contracts, the staff and some TRG members believed that, based on the wording of IFRS 17, the coverage period and coverage units are determined by reference to insurance services only. However, most TRG members disagreed that such contracts should be treated as providing only insurance services.
What's the impact?
The outcome of the TRG’s discussion on direct participating contracts appears consistent with the manner in which these contracts are identified and accounted for (i.e. applying the variable fee approach), and reflects the contracts’ characteristics. Given the wide range of these contracts, assessing the pattern of service provision reflecting both insurance and investment-related services will require judgement.
However, some TRG members observed that if investment-related services provided are reflected in CSM allocation only for direct participating contracts, then this could result in what they believe are economically similar contracts having significantly different recognition patterns, depending on whether they qualify as direct participating contracts or not. This is because they consider that insurance contracts that are not direct participating contracts may still provide significant investment-related services.
The staff will report the observations shared by TRG members to the IASB before considering any further next steps. In the meantime, you can continue to progress the overall design of your implementation plan, but be mindful to build in flexibility to accommodate the continuation of this discussion. We recommend that you stay tuned for further developments in this area.
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.