IFRS 17IE Insurances subsequent measurement

Last Updated on 10/02/2020 by 75385885

IFRS 17IE Insurances subsequent measurement

Example 2—Subsequent measurement (paragraphs 40, 44, 48, 101 and B96–B97)

IE12 This example illustrates how an entity subsequently measures a group of insurance contracts, including a situation when the group of insurance contracts becomes onerous after initial recognition.

IE13 This example also illustrates the requirement that an entity discloses a reconciliation from the opening to the closing balances of each component of the liability for the group of insurance contracts in paragraph 101.

Assumptions

IE14 Example 2 uses the same fact pattern as Example 1A on initial recognition. In addition:

  1. in Year 1 all events occur as expected and the entity does not change any assumptions related to future periods;
  2. in Year 1 the discount rate that reflects the characteristics of the cash flows of the group remains at 5 per cent a year at the end of each year (those cash flows do not vary based on the returns on any underlying items);
  3. the risk adjustment for non-financial risk is recognised in profit or loss evenly in each year of coverage; and
  4. the expenses are expected to be paid immediately after they are incurred at the end of each year.

IE15 At the end of Year 2 the incurred expenses differ from those expected for that year. The entity also revises the fulfilment cash flows for Year 3 as follows:

  1. in Example 2A, there are favourable changes in fulfilment cash flows and these changes increase the expected profitability of the group of insurance contracts; and
  2. in Example 2B, there are unfavourable changes in fulfilment cash flows that exceed the remaining contractual service margin, creating an onerous group of insurance contracts.

Analysis

IE16 On initial recognition, the entity measures the group of insurance contracts and estimates the fulfilment cash flows at the end of each subsequent year as follows:

the entity measures the group of insurance contracts and estimates the fulfilment cash flows

IE17 At the end of Year 1, applying paragraphs B96–B97, the entity analyses the source of changes in the fulfilment cash flows during the year to decide whether each change adjusts the contractual service margin. Using this information, a possible format of the reconciliation of the insurance contract liability required by paragraph 101 is as follows:

 
  1. Applying paragraph 44(a), the entity adjusts the contractual service margin of the group of contracts with any new contracts added to the group.
  2. In this example, insurance finance expenses of CU27 are calculated by multiplying CU545 (the difference between the estimates of the present value of the future cash flows at initial recognition of CU(355) and the cash inflows of CU900 received at the beginning of Year 1) by the current discount rate of 5 per cent, determined applying paragraphs 36 and B72(a).
  3. Applying paragraph 81, the entity chooses not to disaggregate the change in the risk adjustment for non-financial risk between the insurance service result and insurance finance income or expenses, therefore the entity presents the entire change in the risk adjustment for non-financial risk as part of the insurance service result in the statement of profit or loss.
  4. Applying paragraphs 44(b) and B72(b), the entity calculates interest accreted on the carrying amount of the contractual service margin of CU12 by multiplying the opening balance of CU235 by the discount rate of 5 per cent. That rate is applicable to nominal cash flows that do not vary based on the returns on any underlying items, determined on initial recognition of the group of insurance contracts.
  5. Applying paragraphs 44(e) and B119, the entity recognises in profit or loss in each period an amount of the contractual service margin for the group of insurance contracts to reflect the services provided under the group of insurance contracts in that period. The amount is determined by identifying the coverage units in the group. These coverage units reflect the quantity of benefits provided under each contract in the group and its expected coverage duration. The entity allocates the contractual service margin at the end of the period (before recognising any amounts in profit or loss) equally to each coverage unit provided in the current period and expected to be provided in the future, and recognises in profit or loss the amount allocated to the coverage units provided in the period. In this example, the service provided in each period for the group of contracts is the same because all contracts are expected to provide the same amount of benefits for all three periods of coverage. Consequently, the amount of the contractual service margin recognised in profit or loss in the period of CU82 is CU247 (CU235 + CU12) divided by three periods of coverage. The entity could achieve the objective of the recognition of the contractual service margin on the basis of the coverage units using a different pattern. For example, the entity could allocate equally in each period the contractual service margin including the total interest expected to be accreted over the coverage period. In this example, the allocation pattern using this method would equal CU86 in each period calculated as CU86 = CU235 × 1.05 ÷ (1 + 1 ÷ 1.05 + 1 ÷ 1.052) instead of the increasing pattern of CU82 in Year 1, CU86 in Year 2 and CU91 in Year 3.Example 6 illustrates the allocation of the contractual service margin in a situation when the entity expects contracts in a group to have different durations.

Example 2A—Changes in fulfilment cash flows that increase future profitability

Assumptions

IE18 At the end of Year 2, the following events occur:

  1. the actual claims of CU150 are CU50 lower than originally expected for this period;
  2. the entity revises the estimates of future cash outflows for Year 3 and expects to pay CU140, instead of CU200 (the present value is CU133 instead of CU191, a decrease in the present value of CU58); and
  3. the entity revises the risk adjustment for non-financial risk related to estimates of future cash flows to CU30 instead of the initially estimated CU40.

Analysis

IE19 Thus, the estimates of the revised fulfilment cash flows at the end of Year 2 are as follows (the fulfilment cash flows for Year 1 and Year 3 are provided for comparison):

the estimates of the revised fulfilment cash flows at the end of Year 2

IE20 At the end of Year 2, applying paragraphs B96–B97, the entity analyses the source of changes in the fulfilment cash flows during the year to decide whether each change adjusts the contractual service margin. Using this information, a possible format of the reconciliation of the insurance contract liability required by paragraph 101 is as follows:

this information a possible format of the reconciliation of the insurance contract liability
  1. For the method of calculation, see Year 1.
  2. Applying paragraph 44(c), the entity adjusts the contractual service margin of the group of insurance contracts for changes in fulfilment cash flows relating to future service. Applying paragraph B96, the entity adjusts the contractual service margin for changes in estimates of the present value of the future cash flows measured at the discount rate determined on initial recognition of the group of insurance contracts of CU58 and changes in the risk adjustment for non-financial risk that relate to future service of CU10. Example 6 illustrates the accounting for changes in the estimates of the present value of the future cash flows when there is a change in discount rate after initial recognition of a group.
  3. Applying paragraph B97(c), the entity does not adjust the contractual service margin for the experience adjustment of CU50 defined as the difference between the estimate at the beginning of the period of insurance service expenses expected to be incurred in the period of CU200 and the actual insurance service expenses incurred in the period of CU150. Applying paragraph 104, the entity classifies those changes as related to current service.

IE21 At the end of Year 3 the coverage period ends, so the remaining contractual service margin is recognised in profit or loss. In this example, all claims are paid when incurred; therefore, the remaining obligation is extinguished when the revised cash outflows are paid at the end of Year 3.

IE22 At the end of Year 3, applying paragraphs B96–B97, the entity analyses the source of changes in the fulfilment cash flows during the year to decide whether each change adjusts the contractual service margin. Using this information, a possible format of the reconciliation of the insurance contract liability required by paragraph 101 is as follows:

source of changes in the fulfilment cash flows during the year to decide whether each change adjusts

(a) For the method of calculation, see Year 1.

IE23 The amounts recognised in the statement of financial position and the statement of profit or loss summarise the amounts analysed in the tables above as follows:

recognised in the statement of financial position and the statement of profit or loss summarise
  1. In Year 1, the amount of cash of CU(700) equals the receipt of premiums of CU(900) and the payment of claims of CU200. There are additional payments of claims: CU150 in Year 2 and CU140 in Year 3. For simplicity, there is no interest accreted on the cash account.
  2. This example illustrates the amounts recognised in the statement of profit or loss. Example 3A illustrates how these amounts could be presented.

Example 2B—Changes in fulfilment cash flows that create an onerous group of insurance contracts

IE24 At the end of Year 2, the following events occur:

  1. the actual claims of CU400 are CU200 higher than originally expected in this period.
  2. the entity revises its estimates of the future cash outflows for Year 3 to CU450, instead of CU200 (an increase in the present value of CU238). The entity also revises the risk adjustment for non-financial risk related to those future cash flows to CU88 at the end of Year 2 (CU48 higher than the originally expected CU40).

IE25 Thus, the estimates of the revised fulfilment cash flows at the end of Years 2 and 3 are as follows (the fulfilment cash flows for Year 1 are provided for comparison):

the estimates of the revised fulfilment cash flows at the end of Years 2 and 3 are as follows

IE26 At the end of Year 2, applying paragraphs B96–B97, the entity analyses the source of changes in the fulfilment cash flows during the year to decide whether each change adjusts the contractual service margin. Using this information, a possible format of the reconciliation of the insurance contract liability required by paragraph 101 is as follows:

nalyses the source of changes in the fulfilment cash flows during the year
  1. For the method of calculation, see Year 1.
  2. Applying paragraph 44(c), the entity adjusts the contractual service margin for the changes in the fulfilment cash flows relating to future service, except to the extent that such increases in the fulfilment cash flows exceed the carrying amount of the contractual service margin, giving rise to a loss. Applying paragraph 48, the entity recognises this loss in profit or loss. Consequently, the entity accounts for the changes in the fulfilment cash flows related to future service of CU286 (estimates of the present value of the future cash outflows of CU238 plus the change in the risk adjustment for non-financial risk of CU48) as follows:
    1. the contractual service margin is adjusted by CU173, which reduces the contractual service margin to zero; and
    2. the remaining change in the fulfilment cash flows of CU113 is recognised in profit or loss.
  3. Applying paragraph 44(e), the entity does not recognise any contractual service margin in profit or loss for the year because the remaining balance of the contractual service margin (before any allocation) equals zero (CU0 = CU165 + CU8 – CU173).

IE27 At the end of Year 3, the coverage period ends and the group of contracts is derecognised. Applying paragraphs B96–B97, the entity analyses the source of changes in the fulfilment cash flows during the year to decide whether each change adjusts the contractual service margin. Using this information, a possible format of the reconciliation of the insurance contract liability required by paragraph 101 is as follows:

cash flows during the year to decide whether each change adjusts the contractual service margin

(a) For the method of calculation, see Year 1.

IE28 The amounts recognised in the statement of financial position and the statement of profit or loss summarise the amounts analysed in the tables above as follows:

financial position and the statement of profit or loss summarise the amounts analysed in the tables
  1. In Year 1, the cash of CU(700) equals the receipt of premiums of CU(900) and the payment of claims of CU200. In Year 2 and Year 3, there is a payment of claims of CU400 and CU450 respectively. For simplicity, there is no interest accreted on the cash account.
  2. This example illustrates the amounts recognised in the statement of profit or loss. Example 3A illustrates how these amounts could be presented.

 

 

 

Last Updated on 10/02/2020 by 75385885

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