IFRS 17IE Subsequent measurement insurances

Last Updated on 10/02/2020 by 75385885

IFRS 17IE Subsequent measurement insurances

Example 6—Additional features of the contractual service margin (paragraphs 44, 87, 101, B96–B99 and B119)

IE56 This example illustrates adjustments to the contractual service margin of insurance contracts without direct participation features for:

  1. the changes in discretionary cash flows for insurance contracts that give an entity discretion over the cash flows expected to be paid to the policyholder, including determination of changes in those cash flows separately from changes in financial assumptions;
  2. the adjustments related to the time value of money and financial risks in a situation when the interest rate changes; and
  3. the amount recognised in profit or loss for the services provided in the period in a situation when the entity expects contracts in a group to have different durations.

Assumptions

IE57 An entity issues 200 insurance contracts with a coverage period of three years. The coverage period starts when the insurance contracts are issued.

IE58 The contracts in this example:

  1. meet the definition of insurance contracts because they offer a fixed payment on death. However, to isolate the effects illustrated in this example, and for simplicity, any fixed cash flows payable on death are ignored.
  2. do not meet criteria for insurance contracts with direct participation features applying paragraph B101(a) because a pool of assets is not specified in the contracts.

IE59 The entity receives a single premium of CU15 at the beginning of the coverage period. Policyholders will receive the value of the account balance:

  1. if the insured person dies during the coverage period; or
  2. at the end of the coverage period (maturity value) if the insured person survives to the end of the coverage period.

IE60 The entity calculates the policyholder account balances at the end of each year as follows:

  1. opening balance; plus
  2. premiums received at the beginning of the period (if any); minus
  3. an annual charge of 3 per cent of the sum of the account balances at the beginning of the year and premium received if any; plus
  4. interest credited at the end of the year (the interest credited to the account balances in each year is at the discretion of the entity); minus
  5. the value of the remaining account balances paid to policyholders when an insured person dies or the coverage period ends.

IE61 The entity specifies that its commitment under the contract is to credit interest to the policyholder’s account balance at a rate equal to the return on an internally specified pool of assets minus two percentage points, applying paragraph B98.

IE62 On initial recognition of the group of contracts, the entity:

  1. expects the return on the specified pool of assets will be 10 per cent a year.
  2. determines the discount rate applicable to nominal cash flows that do not vary based on the returns on any underlying items is 4 per cent a year.
  3. expects that two insured people will die at the end of each year. Claims are settled immediately.
  4. estimates the risk adjustment for non-financial risk to be CU30 and expects to recognise it in profit or loss evenly over the coverage period.

IE63 In Year 1, the return on the specified pool of assets is 10 per cent, as expected. However, in Year 2 the return on the specified pool of assets is only 7 per cent. Consequently, at the end of Year 2, the entity:

  1. revises its estimate of the expected return on the specified pool of assets to 7 per cent in Year 3.
  2. exercises its discretion over the amount of interest it will credit to the policyholder account balances in Years 2 and 3. It determines that it will credit interest to the policyholder account balances at a rate equal to the return on the specified pool of assets, minus one percentage point, ie the entity forgoes spread income of one percentage point a year in Years 2 and 3.
  3. credits 6 per cent interest to the policyholder account balances (instead of the initially expected 8 per cent).

IE64 In this example all other amounts are ignored, for simplicity.

Analysis

IE65 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 group of insurance contracts and estimates the fulfilment cash flows 65

(a) The entity calculates the estimates of the present value of the future cash outflows using a current discount rate of 10 per cent that reflects the characteristics of the future cash flows, determined applying paragraphs 36 and B72(a).

IE66 Applying paragraphs B98–B99, to determine how to identify a change in discretionary cash flows, an entity shall specify at inception of the contract the basis on which it expects to determine its commitment under the contract, for example, based on a fixed interest rate, or on returns that vary based on specified asset returns. An entity uses this specification to distinguish between the effect of changes in assumptions that relate to financial risk on that commitment (which does not adjust the contractual service margin) and the effect of discretionary changes to that commitment (which adjusts the contractual service margin).

IE67 In this example, the entity specified at inception of the contract that its commitment under the contract is to credit interest to the policyholder account balances at a rate equal to the return on a specified pool of assets minus two percentage points. Because of the entity’s decision at the end of Year 2, this spread decreased from two percentage points to one percentage point.

IE68 Consequently, at the end of Year 2, the entity analyses the changes in the policyholder account balances between the result of changes in financial assumptions and the exercise of discretion, as follows:

the changes in the policyholder account balances between the result of changes
  1. The annual charge equals the percentage of the balance at the beginning of each year (including premiums received at the beginning of the year). For example, in Year 1 the annual charge of CU90 is 3% × CU3,000.
  2. Interest credited each year equals the percentage of the balance at the beginning of each year minus the annual charge. For example, in Year 1 the interest credited of CU233 is 8% × (CU3,000 – CU90).
  3. The death benefit equals the percentage of the balance at the beginning of each year minus the annual charge plus interest credited. For example, in Year 1 the death benefit of CU31 is 2/200 × (CU3,000 – CU90 + CU233).

IE69 The entity summarises the estimates of future cash flows for Years 2 and 3 in the table below.

The entity summarises the estimates of future cash flows

IE70 Applying paragraphs B98–B99, the entity distinguishes between the effect of changes in assumptions that relate to financial risk and the effect of discretionary changes on the fulfilment cash flows as follows:

effect of changes in assumptions that relate to financial risk and the effect of discretionary changes
  1. The entity calculates the estimates of the present value of the future cash outflows using a current discount rate that reflects the characteristics of the future cash flows, determined applying paragraphs 36 and B72(a).
  2. See the table after paragraph IE69.
  3. The change in estimates of future cash flows of CU186 equals the difference between the estimates of the future cash flows revised for changes in financial assumptions of CU3,228 minus the estimates of the future cash flows before the change in financial assumptions of CU3,414. Hence, it reflects only the change in financial assumptions.
  4. The change in estimates of the present value of the future cash flows of CU193 is the difference between the estimates of the present value of the future cash flows at the end of Year 2 (revised for changes in financial assumptions) of CU3,017 and the estimates of the present value of the future cash flows at the beginning of Year 2 (before changes in financial assumptions) of CU2,824. Hence, it reflects the effect of the interest accretion during Year 2 and the effect of the change in financial assumptions.
  5. The effect of the exercise of discretion of CU61 equals the difference between the estimates of the future cash flows revised for the exercise of discretion of CU3,289 and the estimates of the future cash flows before the effect of the exercise of discretion of CU3,228.

IE71 A possible format for the reconciliation of the insurance contract liability required by paragraph 101 for Year 2 is as follows:

possible format for the reconciliation of the insurance contract liability
  1. Applying paragraph B97, the entity does not adjust the contractual service margin for a group of contracts for changes in fulfilment cash flows related to the effect of time value of money and financial risk and changes therein (being the effect, if any, on estimated future cash flows and the effect of a change in discount rate). This is because such changes do not relate to future service. Applying paragraph 87, the entity recognises those changes as insurance finance expenses. Consequently, the insurance finance expenses of CU195 are the sum of:
    1. the effect of interest accretion and the effect of the change in financial assumptions of CU193 (see the table after paragraph IE69); and
    2. the effect of the change in the assumptions related to financial risk on the change in the discretionary cash flows of CU2, which equals:
      1. CU57 of the present value of the effect of the change in discretion discounted using the current rate (see the table after paragraph IE70); minus
      2. CU55 of the present value of the change in discretion discounted using the rate determined on initial recognition of the group of insurance contracts (see footnote (c)).
  2. Applying paragraphs 44(b) and B72(b), the entity calculates interest accreted on the carrying amount of the contractual service margin of CU10 by multiplying the opening balance of CU258 by the discount rate of 4 per cent determined on initial recognition of the group of insurance contracts. That rate is applicable to nominal cash flows that do not vary based on the returns on any underlying items.
  3. Applying paragraphs 44(c) and B98, the entity regards changes in discretionary cash flows as relating to future service, and accordingly adjusts the contractual service margin. Applying paragraphs B96 and B72(c), the adjustment to the contractual service margin is calculated by discounting the change in the future cash flows of CU61 using the discount rate of 10 per cent, which reflects the characteristics of the cash flows determined on initial recognition of the group of insurance contracts. Consequently, the amount of discretionary cash flows that adjusts the contractual service margin of CU55 is CU61 ÷ (1 + 10%).
  4. Applying paragraphs 44(e) and B119, the entity recognises in profit or loss the amount of contractual service margin determined by allocating 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, as follows:
    1. the amount of the contractual service margin immediately before allocation to profit or loss is CU213 (opening balance of CU258 plus interest of CU10 minus the change related to future service of CU55);
    2. the number of coverage units in this example is the total of the number of contracts in each period for which coverage is expected to be provided (because the quantity of benefits provided for each contract is the same). Hence, there are 394 coverage units to be provided over the current and final year (198 contracts in Year 2 and 196 contracts in Year 3);
    3. the contractual service margin per coverage unit is CU0.54 (CU213 ÷ 394 coverage units); and
    4. the contractual service margin recognised in profit or loss in Year 2 of CU107 is CU0.54 of contractual service margin per coverage unit multiplied by the 198 coverage units provided in Year 2.

 

 

Last Updated on 10/02/2020 by 75385885

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