Timing of Initial Recognition of Insurance contracts

Timing of Initial Recognition of Insurance contracts Timing of Initial Recognition of Insurance contracts – Groups of insurance contracts are initially recognised from the earliest of [IFRS 17 25]:

  • when the coverage period starts;
  • when the first payment from the policyholder is due, or actually received if there is no due date; and
  • based on the facts and circumstances, when the entity determines that the group of contracts is onerous.

An entity should include individual contracts in an already existing group only when they are issued. The standard notes that an entity can issue more contracts in a group after the end of a reporting period. This could lead to a change in the discount rate from initial recognition of the group.

Illustration  Determining the date of recognition of a group of insurance contracts

Example 1 Timing of Initial Recognition of Insurance contracts

An entity issues insurance contracts, that form a group, to policyholders beginning on 25 December 2020. The coverage period of the group begins on 1 January 2021 and the first premium from a policyholder in the group is due 5 January 2021. Timing of Initial Recognition of Insurance contracts

The group of insurance contracts is not onerous. The group of insurance contracts is recognised on 1 January 2021 (i.e., the start of the coverage period of the group) which is earlier than the date that the first premium is due. Timing of Initial Recognition of Insurance contracts

Example 2 Timing of Initial Recognition of Insurance contracts

An entity issues insurance contracts, that form a group, to policyholders beginning on 25 December 2021. The coverage period of the group begins on 1 January 2022 and the first premium from a policyholder in the group is due on 30 December 2021. The group of insurance contracts is not onerous. Timing of Initial Recognition of Insurance contracts

The group of insurance contracts is recognised on 30 December 2021 (i.e., the date that the first premium is due), which is before the coverage period begins. However, if the entity has a reporting date of 31 December 2021, only those contracts within the group issued as of the reporting date will be recognised in the financial statements for the period ending 31 December 2021.

Example 3 Timing of Initial Recognition of Insurance contracts

An entity issues insurance contracts, that form a group, to policyholders beginning on 25 December 2022. On that day, the entity determines that the group of insurance contracts is onerous. The coverage period of the group begins on 1 January 2023 and the first premium from a policyholder in the group is due on 5 January 2023.

The group of insurance contracts is recognised on 25 December 2022 which is when the group of insurance contracts is determined to be onerous. However, if the entity has a reporting date of 31 December 2022, only those contracts within the group issued as at the reporting date will be recognised in the financial statements for the period ending 31 December 2022.

Food for IFRS thought

The inception date of a contract is when an entity has a contractual obligation to accept risk (also known as the issue date of a contract). The inception date is typically before the beginning of coverage and due date for the initial premium. However, IFRS 17 only requires recognition of issued insurance contracts before these dates if facts and circumstances indicate that the contracts in the group are onerous.

Allowing entities to recognise insurance contracts they have issued after inception of the contracts represents a practical expedient introduced by the Board to allow entities to continue their existing recognition practices. However, an entity is required to consider whether facts and circumstances indicate that insurance contracts it has issued are onerous at inception or any other time before they would otherwise be recognised. (IFRS 17 BC 140 – 145)

An insurance contract may, at initial recognition, join an existing group of insurance contracts if all the contracts have similar expected profitability at the time of initial recognition and are issued within a year of each other (i.e., same cohort — see Cohorts in Level of aggregation). Timing of Initia l Recognition of Insurance contracts

When contracts are added to a group in a subsequent reporting period, this may result in a change in determining discount rates at the date of initial recognition of the group as discount rates may be determined using weighted average rates over the period that contracts in the group are issued (see Insurance contract discount rate).

When this occurs, an entity should apply the revised (weighted average) discount rates from the start of the reporting period in which the new contracts are added to the group. There is no retrospective catch-up adjustment. [IFRS 17 28] Timing of Initial Recognition of Insurance contracts

Food for IFRS thought

Assessing expected profitability is performed on initial recognition of contracts as they are assigned to a group of contracts. The contracts all then stay within that same group until they are derecognised. This means that it is possible within a group to offset losses on some contracts with gains on others and therefore to avoid the recognition of onerous contract losses, as these are determined at group level.

In some cases, an entity will pay or receive insurance acquisition cash flows for contracts issued prior to the date of recognition of the group of insurance contracts to which those insurance acquisition cash flows are attributable (unless the insurer chooses to recognise these as expenses or income under the premium allocation approach — see Premium allocation approach).

In these situations, an insurer should recognise an asset or a liability for these cash flows (i.e., a prepayment or an accrual). When the group of insurance contracts to which the insurance acquisition cash flows are allocated is recognised, the asset or liability should be derecognised (because the insurance acquisition cash flows are now part of the cash flows of the group of insurance contracts). [IFRS 17 27] Timing of Initial Recognition of Insurance contracts

Timing of Initial Recognition of Insurance contracts

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