IFRS 17 and AASB 17

AASB 17 is a new accounting standard for insurance business.  It is based on, and almost identical to the international standard, IFRS 17, issued by the International Accounting Standards Board (IASB).

It becomes effective for accounting periods starting 1 January 2021 or later, though it may be adopted early.

The new standard is quite different in many detailed ways from the current accounting standards for life insurance, general insurance and health in Australia. The standard is complex and there are many challenges to fully understand its implications and to be able to provide definitive guidance.

Information Note (IN)

In late 2016, the Actuaries Institute formed a task force to help the profession prepare for the new standard.  The taskforce decided to produce an Information Note (IN) as its primary piece of work.

A draft of the IN for discussion was published in March 2018 (version 1.0), and the first operating IN (version 1.1) was published in July 2018.

Here is version 1.1 of the IN.

Here is the draft version 1.0.

Here is a copy of version 1.1 showing the more substantial changes from version 1.0.

These and other relevant documents can be found here.
The IASB is working through various sources of feedback and is providing clarification to IFRS 17 over time.

The task force intends to update the IN (every 3-6 months or so) to reflect this, together with other improvements considered necessary as accounting interpretations are clarified and members gain more experience with the standard.

The International Actuarial Association is preparing an International Actuarial Note (IAN) but it is in an early stage of development. Where appropriate the IN will be adapted to be consistent with the IAN.

Feedback

The Task Force is keen to be given feedback from members as they put the IN to use.  To help with this, please use this form and get in touch with Tony Burke, and he will engage the TF as required.

Task Force members (as at August 2018)

  • Ian Laughlin (Taskforce Chair, Australian Prudential Regulation Authority (APRA), Australian Taxation office (ATO), Australian Securities & Investments Commission (ASIC) and Treasury),
  • Grant Robinson (Building Blocks Approach (BBA))
  • Brett Pickett (APRA representative and LIWMPC representative),
  • Francis Beens (Insurance Council of Australia (ICA) and General Insurance Practice Committee Representative),
  • Brendan Counsell (Premium Allocation Approach (PAA), International Actuarial Association (IAA) and the Accounting & Actuaries Liaison Committee AALC),
  • Trang Duncanson (Analyst Community, Financial Services Council (FSC), Actuaries Institute Communication Lead),
  • Anne Driver (AALC, Australian Accounting Standards Board (AASB) TRG);
  • Andrew Scott (Reserve Bank of NZ),
  • Ben Coulter (Reserve Bank of NZ and New Zealand Society of Actuaries),
  • Antony Claughton (Health Practice Committee (HPC) representative),
  • David Rush (Variable Fee Approach (VFA), Australian Securities and Investments Commission (ASIC)
  • Lisa Simpson
  • Jun Oh (Australian Prudential and Regulation Authority (APRA)
  • Chris Scheuber ( Risk Adjustment & Discount rate)
  • Briallen Cummings (Lead, disclosures / OCI, reporting, current estimates and strategic transition)


WORKING WITH APRA

The Task Force has had a number of interactions with APRA, and this has led to a decision to set up working groups to consider specific issues of relevance to APRA.  These working groups will have representation from both APRA and the Task Force.  The first of the working groups is operational and is addressing the Variable Fee Approach (VFA).

As noted in the IN, AASB 17 is an accounting standard. The APRA working groups therefore cannot make decisions about the interpretation of AASB 17 but are considering issues that emerge for APRA from the adoption of AASB 17.  As an accounting standard, AASB 17 is a legal instrument that is enforceable by ASIC.

References

There are many documents that have been produced commenting on IFRS17/AASB17. Members may find the following list useful:

RECENTLY ADDED

August EFRAG TEG meeting on issues raised by CFO forum and industry for Endorsement Advice on IFRS 17:

02-02 IFRS 17 Industry issues analysis – remaining issues - EFRAG TEG 18-08-08.pdf

02-03 IFRS 17 Industry issues analysis - compared to TEG 25 July 2018 - EFRAG TEG 18-08-08.pdf


KEY LINKS

Australian Accounting Standard Board (2017).  AASB 17 Insurance Contracts.

Australian Prudential Regulatory Authority (2017).  APRA’s Approach to AASB 16 Leases and AASB 17 Insurance Contracts

This letter to all general insurers, life insurers and private health insurers set out APRA’s planned response to the issuance of AASB 16 Leases and AASB 17 Insurance Contracts. 

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (February 2018).  Summary of the Transition Resource Group for IFRS 17 Insurance Contracts meeting held on 6 February 2018.

This paper provides a summary of the 6 February 2018 meeting of the Transition Resource Group discussing submission papers AP01-AP07.

OTHERS

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (May 2018).  Summary of the Transition Resource Group for IFRS 17 Insurance Contracts meeting held on 2 May 2018.

This paper provides a summary of the 2 May 2018 meeting of the Transition Resource Group discussing submission papers AP01-AP07.

Australian Accounting Standards Board (2014).  AASB 1023: General Insurance Contracts.  

Australian Accounting Standard Board (2014).  AASB 1038: Life Insurance Contracts.

Australian Accounting Standard Board Discussion Paper: Australian-specific Insurance Issues – Regulatory Disclosures and Public Sector Entities.

Australian Accounting Standard Board Transition Resource Group for Insurance Contracts: Submission to the IASB 17 TRG – Contract Boundary for Australian Insurance Products.

Actuaries Institute (2012).  Valuation of Health Insurance Liabilities.  Practice Guideline 699.02

This Practice Guideline is intended to assist actuaries preparing estimates of the health insurance liabilities of Insurers licensed under the Act.  Health insurance liabilities include both the Outstanding Claims Liability and the Future Claims Liability.  Chapter 10 covers risk margins.

Actuaries Institute (2011).  Illiquidity Premiums

A working party of The Actuaries Institute produced a proposal dated 17 November 2011.  This provided a large body of information on different methodologies, giving examples of illiquidity premium estimates from historic data for Credit Default Swaps, semi-government bonds and government guaranteed bonds.  This was then re-stated as a formula using corporate bond spreads as an input, using least squares regression techniques

Australian Prudential Regulatory Authority (2018).  Update on New Accounting Standards – AASB 16 and AASB 17

This letter to all general insurers, life insurers and private health insurers provides an update to APRA’s planned response to the issuance of AASB 16 Leases and AASB 17 Insurance Contracts.  In particular, it provides the results of the 2017 survey of insurers regarding the impacts of AASB 17.

Australian Prudential Regulatory Authority (2017).  APRA’s Approach to AASB 16 Leases and AASB 17 Insurance Contracts

This letter to all general insurers, life insurers and private health insurers set out APRA’s planned response to the issuance of AASB 16 Leases and AASB 17 Insurance Contracts.

Australian Prudential Regulatory Authority (2014).  Approved alternative method to calculate the illiquidity premium. [link unavailable due to website update]

This letter to CEOs and Appointed Actuaries of Life Insurers (including Friendly Societies) set out an approved alternative method to calculate the illiquidity premium using RBA published data (at that time).

Australian Prudential Regulatory Authority (2013).  General Insurance Prudential Standard GPS (115): Insurance Risk Charge.

Australian Prudential Regulatory Authority (2013).  Life Prudential Standard LPS (115): Insurance Risk Charge.

Australian Prudential Regulatory Authority (2012).  Illiquidity Premium. [link unavailable due to website update] This letter to CEOs (or equivalent) and Appointed Actuaries of Life Insurers set out a proposed methodology to calculate the illiquidity premium using RBA published data (at that time)

Bui.  H.  And Cummings.  B. (2008).  Risk margins for Life Insurers Liabilities.  Presented to the Institute of Actuaries of Australia, 4th Financial Services Forum.

This paper provided Australian actuaries practicing in life insurance with an introduction to the consideration, current thinking and techniques involved in setting risk adjustments under the exit framework that was being considered by the International Accounting Standard Board for insurance contracts.  Risk adjustments were calculated based on a Cost of Capital Method and quantile methods, with the key finding that the Cost of Capital Method was easier to apply than the quantile method.

Bu. Di. and Liao. Y. (2013).  Structural Credit Risk Model with Stochastic Volatility: A Particle-Filter Approach, NCER Working Party Series

This is an Australian paper that provides a structural approach in calculating an illiquidity premium.

Coulter. B. (2016).  PWC.  Risk adjustments for life insurers: Using a GI approach in a life insurance context.

This paper used the Risk Margin Taskforce (2008) paper to estimate a reasonable range of risk adjustments for a typical yearly renewable term life portfolio in New Zealand.

European Financial Reporting Advisory Group.

https://www.efrag.org/Activities/289/IFRS-17---Insurance-Contracts?AspxAutoDetectCookieSupport=1#

EFRAG has established a project on IFRS 17 which has published several papers to provide simplified information on controversial areas of IFRS 17, to enable constituents to understand the issues and for constituents to be in the position to comment on EFRAG's draft endorsement advice to the European Union.

International Actuarial Association (unpublished).  Application of IFRS 17 Insurance Contracts

This soon to be published IAN has been written to assist actuaries in complying with IFRS 17 and ISAP4, by offering practical examples of ways in which actuaries might implement the ISAP and IFRS 17 in the course of their work.

A number of existing IANs will be withdrawn by the IAA as the topics will no longer be applicable under IFRS 17.

International Actuarial Association (unpublished).  Risk Adjustments for Insurance Contracts under IFRS 17

This soon to be published monograph is intended to address the educational needs of practitioners in the insurance field who are involved in the preparation and auditing of financial statements under IFRS 17 Insurance Contracts.  It provides descriptions and illustrative examples of techniques that could be applied in the risk adjustment calculation for various insurance contracts.

International Actuarial Association (2013).  Discount Rates in Financial Reporting: A Practitioners Guide.

This monograph provides information on discounting in financial reporting from a practical and conceptual perspective.

International Actuarial Association (2010).  Stochastic Modeling — Theory and Reality from an Actuarial Perspective.

This book presents the mathematical and statistical framework necessary to develop stochastic models in any setting (insurance or otherwise).

International Actuarial Association (2009).  Measurement of Liabilities for Insurance Contracts: Current Estimates and Risk Margins.

This research paper was written by the ad-hoc Risk Margin Working Group (RMWG) in 2009 on behalf of the IAA.  It has a detailed discussion on the various approaches to calculating risk margins with an overall preference for the Cost of Capital Method.

International Accounting Standard Board (May 2017).  IFRS 17 Insurance Contracts

The IFRS 17 Standard, Basis of Conclusions and Illustrative Examples are available on the website for subscribers.

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (February 2018).  Summary of the Transition Resource Group for IFRS 17 Insurance Contracts meeting held on 6 February 2018.

This paper provides a summary of the 6 February 2018 meeting of the Transition Resource Group discussing submission papers AP01-AP07.

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (February 2018).  AP01: Separation of insurance components of a single insurance contract.

This paper provides background and an accounting analysis to support discussion by the TRG in whether IFRS 17 permits the separation of insurance components of a single insurance contract for measurement purposes.  Also whether a reinsurance contract held should be separated into components to reflect the underlying contracts covered for measurement purposes when applying IFRS 17.

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (February 2018).  AP02: Boundary of contracts with annual repricing mechanisms.

This paper provides background and an accounting analysis to support discussion by the TRG in how to determine the contract boundary of insurance contracts with annual repricing mechanisms.  In particular, whether those contracts would have a contract boundary of one year (i.e. the first annual repricing date) or longer than one year, depending on which type of risks are relevant in applying IFRS 17.34(b).

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (February 2018) (February 2018).  AP03: Boundary of reinsurance contracts held.

This paper provides background and an accounting analysis to support discussion by the TRG in how to read the IFRS 17 requirements on cash flows that are within the boundary of an insurance contract when applying them for reinsurance contracts held.

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (February 2018).  AP04: Insurance acquisition cash flows paid on an initially written contract.

This paper provides background and an accounting analysis to support discussion by the TRG in how to account for insurance acquisition cash flows unconditionally paid when a contract is first written by the entity (an initially written contract).  The entity (a) expects renewals outside the contract boundary to occur; and (b) has written the new business with that expectation.

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (February 2018).  AP05: Determining quantity of benefits for identifying coverage units

This paper provides background and an accounting analysis to support discussion by the TRG in how to determine the coverage units of a group of insurance contracts.

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (February 2018).  AP06: Insurance acquisition cash flows when using fair value transition

This paper provides background and an accounting analysis to support discussion by the TRG about whether, when the fair value approach to transition is applied, insurance acquisition cash flows that occurred prior to the transition date are recognised as revenue and expense in the statement of financial performance for reporting periods subsequent to the transition date.

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (February 2018).  AP07: Reporting on other questions submitted

This paper summarises other questions submitted to the TRG and considered as part of the February meeting.

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (May 2018).  Summary of the Transition Resource Group for IFRS 17 Insurance Contracts meeting held on 2 May 2018.

 

This paper provides a summary of the 2 May 2018 meeting of the Transition Resource Group discussing submission papers AP01-AP07.

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (May 2018).  AP01: Combination of insurance contracts

This paper provides background and an accounting analysis to support discussion by the TRG about when it may be necessary to treat a set or series of insurance contracts as a whole applying IFRS 17.9.

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (May 2018).  AP02: Determining the risk adjustment for non-financial risk in a group of entities

This paper provides background and an accounting analysis to support discussion by the TRG about at which level the risk adjustment is required to be determined (a) in the individual financial statements of entities that are part of a consolidated group and (b) in the consolidated financial statements of the group of entities.

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (May 2018).  AP03: Cash flows within the contract boundary

This paper provides background and an accounting analysis to support discussion by the TRG about the cash flows within the boundary of an insurance contract. 

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (May 2018).  AP04: Boundary of reinsurance contracts held with repricing mechanisms

This paper provides background and an accounting analysis to support further discussion by the TRG about how the boundary of a reinsurance contract held.  In particular, how should the boundary be determined when the reinsurer has the right to reprice remaining coverage prospectively.  See also paper AP03 for IASB Feb 18 TRG

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (May 2018).  AP05: Determining the quantity of benefits for identifying coverage units

This paper provides background and an accounting analysis to support further discussion by the TRG on coverage units.  See also paper AP05 for IASB Feb 18 TRG

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (May 2018).  AP06: Implementation challenges outreach report

This paper provides background and an accounting analysis to support discussion by the TRG on the implementation challenges in applying the requirements of IFRS 17 in (a) the presentation of GIC in the statements of financial position, (b) premiums received applying the PAA and (c) subsequent treatment of insurance contracts acquired in their settlement period.  

International Financial Reporting Standard – Transition Resource Group for Insurance Contracts (May 2018).  AP07: Reporting on other questions submitted

This paper summarises other questions submitted to the TRG and considered as part of the May meeting.

KPMG (2018).  Illustrative Disclosures for Insurers.  Guide to Annual Financial Statements: IFRS 17 and IFRS 9

This paper provides an overview of IFRS 17 and how it may affect insurers’ financial standards.  It includes examples and KPMG insights to assist entities to assess the potential impacts and to prepare for 2021.

KPMG (2017).  Insurance Contracts – First Impressions IFRS 17

This paper provides an overview of IFRS 17 and how it may affect insurers’ financial standards.  It includes examples and KPMG insights to assist entities to assess the potential impacts and to prepare for 2021.

Life Financial Reporting Sub Committee (2016).  Framework for Setting Life Insurance Risk Margins for Regulatory Capital.  Information Note.

This paper presented a framework for setting life insurance risk margins which is similar to, but less complex than, the approach described in the general insurance, Risk Margin Taskforce (2008) paper.

Risk Margin Taskforce (2008).  A framework for assessing risk margins.  Presented to Institute of Actuaries of Australia 16th General Insurance Seminar, 2008

This paper outlined a framework for assessing general insurance liability risk margins and provided practical advice on how to implement it.  The key sources of uncertainty were examined and the main quantitative approaches to analysing uncertainty discussed, including commentary on the advantages and disadvantages of each approach.

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