4.2 IFRS 17 Insurance Contracts Technical Issues

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02 July 2021
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Appendix 2: [Draft] Endorsement Criteria Assessment Skeleton

[DRAFT] Endorsement Criteria Assessment: IFRS 17 Insurance Contracts

Executive Summary [Endorsement Opinion]

To provide summary of key points covering:

  • IFRS 17 background, purpose and context
  • Key endorsement considerations
    • (i) Long-term public good assessment
      • Improvement in financial reporting?
      • Assessment of costs and benefits
      • Impact on the economy
    • (ii) Technical topics – overall view, any areas of concern, areas to monitor/follow up
    • (iii) Overall true and fair view assessment
  • Summary of [draft] endorsement opinion

I. Introduction: legislative framework and our approach to the assessment

1.1 Purpose of [Draft] Endorsement Criteria Assessment (ECA)

1.2 Summary and explanation of legislative background to endorsement criteria

1.3 Detail of endorsement criteria (including text of criteria from SI 2019/685)

1.4 Description of how the [draft] ECA addresses the endorsement criteria:

  1. Wholistic approach, considering IFRS 17 as a whole – fundamental question is whether and how IFRS 17 improves the quality of financial reporting in the UK
  2. Outline of [draft] ECA structure and reporting approach – considered whole standard but reporting focused on exceptions/problematic areas

2. Description of IFRS 17

2.1 Background, context and objectives

  1. Overview of IASB's project – key purpose and objectives:
  2. High-level picture of current accounting in the UK under IFRS 4 [further detailed consideration included in Section 5 when considering whether IFRS 17 improves the quality of financial reporting]

2.2 Description of IFRS 17's main accounting requirements:

  1. High-level description of the main principles
  2. Overview of accounting models - General Measurement Model (GMM), Variable Fee Approach (VFA), Premium Allocation Approach (PAA) - and illustration of how the standard accounts for typical UK product types
  3. Presentation requirements (what primary financial statements will look like)

3. Long term public good assessment

3.1 Overview of long term public good assessment - purpose and approach

Will IFRS 17 improve the quality of financial reporting?

3.2 Consideration of expected impact in context of the IASB's stated objectives for IFRS 17

3.3 Comparison with current accounting for insurance contracts in the UK – analysis of extent to which IFRS 17 represents an improvement

  1. Performance reporting
  2. View of assets and liabilities

3.4 Results of investor and other user outreach

Costs and benefits from applying the standard

3.5 Overview of expected costs and benefits of IFRS 17 and explanation of approach to assessment

Preparers

  1. Detailed costs for preparers, including implementation costs across people, processes, systems and data, identifying sunk costs
  2. Benefits for preparers, both tangible and intangible

Users

  1. Detailed costs for users
  2. Benefits for users, both tangible and intangible

3.6 Conclusion on costs and benefits

Likely effect on the economy of the UK

3.7 Consideration of implications for transparency and the efficient and effective functioning of capital markets

3.8 Consideration of international alignment – EU, Rest of World

3.9 Consideration of the consequences of not adopting the standard

Overall conclusion on UK public good

3.10 Summary of overall conclusion on UK public good

4. 'Technical' criteria assessment

4.1 Description of endorsement criteria (relevance, reliability, comparability, understandability) and what is meant by each

4.2 Explain approach adopted: considered whole standard but reporting focused on exceptions/problematic areas

4.3 Summary of IFRS 17's key principles and consideration of whether they support the endorsement criteria

Exceptions-based topic by topic assessment

[For each topic we would expect the following to be covered:

  • Introduction and description of issue
  • IFRS 17 requirements
  • Current accounting practice in the UK, only to the extent required for understanding
  • Assessment against the endorsement criteria]

Priority issues [tentative assessment]

Measurement

  • Discount rates (area of significant entity-level judgement)
  • CSM allocation (in particular for annuities and bulk purchase annuities)

Level of aggregation

  • Groups of contracts and annual cohorts

Other issues [tentative assessment]

Measurement

  • Risk adjustment
  • With-profits business
  • With-profits contracts with guaranteed annuity options (contracts which change their nature over time)
  • Contracts acquired in their settlement period
  • GMM: interest accretion on the CSM at the locked-in rate
  • Reinsurance of onerous contracts
  • VFA issues (eligibility criteria)

Presentation

  • OCI option (disaggregation of insurance finance income and expense)

Transition

  • Application of methods/options
  • Risk mitigation option (prohibition on retrospective application)

5. True and fair view

5.1 Explain purpose: IFRS 17 may be adopted only if the standard is not contrary to the principle that an entity's accounts must give a true and fair view.

5.2 Explain approach: the true and fair view is assessed at the level of IFRS 17 as a whole, rather than at the level of each individual topic. (Specific requirements of IFRS 17 may be referred to in order to explain/evidence the overall assessment.)

5.3 Discussion:

  1. Considered as a whole, do IFRS 17's requirements represent a coherent whole, designed with consistent principles?
  2. Will IFRS 17 result in a faithful representation of the effects of insurance contracts on an entity's financial position and performance?