For example, how should an insurer account for the exercise of a renewal option if the cash flows associated with renewal periods were initially outside the contract limit? Should the exercise of the option be considered an extension of the existing contract or a new contract? Annual renewable term (TRT) contracts with staggered ratings and unit-linked contracts with additional insurance benefits contain several features that could have an impact on IFRS 17 accounting. Contracts such as these include some or all of the following. Contractual limits for contracts with the possibility of adding coverage TRG members noted that before setting the contract limit at the beginning of an insurance contract, an insurer should verify whether: An insurer may enter into a group contract under which it offers insurance coverage to members of an association or customers of a bank, called certificate holders. A significant obligation to provide services ends when, in practice, the insurer is able to reassess the risks of the respective policyholder (or portfolio of insurance contracts) and, therefore, can set a price or level of performance that fully reflects the reassessed risks. In addition, it was pointed out that the insurer`s intention to reassess or reassess the risk is not relevant to the assessment of the limits of the contract – i.e. the limits of the contract end when the insurer has the practical opportunity to revalue the entire contract, even if it is unlikely that it will actually exercise its right of revaluation. Questioning whether this was a single contract or multiple contracts, FIT members seemed to agree that insurers should only consider reassessing and reassessing policyholder risks when setting contract limits. They found that policyholder risks are risks that are transferred from the policyholder to the insurer. IASB staff noted that these may include insurance and financial risks, but exclude risks that are not transferred from the policyholder to the insurer under such contracts – for .B the risks of confiscation and expenses. An insurer`s practical ability to revalue an insurance contract at a later date may affect the amount of estimated future cash flows it captures within the limits of that contract.
At the September meeting, FIT members focused on cash flows that are outside the contract limits at the time of initial recognition and how to account for changes in circumstances related to these future cash flows. In this assessment, it will be important to consider whether market constraints or other restrictions apply equally to all insurers operating in the same jurisdiction for new and renewed contracts. If all insurers can re-evaluate “as good as new” – that is, how they would price new contracts – then there are virtually no restrictions on their practical ability to revalue prices for the purpose of assessing contract limits. It may be more evident when regulatory or legal requirements limit an insurer`s practical ability to re-evaluate its contracts than market and other restrictions. The first was the subject of the types of contracts discussed above and would therefore lead to a contract limit that would exclude planned future contract extensions. This means that cash flows related to the same legal contract could potentially belong to more than one group of insurance contracts when recognised in accordance with IFRS 17. In the current situation, the insurer has the right to terminate this policy at any time with 90 days` notice, which terminates insurance coverage for all certificate holders. A possible outcome of shorter contractual limits could be that contracts that were originally drafted and priced to reflect an insurer`s expectations for future renewals are measured in a way that does not reflect that expectation.
This may lead to contracts being considered onerous at the time of the first drafting (e.g. B due to the significant cash flows from the purchase of insurance that accumulate at the time of the establishment of the first contract) and to be profitable only if renewed. This is also taken into account when measuring insurance cash flows. Cash flows that are outside the contract limits at the time of initial recognition TRG members also noted that some cash flows may be outside the contract limits when initially recognized because the restrictions that limit an insurer`s ability to revalue the contract had no commercial substance. As circumstances change and these restrictions become more commercially important, these cash flows that were once outside the limits of the contract may fall within the limit. If the contract limits are reassessed in this way, the CSM of the existing group of contracts must be adapted. One question that arises is what limits can limit an insurer`s practical ability to re-evaluate a contract. FIT members noted that a wide margin of discretion is needed to determine whether the content of the Directive reflects several contracts with individual certificate holders or a single contract with an association or bank. The members of TRG examined which of the contracting parties would be compensated for an insured event.
They found that when an insurer repays a certificate holder`s debt to a bank due to an insured event that negatively affects the certificate holder, the individual certificate holder is the one who is compensated even if the bank receives the payment. Therefore, the certificate holder is the policyholder in that order. Establishing contract boundaries requires careful analysis and may require significant changes to systems and processes. The question arises as to whether the expected cash flows resulting from the future exercise of the option are included in the limit of the contract and thus in the valuation of the group of contracts to which it relates. IFRS 17 may require an insurer to divide what is currently considered a contract into several short.B. if there is a unilateral revaluation option in relation to future coverage periods. FIT members agreed that a restriction that also applies to new and existing contracts would not limit an insurer`s practical ability to reassess existing contracts to reflect its reassessed risks. .