IFRS 17 – Insurance Contracts

25/03/2024

1. General Impact

IFRS 17 – Insurance Contracts impacts the balance sheet, other comprehensive income statement, cash flow statement, and financial statement disclosures.

The measurement models under IFRS 17 will affect various key financial statement indicators, mainly “insurance premiums” and “insurance contract liabilities.”

Insurance Premiums: Recognition will no longer be based on insurance premiums or premiums received but will primarily reflect changes in liabilities for remaining insurance coverage and the release of cash flows from purchased insurance.

Insurance Contract Liabilities: Under both IFRS 4 and IFRS 17, insurance contract liabilities include obligations for incurred claims and liabilities for remaining coverage. The most notable change under IFRS 17 is the contractual service margin.

Therefore, the contractual service margin can be considered the key factor reflecting the current and future development of insurance companies through premiums and insurance contract liabilities.

2. Overview

In May 2017, the International Accounting Standards Board (IASB) issued IFRS 17 – Insurance Contracts and prepared a new accounting standard for insurance companies. While the current standard, IFRS 4, allows insurance companies to use their existing national accounting practices, IFRS 17 defines clear and consistent rules that significantly improve the comparability of financial statements and the impact on a global scale. When IFRS 17 takes effect, it will replace IFRS 4.

IFRS 17 applies to annual periods beginning on or after January 1, 2021. Early application is permitted if the entity has already applied IFRS 9 – Financial Instruments and IFRS 15 – Revenue from Contracts with Customers before the effective date of IFRS 17.

The standard may be applied using approaches such as IAS 8, but it also includes the “retrospective adjustment approach” and the “fair value approach” for the transition, depending on data availability.

3. Transition Issues

In Vietnam, only VAS 19 is equivalent to IFRS 4; regarding IFRS 17:

Content

IFRS

VAS

IFRS 4 – Insurance Contracts

VAS 19 – Insurance Contracts and other guidance from the Ministry of Finance related to life and non-life insurance

Scope and Definition

IFRS 4 – Insurance Contracts provides guidance on accounting for insurance contracts to be implemented under the current accounting regimes in each country.

IFRS 4 applies to all insurance and reinsurance contracts issued by an entity.

The standard does not specifically address other aspects of accounting applied to insurance companies, such as accounting for financial assets and financial liabilities held or issued by the company, except to allow an insurance company, in some cases, to reclassify some or all of its financial assets measured at fair value through profit or loss and provide temporary exemptions related to the application of IFRS 9.

An insurance contract is a contract under which one entity (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.

VAS 19 – Insurance Contracts is based on IFRS 4 and aligns more closely with IFRS 4 than with the subsequent amendments to IFRS 4.

However, the Ministry of Finance has not issued any guidance on implementing VAS 19. Therefore, insurance companies apply specific guidance for insurance accounting, including the guidance under Circular No. 199/2014/TT-BTC dated December 19, 2014, by the Ministry of Finance (for life and reinsurance companies) and Circular No. 232/2012/TT-BTC dated December 28, 2012, by the Ministry of Finance (for non-life insurance and reinsurance companies).

As a result, the accounting policies commonly used for insurance contracts have some differences compared to IFRS 4, such as requirements for provisions for catastrophic losses and provisions for future compensation claims, or gaps in the assessment of legal liability, impairment of reinsured assets, and fair value disclosures.

Insurance contract – IFRS 17 (no equivalent VAS)

Recognition

The risk transferred under the contract must be insurance risk, excluding financial risk. The standard allows companies to continue using their current accounting policies for insurance contracts if those policies meet certain minimum specified criteria.

One of the minimum criteria is that the amount of insurance liability must be checked for legal liability adequacy.

Testing should assess the present value estimates of all cash flows under the contract, including claim handling costs, as well as cash flows arising from options and guarantees. If the adequacy test determines that the insurance liability is insufficient, the entire shortfall is recognized in profit or loss.

In addition to other enhancement requirements, disclosure of insurance risk, such as sensitivity analysis showing the impact on profit or loss and equity due to related insurance risk variables (e.g., mortality and morbidity, interest rates, etc.), is also required. Then, the methods and assumptions used in the sensitivity analysis must be disclosed. Finally, qualitative information about the extent to which insurance contracts are significantly affected by cash flows, uncertainty about amounts, and the timing of the insurer’s future cash flows must also be disclosed.

According to IFRS 17, the “general model” requires the entity to assess an insurance contract at initial recognition based on the total fulfillment cash flows (including expected future cash flows, adjustments reflecting the time value of money and financial risks related to future cash flows, non-financial risks are excluded from cash flow estimates, and adjustment for non-financial risks) and the contractual service margin. The fulfillment cash flows are remeasured at each reporting period. Unrecognized profits (contractual service margin) are recognized over the coverage period.

Besides this general model, the standard also offers a simpler approach called the “premium allocation approach.” This simplified approach applies to certain contracts, including those with coverage periods of one year or less.

For insurance contracts with direct participation features, the “variable fee approach” will apply. The variable fee approach is a variant of the general model. When applying the variable fee approach, the company’s share of changes in the fair value of the underlying items is included in the contractual service margin.

Therefore, changes in fair value are not recognized in profit or loss during the period they occur but are spread over the remaining coverage period of the contract.