Background:
Almost 20 years later International Accounting Standard Board (IASB) published IFRS 17 Insurance Contracts. Indeed, this accounting standard ultimately regulates all Insurance contracts. One must understand what an Insurance Contracts is, which simply put a contract under which one party (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.
The IASB’s newstandard for insurance contracts has an effective date of 1 January 2023. Thus, it is expected that the Insurance Regulatory and Development Authority of India (IRDAI) will announce soon on applicable date for Ind AS 117.
Revised Standard introduces insurance contract measurement principles requiring (1) current, explicit and unbiased estimates of future cash flows (2)discount rates that reflect the characteristics of the contracts’ cash flows (3) explicit adjustment for non-financial risk.
Revenue is no longer equal to written premiums but to the change in the contractliability covered by consideration. Revised guidance draws a specific distinction between insurance risk and other risks and defines insurance risk as other than financial risk transferred from the holder of a contract to the issuer.
There are three measurement models, an entity must select the appropriate one which is applicable
A. General Measurement Model (GMM)
Entity calculates best estimated future cash flows.
Established CSM(Contractual service margin, which is future profit expected to arise)to be framed for all applicable group of contracts.
Thus, above suggest that on day one entity will identify the CSM and recognize as liability which to be recognized over the term of the contract.
B. Variable Fee Approach (VFA).
Direct participation features would impact profitability which in turn dependent on market movements.
Thus, CSM will changes over the term of the contract .
C. Premium Allocation Approach (PAA).
Simplest approach.
Doesn’t involve CSM.
At inception,Liability for remaining coverage would be premiums received less any acquisition costs, adjusted for any impacts of derecognitions.
There would be significant work if there are many different groups of contracts.
FOR SMOOTH TRANSITION - STEPS TO BE FOLLOWED:
1. Identify all contracts in scope –
a. First step is to identify which one is an insurance contract and segregate others investment component linked it, which will guide within the applicable scope under Ind AS 117.
b. Any Reinsurance contact held will be considered within the scope.
2. Identify portfolios and divide contracts into groups for measurement -
a. Once the contracts are identified on scope limits, the company has to be determined the portfolio of contracts which are similar risk in nature and managed together.
b. Grouping together as loss making (Onerous) contracts at inception, contracts with profit sharing and not become onerous in future and regular contracts.
c. All risks inside these groups are measured similarly based on their group measurement.
3. Recognize for each group of contracts -
a. These grouped portfolios are recognized either at the beginning of the coverage period of the group or on the first payment due date from policy holder of the group or;
b. Any of the groups when becomes onerous,
c. By measuring the contractual service margin (CSM) with and without direct participative features.
4. Re-measure the group of contracts –
a. Once the initial recognition is made at the policy inception, the risk is to be remeasured at the end of each reporting period to identify the liability for remaining coverage period.
b. Changes in the carrying/existing provisional amount set on liability for incurred claims is consistent.
5. Present revenue and insurance finance income or expense separately
a. The Profit and loss statement presentation are simplified, where the estimates are remeasured in each reporting period.
b. Presenting the only insurance revenue excluding the investment component.
c. Insurance contract assets and liabilities are to be shown separately.
d. Insurance service result (insurance revenue minus insurance service expenses), and reinsurance contact held will be shown in single line item with net effect.
6. Disclose information on amounts, judgements and risks:
a. The company shall provide detailed necessary information to easy understanding of the user quantitative aspects like;financial statement, estimation on the future cash flow, details on risk adjustment and contract servicemargin,discountedrate information etc,
b. Details about the judgements used like estimation methods and model inputs, impacts on the method changes etc.
c. Nature of the risk arising in future, reinsurance participation risk, credit risk,market risk, liquidity risk etc.
MANAGEMENT CONSIDERATION
1. Transition approach – Management must consider strong technical team to quickly adopt decision making while transition and availability of adequate data for decision making.
2. System selection–Management must consider application of passable system which enables company to take project forward with change adoptability.
3. Collaboration of teams: various experts mustform a task committee comprising of Actuarial, IT, finance, Tax, compliance to manage the conversion project.
4. Testing of system and data flow including Audit Trail – Application of Audit trail must be covered as art of Transition process for any manual adjustments outside the system to keep control of audit trail and Practical application.
5. Approval from Audit Committee - For Transition activities and intermittent outcome including status of the project.
6. Investor’s communication – judgment,risk involved along with key performance indicators validation Dedicated effort with quick decision making make conversion to Ind AS 117, generally takes around 6 to 9 months to take out the numbers.
Dedicated effort with quick decision making make conversion to Ind AS 117, generally takes around 6 to 9 months to take out the numbers.
The Author is a Mumbai-based Chartered Accountant. He is an expert in IFRS, Indian GAAP and Ind AS.
