26. The agenda paper addresses the definition of ‘quantity of benefits’ in paragraph B119(a) of IFRS 17, which serves as the basis for recognising the CSM, and continues the discussion from the February 2018 TRG meeting. IASB staff have since performed an outreach to TRG members requesting feedback and examples, from which the staff developed the analysis and 16 examples in the paper for this meeting.
27. A few TRG members noted that they disagreed with the quoted observation from the February 2018 TRG meeting, where the minutes indicate that the TRG agreed that coverage units should reflect the likelihood of insured events occurring only to the extent that they affect the expected duration of contracts in the group, and that coverage units do not reflect the likelihood of insurance events occurring to the extent that they affect the amount expected to be claimed by the policyholder in the period.
Insurance contracts without investment components
28. The TRG members mainly agreed with the principle that coverage units should reflect different levels of cover provided in different periods. However, TRG members expressed concerns with a suggestion that the benefit provided under the contract is the entity standing ready to meet the contractual maximum cover, because they did not think that this approach was appropriate in some situations. This could, for example, be the case where there is a mixture of contracts with a high coverage limit and contracts with low limits within the same group, or where there is a maximum cover without commercial substance.
29. TRG members agreed that, due to the wide variety of insurance products, a principles-based approach for determination of quantity of benefits is more appropriate than one approach and strict rules and guidelines. Several TRG members noted that examples should be used with caution to illustrate the principles, because they would depend on specific facts and circumstances. Members agreed that the objective is to provide an estimate of the services provided by the insurer. Further, this estimate is not an accounting policy choice, but it is instead a judgement requiring estimates to best reflect the provision of service, and the approach should be applied systematically and rationally.
30. Some TRG members suggested that the approaches and examples were too detailed, and that they deviated from the original principle that the CSM should be recognised straightline based on the passage of time. However, others pointed out that further guidance interpreting ‘quantity of benefits’ was necessary in view of the requirement to reflect the differing quantity and term of benefits inherent in a group, or even in a single contract.
31. The TRG members were generally in agreement with the principles set out by the staff for determining the quantity of benefits in the period, including that:
- the entity needs to consider expected benefits to be received by the policyholder, and not the expected cost of providing those benefits; hence, expected claims payments cannot be applied in the principle for determination of the coverage units; and
- since the policyholder benefits from the entity’s act of standing ready to meet valid claims, and not just from making that claim if an insured event occurs, the quantity of benefits depends on the amount that can be claimed in each period.
While the staff suggested that the probability of making a claim does not affect the benefit of it being able to make a claim, some TRG members thought that there could be instances where this would not be the case.
32. TRG members agreed that judgement is required to determine the quantity of benefits that meets the objective in the standard. Possible ways of determining this could be, but are not limited to:
- the maximum contractual cover in each period; and
- the amount that the entity expects the policyholder to be able to validly claim in each period if an insured event occurs.
TRG members emphasised that how the quantity of benefit is determined would depend on actual facts and circumstances in the particular contract, and should reflect the principle. The possible ways summarised in the previous paragraph should not be read as being a choice. TRG members noted that methods of determining quantity of benefits based on premiums or based on expected cash flows could be appropriate if it could be demonstrated that they were reasonable proxies for services provided in each period.
Determination of coverage units and quantity of benefits is not an accounting policy choice; entities are required to apply judgement to depict the expected services to be provided by the insurer to the policyholder. For contracts without investment components, a possible method could be, depending on the characteristics in the insurance contract, to use the amount that the entity expects the policyholder to be able to validly claim in each period if an insured event occurs as the basis for the quantity of benefits.
Insurance contracts with investment components
33. The staff paper proposed that, for contracts applying the variable fee approach (VFA), determination of quantity of benefits should include consideration of the pattern of services for both insurance and investment-related services. The staff point out that the standard acknowledges that VFA contracts provide investment services, and that changes in the entity’s share of returns from underlying investment items are regarded as changes in the entity’s compensation for the contract that impact the CSM. Therefore they believe that the allocation of the CSM should be based on the pattern of both insurance and investment services.
34. The staff paper noted that other contracts with investment components that do not qualify for the VFA do not provide ‘investment-related services’, as defined in IFRS 17. For these contracts, the staff noted that changes in the effects of the time value of money and financial risk do not affect the CSM. The paper therefore suggested that the determination of quantity of benefits for non-VFA contracts for CSM allocation should be based solely on the coverage period of insurance services, and it should exclude consideration of the benefits provided relating to the investment component. The staff believe the treatment of coverage units should be consistent with the unlocking of the CSM.
35. The staff acknowledged that the basis for conclusions is unclear regarding the CSM amortisation period for contracts under the VFA and, in the staff paper, they recommended a narrow amendment to the standard to modify the definition of ‘coverage period’ for VFA contracts to clarify that it includes the period in which investmentrelated services are provided.
36. For insurance contracts that include an investment component that do not qualify for the VFA, many TRG members expressed significant concern with the proposed view that the CSM should only be amortised over the insurance service coverage period. They pointed out that there are many contracts in various territories, including the US and Asia, that have characteristics similar to VFA contracts with asset-dependent cash flows. The amounts credited to these contracts are based on an asset return less a spread, and the related cash flows are then discounted using the asset-based rate (as illustrated in Example 6 of the standard). Because the insurance component is often less significant, this spread is frequently a major component of the CSM. In the view of TRG members, it seems inappropriate to recognise this spread over only the insurance coverage period of these contracts rather than the coverage and investment periods. They also believe that guidance in paragraph B98 of IFRS 17, which provides for certain changes in the discretionary cash flows to be applied against the CSM for ‘indirect participating contracts’, is evidence that IFRS 17 treats some components of these contracts as investment services, similar to the VFA model.
37. One member expressed a view that the wording in IFRS 17 is unclear because the description of coverage period refers to all premiums within the boundary of the contract, which could include those after the insurance service has ceased.
38. Another member noted that, whilst IFRS 17 cannot be read as staff intended for VFA contracts, without the proposed amendment, she is concerned with the consequences of making a change to the standard, which did not seem to be a narrow amendment, given the difference of views expressed by TRG members.
The Chair of the TRG informed that the staff would give an update to the Board of both the proposed narrow amendment and the outcome of the discussion of contracts with investment components that fail VFA. Whether these matters will be subject to further discussion by the TRG will depend on the Board’s view.