30. The question raised is whether insurance acquisition cash flows and the related revenue are recognised in the statement of profit or loss using paragraph B125 if those cash flows cannot be recovered from the cash flows of the portfolio of contracts. In addition, the TRG addressed how experience adjustments related to insurance acquisition cash flows should be presented.
31. The TRG agreed with staff that an entity is not required to separately identify whether it will recover insurance acquisition cash flows at each reporting date, since any remeasurement of fulfilment cash flows will capture any lack of recoverability. The TRG agreed with the analysis prepared by the staff that the amount recognised as insurance revenue should be determined by applying both paragraphs B123 and B125 of IFRS 17. Hence, insurance revenue cannot exceed the amount that the entity is expected to receive as consideration for services provided.
32. A TRG member asked for clarification on whether commissions that are payable in future periods and are contingent on contract continuation (for example, ‘renewal commissions’), and that do not require any services other than original contract placement, are acquisition costs. The IASB staff noted that such commissions could be acquisition cash flows if they meet the definition of acquisition cash flows. Other types of recurring commissions might be incurred in exchange for servicing claims or performing other administrative tasks for the insurer; these costs are not acquisition costs, but instead are administrative or maintenance costs as described in paragraph B65(h) of IFRS 17.
33. The TRG members noted that the seven numerical examples included in appendix to the staff paper were very helpful, and they provide useful information on how to account for insurance acquisition cash flows in different situations.
34. The TRG observed that entities needs to consider whether experience variances related to insurance acquisition cash flows relate to future service, and adjust the CSM in accordance with paragraph B96 of IFRS 17, or relate to past or current service. Consistent with the discussion related to premium experience adjustments, TRG members noted that it would be helpful to preparers if the guidance in paragraph 106 relating to experience adjustments was clarified, to include acquisition cost experience adjustments.
The TRG noted that, in some situations, an experience adjustment could relate to both current and future service and partly adjust the CSM.
35. The question discussed by the TRG was whether terms in a contract that waive premium payments if an uncertain future event occurs (such as disability of the policyholder) is a pre-existing risk of the policyholder transferred to the entity by the contract and therefore an insurance risk. Alternatively, if the risk is created by the contract, the premium waiver would not be insurance risk.
36. The TRG agreed with the analysis prepared by the staff and observed that the event that gives rise to the premium waiver (for example, becoming disabled) adversely affects the policyholder and is a risk transferred to the insurer (that is, the risk that waives the premiums exists prior to the contract). Therefore the risk that the issuer of the contract is obligated to continue to provide the same benefits (for example, other insurance coverage or investment services) to the policyholder without receiving any consideration is insurance risk.
37. Several TRG members emphasised that the analysis of this issue was useful. They noted that, while the definition of insurance risk has not changed from IFRS 4, the requirements for separation of components in a contract have changed to further restrict ‘unbundling’. Therefore, for certain products, there could be an interrelation between this paper and submission 33 in agenda paper 11. However, the staff emphasised that, unlike some of the products referenced in agenda paper 11, IFRS 17 contains specific guidance related to separation of investment components, whilst separation of loans is not included in the standard.
38. It was observed that the existence of a premium waiver in a contract that otherwise would be an investment contract could result in a contract being classified as an insurance contract in its entirety (unless the investment component separation criteria are met) if the premium waiver constitutes significant insurance risk. Such waivers included in insurance contracts (for example, a term life insurance policy with a premium waiver on disability) are likely to result in multiple coverage units, and they could also impact the coverage period to the extent that the coverage period for the waiver differs from that of the base insurance contract.
The TRG noted that, in situations where premiums are waived, resulting in a reduction in cash flows (for example, premium payments), this ‘claim’ should not be presented in the insurance service revenue, because this is not consideration received.