Establishing contract boundaries requires careful analysis and may require significant changes to systems and processes. 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 reassess – that is, how they would set prices for new contracts – then there are virtually no restrictions on their practical ability to reassess prices for the purpose of assessing contract limits. Cash flows that fall outside the limits of the contract at the time of initial recognition This means that cash flows related to the same legal contract could potentially fall into more than one group of insurance contracts when recognised in accordance with IFRS 17. Currently, when measuring insurance contracts that give policyholders the option to add insurance coverage at a later date, it is common to separate the premium for each component (i.B s basic contract and option). Under IFRS 17, contract limits are set for the entire contract if the rights and obligations associated with the option are substantial and the contract is not divided into several components. Insurers may need to develop new estimates for a portion of cash flows in order to value these contracts in accordance with IFRS 17. Under IFRS 17, the limits of these contracts may be limited to the year for which the premiums were collected. An insurer may enter into a group contract under which it provides insurance coverage to members of an association or to customers of a bank, the so-called certificate holders.
FIT members noted that before establishing contract limits at the beginning of an insurance contract, an insurer should consider whether: If it is a single contract or multiple contracts, a question that arises is what limits may limit an insurer`s practical ability to re-evaluate a contract. The contractual limits of contracts with the possibility of adding coverage TRG members found that a great deal of discretion is required in deciding whether the content of the Directive reflects several contracts with individual certificate holders or a single contract with an association or bank. 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 shorter.B-term contracts, for example if there is a unilateral revaluation option with respect to future coverage periods. 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. 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. 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. FIT members noted that in this particular case, the contract limit is 90 days, as the insurer`s physical obligation to provide services under a contract ends when it can terminate the contract. FIT members seemed to agree that insurers should only consider the possibility of reassessing and reassessing policyholders` 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 – by .B.
the risks of confiscation and expenditure. 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. Where an insurer has a significant obligation to provide services to its policyholders, the cash flows resulting from substantive rights and obligations are within the limits of the contract and are included in the valuation of the group of contracts to which they relate. 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. The insurer should evaluate the limits of the contract for the entire contract, including the option. Insurers can issue contracts that give policyholders the option to add insurance coverage at a later date. If a policyholder makes use of this option, the insurer is required to provide additional coverage. To determine whether cash flows are within the limits of an existing insurance contract, insurers must assess whether these contracts should be divided into several insurance components. If this is not the case, insurers must consider whether granting an option to the policyholder to acquire additional future coverage gives rise to significant rights and obligations. 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. 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 reassess the entire contract, even if it is unlikely that it will actually exercise its right of revaluation. 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? Comments made during this and previous discussions on treaty limits underscore the need to fully understand the substantive rights and obligations of insurance contracts in the application of contract limit requirements. 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. 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. Because IFRS 17 does not specify the sources of potential restrictions on these revaluations, it does not limit these restrictions to those of a contractual, legal or regulatory nature. Management must consider all conditions when assessing contract limits under IFRS 17, including risks that are reassessed and reassessed at what level. FIT members also noted that some cash flows may be outside the limits of the contract when they were first recognized because the restrictions that limited an insurer`s ability to revalue the contract had no commercial substance.
As circumstances change and these restrictions become more commercially important, cash flows that were once outside the boundaries of the contract may lie within the limits. .