IFRS 17: Insurance Contracts (2023);
IFRS 9: Financial Instruments (2023).
IFRS 17 Insurance Contracts revised was issued by the IASB in June 2020 and endorsed by the EU to replace IFRS 4 Insurance Contracts. In December 2021, the IASB issued a limited scope amendment to IFRS 17 related to the classification overlay which has been endorsed by the EU. This approach addresses possible accounting mismatches between financial assets and insurance contract liabilities in the comparative information presented on initial application when IFRS 9 and IFRS 17 become effective at the same time. IFRS 17 and IFRS 9 will be effective from 1 January 2023 and the transition date will be 1 January 2022.
IFRS 17 is expected to increase comparability between insurers by requiring all insurance contracts to be accounted for in a consistent manner. Insurance obligations will be accounted for using current fulfilment value every reporting period with current assumptions and discount rates, – instead of using the highest value of either the tariff rates (‘tariefgrondslagen’) or Solvency II value (as used for the Liability adequacy test) which is currently the a.s.r. accounting policy (see accounting policies J and K). Shadow accounting and provisions for the realised gains and losses on financial assets allocated to insurance contracts have been a significant driver in ensuring that the insurance contract liabilities remain adequate compared to Solvency II valuation of insurance contracts. Shadow accounting and provisions for realised gains and losses will be discontinued under IFRS 17.
This standard represents the most significant change to European insurance accounting requirements in decennia and will have a significant impact on the information presented in the financial statements (the primary statements as well as the disclosures). The standard introduces three models for the measurement of the insurance contracts.
The general model (GM) for the life insurance contracts (including funerals and pension contracts) and income insurance contracts in the Non-life segment and the long-term reinsurance contracts within the life segment.
The variable fee approach (VFA) for contracts with a direct participating feature such as the unit linked type insurance contracts and defined contribution pension type contracts.
The premium allocation approach (PAA) which is a simplified version of the GM and is mainly opted to be used for short-term duration contracts consisting of property and casualty (P&C) and health insurance contracts. PAA is also used for most reinsurance contracts based on the short-term nature of these contracts.
The GM measures insurance liabilities by taking the fulfilment cash flows, being the present value of future cash flows (PVFCF) including a risk adjustment to account for future uncertainty of non-financial risks, and a contractual service margin (CSM). The CSM represents the unearned profits of insurance contracts and will change the recognition of revenue in each reporting period for insurance companies.
The VFA model is required for contracts with direct participating features and although it contains the same basic components as the GM (PVFCF, RA and CSM), the way in which the investments interact and specifically the manner in which the fair value movements of the related assets and returns are recognised differ from the GM, whereby the outcome under VFA provides a better matching in the balance sheet and income statement for these contracts. In applying IFRS 17 for both the GM and VFA, directly attributable acquisition costs are accounted for as part of the insurance liability.
The PAA has similar mechanics as the current IFRS approach and therefore only limited impact on main result drivers and only limited judgmental areas for the underwriting result.
Under current a.s.r.’s accounting policy, revenue for insurance contracts is recognised when premiums are earned or received. Under IFRS 17, the insurance contract revenue depicts the insurance coverage and other services provided arising from the group of insurance contracts at an amount that reflects the consideration to which a.s.r. expects to be entitled in exchange for those insurance contract services. Revenue includes the release of the CSM and RA in profit or loss over the coverage period and excludes the non-distinct investment component when applicable. Insurance service result is a new income statement line item which is effectively a net result on non-financial risks of all insurance contracts. Current economic and non-economic (e.g. actuarial) assumptions are used in remeasuring the fulfilment value at each reporting period. Changes in non-economic assumptions related to future services are absorbed in the CSM, while under IFRS 4 these changes did not have an impact as they were measured based on tariff rates at inception, taking into account shadow accounting and provisions for the realised gains and losses on financial assets allocated to insurance contracts.
The following aspects are important to a.s.r.’s implementation (IFRS 17):
a.s.r. has opted to recognise all insurance finance income or expenses for the reporting period in profit or loss (P&L). a.s.r. also opted to disaggregate the change in the RA for non-financial risk between the insurance service result and insurance finance income or expenses in the income statement.
Given the nature of the service provided to policyholders with GM (Insurance services) and VFA (investment type service) the CSM is released for a group of contracts in line with the services provided and is expected to be generally on a straight-line basis over the expected remaining duration (taking into account contract terms and lapse assumptions) on an individual insurance contract basis.
Although the PAA methodology does not have a CSM, the insurance service revenue will also be generally recognised on a straight-line basis over the insurance contracts duration generally similar to the current accounting treatment.
The incorporation of a RA is a significant change from IFRS 4 but similar to Solvency II risk margin methodology and is recognised in both the liability for remaining coverage (LRC) and the liability for incurred claims (LIC). The RA uses amongst others a 6% Cost of Capital methodology and takes into account diversification in line with Non-Life pricing policy.
Discount rates to discount the expected future fulfilment cash flows are determined using a liquid risk free curve to which an illiquidity premium is added. The risk-free curve is based on the swap rate and includes a credit-risk adjustment and a first smoothing point of 20 years. The illiquidity premium is derived from a.s.r.’s own asset portfolio.
Contracts are grouped together if, at inception, these are in the same portfolio and managed together, (generally based on the Solvency II homogeneous risk groups and disaggregated when needed based on the IFRS 17 assumptions), same level of profitability and recognised within the same annual reporting period (‘annual cohorts’) a.s.r. will not make use of the carve-out for annual cohorts on the IFRS 17 standard as endorsed by the EU.
The cashflows included in the contract boundaries are aligned with Solvency II except for initial recognition regarding non-onerous contracts.
a.s.r. will keep using the operating result, adjusted for the different aspects under IFRS 17, as a main KPI performance measure. For insurance contracts in the Non-Life segment the (net) combined ratio will remain the main KPI and will be defined as the sum of insurance service expenses divided by insurance contract revenue.
IFRS 17 must be implemented retrospectively with amendment of comparative figures. However, other approaches are used on transition when the full retrospective approach (FRA) is impracticable. On transition a.s.r. will primarily use the FRA for funeral, P&C and health insurance contracts. The Fair Value Approach (FVA) will be used for most individual life, pension and individual income insurance contracts. The modified retrospective approach (MRA) will be applied for the group income insurance contracts. In the fair value transition approach, the contractual service margin is determined by reference to the fair value of insurance liabilities in a manner consistent with the fair value as determined in the acquisitions over the last number of years. The fair value is based on the compensation for fulfilling the insurance obligations and includes a market based compensation for transferring the risk.
IFRS 9 is effective from 1 January 2018 and EU endorsed. a.s.r. applies the temporary exemption from applying IFRS 9 for predominant insurance entities as permitted by the amendments to IFRS 4. The IFRS 4 amendments postpone the implementation of IFRS 9 until the effective date of the new insurance contracts standard IFRS 17. Due to this exemption, there is currently no impact of IFRS 9 on the consolidated financial statements of a.s.r. but it may have a significant impact on shareholders’ equity, net result and/or other comprehensive income and on the consolidated financial statements of a.s.r. in 2023.
IFRS 9 replaces most of the current IAS 39 Financial Instruments: Recognition and Measurement, and includes requirements for classification and measurement of financial assets and liabilities, impairment of financial assets and hedge accounting.
a.s.r. bases the classification and measurement of financial assets under IFRS 9 on its business model. a.s.r. determined its business model as “other” as a.s.r. manages assets and liabilities on a fair value basis and uses that information to assess the performance and to make decisions. This is also in line with Solvency II. This business model results primarily in a valuation of assets designated at fair value through profit or loss. In many instances, the classification and measurement under IFRS 9 will be similar to IAS 39, although certain differences will arise. The classification and measurement of financial liabilities remains unchanged. The classification and measurement is based on the interaction between IFRS 17 insurance contract accounting and IFRS 9 accounting for financial assets and liabilities, taking into account decisions and guidance prepared in the IFRS 17 and IFRS 9 implementation project.
The following aspects are important to a.s.r.’s implementation (IFRS 9):
Classification and measurement. a.s.r. intends to align the accounting for financial assets under IFRS 9 as much as possible to the accounting for insurance. As a result to avoid accounting mismatches in the income statement, investments backing the insurance contracts will be valued at fair value through profit or loss (excluding equities). These financial instruments consist primarily of government and corporate bonds, loans and mortgages.
In line with Solvency II reporting a.s.r. will account for debt instruments at their “dirty” fair value, thus including any related accrued interest.
Equities will generally be measured at fair value through other comprehensive income (FVOCI). Any gains and losses will not be recycled to the income statement, thereby reducing volatility in the income statement under IFRS 9.
a.s.r. will use the classification overlay approach whereby the 2022 comparative figures will be adjusted retrospectively as though IFRS 9 was implemented on 1 January 2022.
a.s.r. currently does not apply hedge accounting and will not apply hedge accounting under IFRS 9 to its insurance activities.
Although the accounting for the post-employment benefits related to pensions (IAS 19) is unchanged, as a result of the FVTP&L classification of the investments an accounting mismatch arises in the income statement. This is due to the actuarial gain and losses related to the DBO being recognised in OCI (i.e. discount rate, indexation and mortality) while the fair value movements on the investments are recognised in the income statement (FVTP&L). This mismatch will be addressed through the revised operating result.
a.s.r. applies FVTP&L and FVOCI non-recycling to most of the financial instruments. Therefore the changes with respect to the expected credit loss model are limited to the impact on the other receivables in the Distribution & Services and Asset Management segments.
In 2022, the programme IFRS 17 and IFRS 9 entered its final implementation phase. Systems and models were brought into production or are being further improved or reviewed. The opening balance sheet and comparative figures 2022 have been prepared and analysed and included in the audit process. a.s.r. expects all systems, processes, models and the control environment to be implemented before the end of 2023.
The presented condensed opening balance sheet and related disclosures in these consolidated financial statements 2022 are provisional. Since implementation has not been finalised some uncertainties have been identified. Due to the complexity of IFRS 17 and the lack of experience with this new standard this will influence the control environment. Management has taken mitigating measures like the hiring of expertise and resources, performing more thorough analysis. The main areas where finalisation of the implementation is work in progress are the business lines Income and Pensions. The IFRS 17 model validation in the Life segment is also still work in progress. As a result, there is an inherent uncertainty related to the figures presented in the condensed opening balance sheet as at 1 January 2022.
a.s.r. has as part of its opening balance sheet assessed the estimated impact that the initial application of IFRS 17 and IFRS 9 will have on its consolidated financial statements. Based on assessments undertaken to date, the total adjustment (after tax) to the balance of a.s.r.’s total equity is estimated to decrease by € 0.1 billion at 1 January 2022 and is presented in the condensed balance sheet on the next page. The balance sheet per 31 December 2022 and the income statement for 2022, are still being reviewed by a.s.r. and therefore not finalised for publication.
|(in € billions)||31 December 2021||Reclassification||Revaluation||Restated|
1 January 2022
|Investments on behalf of policyholders||11.6||-11.6||-||-|
|Investments related to direct participating contracts||-||11.6||0.0||11.6|
|Investments related to investment contracts||2.0||0.0||0.0||2.0|
|Loans and receivables||15.3||-15.3||-||-|
|Reinsurance contract assets||-||0.5||0.0||0.5|
|Remaining assets (not specified above)||6.1||-0.1||-0.1||5.9|
|Liabilities arising from insurance contracts||37.8||-37.8||-||-|
|Liabilities arising from insurance contracts on behalf of policyholders||14.6||-14.6||-||-|
|Insurance contract liabilities||-||40.4||1.8||42.2|
|Liabilities arising from direct participating insurance contracts||-||12.1||-0.2||11.9|
|Liabilities arising from investment contracts||2.0||0.0||0.0||2.0|
|Remaining liabilities (not specified above)||7.6||-0.7||-0.1||6.8|
|Total equity and liabilities||75.0||-0.4||1.4||76.0|
The condensed opening balance sheet is provisional with regard to the insurance contracts and presented in euro billions. The opening balance sheet will be finalised with the publication of the interim financial statements 2023.
The CSM included in the insurance contract liabilities and liabilities arising from direct participating insurance contracts is expected to be in the range between € 1.7 billion and € 2.3 billion.
For measuring the insurance contracts a.s.r. has used the best information and knowledge currently available and put internal controls in place to ensure reliable figures. However given the complexity of IFRS 17, the recent transition, increasing experience or changes based on market consensus prior to publication of the interim financial statements 2023, certain assumptions and calculations might improve resulting in an amended opening balance sheet. Any changes or adjustments may have an impact on the measurement of the insurance contracts (including CSM) and total equity.
The accounting policy choices made when implementing IFRS 17 and IFRS 9 aim to reduce the net volatility as presented in the income statement and to avoid accounting mismatches where possible. However, volatility in the shareholders’ equity and net result is still expected to increase significantly compared to reporting under IFRS 4. As a result, a.s.r. will be steering primarily on a revised operating result, as an alternative performance measure, which is expected to be less volatile than the IFRS result.