Applying presentation and disclosure requirements Presentation and disclosure requirements

Exposure draft of amendments to IFRS 17

International Accounting Standards Board, June 2019

 

Presentation of insurance contract assets and liabilities

December 2018 International Accounting Standards Board meeting

 

Ceding commissions and reinstatement premiums

September 2018 TRG meeting

 

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With the Board having published its exposure draft of the amendments to IFRS 17, you can find our latest insight and analysis at home.Kpmg/ifrs17amendments.

 

Proposed amendment to IFRS 17

The Board voted to propose a narrow-scope amendment to IFRS 17's presentation requirements at its December 2018 meeting. 

The Board's proposal aims to provide practical relief to insurers by requiring them to present insurance contract assets and liabilities on the balance sheet at the portfolio level – a higher level of aggregation than currently required by IFRS 17.

Read our web article to find out more.

 

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What's the issue?

Ceding commissions paid to the cedant and reinstatement premiums paid to the reinsurer after an insured event has occurred are common features of reinsurance contracts.

A question arises over whether the reinsurer should consider these amounts:

• part of premiums – i.e. revenue; or
• part of claims – i.e. insurance service expenses. 

 

What did the TRG discuss?

TRG members observed that the reinsurer, like the cedant, should look at the economic effect of the exchanges with the cedant to determine the appropriate presentation. Considering the economic effect of each feature means considering whether cash flows ultimately exchanged between the parties are contingent on claims, regardless of whether they are described as ‘commissions’, ‘premiums’ or ‘claims’. TRG members made the following observations.

 

Economic effect of cash flows	Accounting treatment
Not contingent on claims	The feature has the same economic effect as charging a lower (or higher) premium and should be presented as part of insurance revenue.
Contingent on claims	The feature has the same economic effect as reimbursing a higher (or lower) amount of claims and should be presented as part of insurance service expenses.

 

What's the impact?

The TRG discussion emphasises that the form or title of contractual cash flows does not determine their presentation – their economic effect does. This may result in changes from existing practice, as some reinsurers currently present ceding commissions as expenses (including some fixed commissions as acquisition costs) – these may need to be netted against revenue when applying IFRS 17. Also, reinstatement premiums are commonly presented as additional income under current practice. Under IFRS 17, these may reduce insurance service expenses instead.

If the classification of cash flows as premiums or claims changes when compared with current practice, then this will affect the ratios commonly used as key performance measures by reinsurers. 

 

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This topic page is part of our Insurance – Transition to IFRS 17 series, which covers the discussions of the International Accounting Standards Board and its Transition Resource Group (TRG) regarding the new insurance contracts standard.

You can also find more insight and analysis on the new insurance contracts standard at IFRS – Insurance.

 

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