The International Accounting Standards Board (IASB) has agreed to significantly broaden its definition of reinsurance contracts in new amendments to the International Financial Reporting Standard (IFRS) 17.
This week, the Board began the process of redeliberating changes proposed in the Exposure Draft (ED), based on industry feedback that called for improvements to the way reinsurance is treated under the new accounting standard.
In the June ED, the IASB outlined its intention to allow insurers to recognise gains on reinsurance contracts held in respect of groups of onerous underlying contracts, addressing a fundamental accounting mismatch in the original standard.
However, many respondents, including broker Willis Towers Watson, expressed concerns that the scoping of the relief had been drawn too narrowly in restricting use to a very limited range of reinsurance contracts.
In response, the Board has agreed to significantly broaden the scope so that all reinsurance contracts held, including both proportional and non-proportional, would be taken into account where they cover groups of onerous underlying contracts, allowing losses on initial recognition of the underlying contracts to be offset by the matching reinsurance.
The calculation would change from one based on narrow contractual terms to one based on expected cash flows, the IASB explained.
Willis Towers Watson agreed that this update would also make the treatment of reinsurance at initial recognition consistent with its subsequent measurement.
The IASB also decided to defer discussions on the effective date of IFRS 17 until the extent and complexity of all the amendments has been determined, expected end of February 2020.
“If ultimately ratified and incorporated into the final standard, this change would largely address insurers’ concerns about the consequences of the existing economic mismatch,” said Roger Gascoigne, Senior Director at Willis Towers Watson.
“Nevertheless, insurers should be aware that implementing these changes at this stage is likely to add significantly to the complexity of reflecting many current reinsurance or retrocession arrangements, particularly for contracts measured using the Premium Allocation Approach,” Gascoigne warned.
“It is imperative that both insurers and reinsurers analyse the specific impacts on their results, processes and overall implementation programmes.”
Brian Shea, Managing Director, Strategic and Financial Analytics at Willis Re, also commented: “The treatment of reinsurance under IFRS 17 has been deserving of greater attention for some time.”
“These proposed amendments better reflect the role of reinsurance in mitigating risks,” he added. “We continue to work with insurers and reinsurers to ensure that their reinsurance programmes are fit for IFRS 17.”