ASIC is calling on insurers to respond to a new accounting standard for insurance contracts.

Accounting Standard AASB 17 Insurance Contracts (AASB 17) is effective for reporting periods beginning on or after 1 January 2023.

ASIC Commissioner Cathie Armour said, ‘The new standard can significantly affect the reported financial results of many insurers and that insurers should be determining the extent of any impact now.

’Directors and management of insurers need to plan for the new standard and inform investors and other financial report users of the impact on reported results’, she said.

Insurers are required to disclose the impacts of the new standard in 31 December 2020 financial reports.

ASIC has outlined a number of key matters to be considered as part of any implementation plans. These include identifying changes to accounting treatments, required system changes, business impacts, impacts on compliance with financial requirements, disclosures required in financial reports prior to the effective dates of the standards, possible continuous disclosure obligations, and the impact on any fundraising or other transaction documents.

More information about these issues is covered in the attachment to this release.

Attachment to 20-286MR – Insurers urged to respond to new accounting standard

ASIC has outlined a number of key matters insurers should consider as part of any implementation plans. These include:

Implementation

• Determining how the new standard will impact on future financial reports in areas such as:

1. Contracts affected – Identifying which contracts or elements of contracts are covered by the new standard and which are subject to the financial instruments standard, the revenue standard or another standard. Insurers are required to apply the new financial instruments standard from the reporting period to which the new insurance standard is first applied.
2. Realistic assumptions – Ensuring that the valuation of insurance contract liabilities is based on realistic cash flows and other assumptions having regard to past experience, market changes, court decisions on claims settlements, and other relevant information.  Where prior period cash flow projections have not been met for groups of contracts, careful consideration should be given to whether current assumptions are reasonable and supportable.
3. Groups of contracts - In determining whether there is a need to provide for onerous contracts:
1.  contracts should be grouped at an appropriately low level so that cash flows from one portfolio are not used to support the value of contracts in another portfolio; an
2. a portfolio comprises contracts subject to similar risks and managed together. In assessing whether contracts are subject to similar risks careful consideration should be given to whether the legal form of an insurance contract reflects the substance (for example, when separate contracts are bundled into one legal contract for administrative purposes).
4. Coverage period – Careful consideration should be given to the appropriate determination of contract periods (“boundaries”) as this can significantly affect the expected future cash flows to be taken into account when valuing insurance contracts and assessing whether there needs to be a provision for onerous contracts. In determining contract periods, consideration is given to factors such as:
1. whether the insurer can refuse to renew a contract; and
2. the practical ability of the insurer to reassess risks and set a price or a new level of benefits for those risks.
5. Deferred acquisition cost assets – In determining whether to include contract renewals for the purposes of establishing the periods over which deferred acquisition cost assets are amortised and over which future cash flows are considered for impairment testing of those assets, careful consideration should be given to expected contracts renewals having regard to past history and other relevant factors.
6. Separating components – Identifying product components and accounting for them separately, including distinct investment and risk components, and any embedded derivatives.
7. Measurement model – Considering all relevant facts and circumstances in determining whether to apply the General Measurement Model (GMM) or the simplified Premium Allocation Approach (PAA) to each portfolio of insurance contracts. An insurer can only use PAA if the liability for a group of contracts would not be materially different from applying GMM at the inception of the group or if the coverage period of each contract in the group is one year or less.
8. Risk adjustments – Ensuring that any risk adjustments in valuing insurance contract liabilities are determined on a consistent basis from period to period (e.g. consistent confidence levels are applied) unless there are good reasons for a change and those reasons and the impact are clearly disclosed.  Different risk bases may need to be applied for financial reporting and prudential solvency purposes (e.g. different levels of probability of sufficiency, risk volatility and components of risk adjustments).
9. Disclosure – Ensuring adequate information on matters such as:
1. key assumptions, significant accounting treatments and sources of estimation uncertainty;
2.  information that enables users to evaluate the nature, amount, timing and uncertainty of future cash flows that arise from contracts;
3. the effect of the regulatory frameworks in which the insurer operates, such as minimum capital requirements; an
4.  sensitivities to changes in risk exposures arising from insurance contracts, including a sensitivity analysis that shows how profit or loss and equity would have been affected by changes in risk exposures that were reasonably possible at the end of the reporting period.
10. Transition – Ensuring that the requirements on applying the modified retrospective or fair value approach rather than the full retrospective approach on adoption of the new standard are met.

• Ensuring that implementation plans are developed, progress is monitored against those plans and action is taken where milestones are not met.
• Management applying appropriate accounting, actuarial and other experience and expertise in making significant judgements on accounting treatments and estimates under the new standard. Directors appropriately challenge accounting treatments and estimates.
• Identifying system and process changes needed to produce information required under the new standard, including related disclosures.
• Determining the impact on compliance with financial condition requirements (e.g. APRA capital or solvency requirements and loan covenants), future tax liabilities, the ability to pay dividends, and employee incentive schemes.
• Ensuring contracts that are currently loss-making under existing standards continue to be treated as loss-making when adopting the new insurance standard in the absence of evidence of sufficient changes in pricing, claims experience, claims handling costs, benefits offered, risks or investment income, unless there is a justifiable basis under the standards. This might include certain kinds of disability products.

Disclosure prior to first financial report

• Prior to the adoption of the new standard:

1. Providing required disclosure in the notes to financial statements prior to the adoption of the new standard regarding known or reasonably estimable information relevant to assessing the possible impact that adoption of the standard will have on the insurer’s future financial statements.
   It is reasonable for the market to expect that quantitative information will be available and disclosed for the reporting date that coincides with the start of the first comparative period that will be affected in a future financial report. Information that there will be no material impact may also be important information for the market;
2. Providing adequate information to the market on the company’s preparedness and the possible financial impact in accordance with any continuous disclosure obligations;
3. For fundraising and other transaction documents prior to the adoption of the new standard:
1. Providing appropriate disclosure of the future impact of the new standards. Insurers should consider how much prominence is given to financial information presented under the pre-existing standards and under the new standards having regard to:
   • proximity to the first financial report under the new standard; and
   • the size and extent of the impact of applying the new standard;
2. Presenting past and prospective financial information on a consistent basis or presenting information on both bases for an overlap period; and
3. Ensuring impacts on historical financial statement information are presented clearly by general discussion, reconciliations of key items such as profit and net assets, and/or line-by-line reconciliations for one or more years. More detailed information and quantification may be required closer to the date of adopting the new standard in financial reports;
4. Disclosing key assumptions made when applying the new standards to forecast information; and
5. Clearly identifying whether the old or new standards have been applied to particular information.

Additional disclosures after adoption

• Where relevant, insurers may wish to consider whether including additional note disclosure in financial reports prepared after adoption of the new standard about the following would assist users of the financial report:

1. The basis for the coverage period used in valuing groups of insurance contracts for accounting purposes and the basis for the period over which deferred acquisition costs are amortised, particularly where those periods are significantly different; and
2. Life insurance statutory funds, given the legislative requirements concerning separate assets and liabilities, the allocation of indirect expenses between funds, transfers between funds, and the allocation of profits between policyholder and shareholder interests.

Editor's note:

This media release was updated on 10 December 2020 date to clarify the application of the standard for contracts that are loss-making.