ESMA issued a letter to the European Financial Reporting Advisory Group (EFRAG) in response to the draft advice of EFRAG on the endorsement of IFRS 17 on insurance contracts into the European law. In the letter, ESMA expresses support for the endorsement of IFRS 17, which will provide a consistent system of requirements to account for insurance and reinsurance contracts. ESMA considers that IFRS 17 will have a positive impact on investor protection and financial stability, as detailed in the Appendix to the letter. ESMA also emphasizes the importance of swift adoption of IFRS 17 to ensure the application by insurance undertakings of IFRS 9 on financial instruments, which has for long been delayed to the detriment of investor protection.
In its letter, ESMA highlights that a key role in promoting greater transparency and consistency in accounting for insurance contracts in accordance with IFRS 17 is played by the principles for aggregation of contracts that form an integral part of the new measurement model. These requirements, including "annual cohort" requirement, aim to ensure that the measurement of contracts and the reporting of profitability are performed at a sufficiently granular level. ESMA notes that, for some contracts with intergenerational mutualization and for cash-flow matched contracts, the application of the annual cohort requirement has raised significant concerns by some stakeholders, including insurance undertakings. The concerns were reported in Annex 1 of the Draft Endorsement Advice of EFRAG.
ESMA is concerned by the decision of EFRAG not to provide a view in its Draft Endorsement Advice on the endorsement of the annual cohort requirement in relation to certain types of contracts. ESMA encourages EFRAG, following the public consultation, to consider all requirements in IFRS 17 for the purpose of providing a full assessment of the standard when providing advice to EC. ESMA also notes that IFRS 17 is a rather articulated standard, which reflects the complexity of the underlying insurance and reinsurance business and which results in the extensive application of professional judgment. While such extensive judgment, if not properly exercised, may impair the level of reliability and comparability of the reported figures, in ESMA’s view, overall, it remains acceptable, given the expected increased relevance of the resulting information and the improved adherence to the underlying business models. ESMA expects that the accompanying disclosures will have a key role in providing the necessary complementary information on how management has exercised this judgment and on how consistent the resulting estimates are across issuers and over time.
Keywords: Europe, EU, Insurance, Accounting, IFRS 17, Insurance Contracts, IFRS 9, Financial Instruments, Reinsurance, EFRAG, ESMA
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