ESMA Issues Response to IASB Draft on Amendments to IFRS 17
ESMA published a letter in response to the IASB exposure draft on amendments to IFRS 17, the accounting standard on insurance contracts. In its letter, ESMA welcomed the IASB approach to propose a limited set of amendments to timely address the implementation challenges with IFRS 17. ESMA supported the IASB decision to not propose amendments to the level of aggregation requirements, including annual cohort provisions that are necessary to pursue the key objectives of performance reporting. Additionally, ESMA issued a letter to the European Financial Reporting Advisory Group (EFRAG) in response to the draft comment letter of EFRAG on the IASB exposure draft on amendments to IFRS 17. Appendices to the letters set out detailed comments on the exposure draft of IASB.
In its letter, ESMA was generally supportive of the direction of the proposed amendments; however, it identified concerns related to the two proposals, highlighting that these concerns should be addressed to provide users of financial information with more transparent and relevant information on insurance contracts:
- ESMA strongly suggested that IASB provide guidance on the definition of renewals and on the methodology for the allocation of the insurance acquisition cash flows to future contractual renewals, to reduce the scope for arbitrary judgment in the implementation of the proposed requirements.
- ESMA agreed with the development of a model that reflects the economic matching between reinsurance contracts held and the related direct insurance contracts. However, ESMA noted that there is a risk that the proposed approach would result in recognizing the benefit of buying reinsurance immediately while shifting recognition of larger losses over a longer period of time. Therefore, ESMA recommended that IASB should reconsider how the proposals can ensure a more accurate matching. In the absence of such timely solution, ESMA recommended that, based on the experience of the implementation of the new standard, IASB should consider, at a later stage, how an improved representation of matching between insurance and reinsurance contracts can be better represented.
In its letter, ESMA supported the proposed one-year postponement of effective date of IFRS 17. However, ESMA strongly recommended that no further postponement of the effective date is envisaged. Similarly, ESMA supported the extension by one year of the applicability of the temporary exception from IFRS 9 on financial instruments, to ensure a coordinated application of the standard with IFRS 17. However, ESMA strongly recommended against further delaying the application of IFRS 9. A further delay would prevent the provision of better information, most notably on credit risk, for significant balances of financial instruments held by issuers operating in the insurance industry.
Keywords: International, Europe, Insurance, Accounting, Reinsurance, IFRS 17, Insurance Contracts, EFRAG, IASB, ESMA
CECL, IFRS 9, and IFRS 17 expert; credit risk and insurance risk specialist; strategic planning and credit analytics solutions consultant
Dieter Van der Stock
IFRS subject matter expert; LDTI subject matter expert; accounting authority; risk management specialist
Experienced life actuary; background in economic capital modeling; ALM specialist; IFRS 17 researcher
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