Regulation (EU) 2021/2036 adopts IFRS 17, which establishes a comprehensive approach for accounting for insurance contracts. This standard aims to ensure that companies provide relevant financial information about these contracts, allowing users to assess their impact on financial position and cash flows. IFRS 17 applies to insurance, reinsurance, and investment contracts with discretionary participation, affecting…
The document is Regulation (EU) 2021/2036 adopted by the European Commission on 19 November 2021. It amends Regulation (EC) No 1126/2008 to adopt the International Financial Reporting Standard IFRS 17 "Insurance Contracts." IFRS 17 was initially published by the IASB on 18 May 2017, with amendments in June 2020. The regulation applies to insurance contracts, reinsurance contracts, and investment contracts with discretionary participation features. The scope notably covers life insurance and life savings contracts in the European Union, representing approximately EUR 5,900 billion of liabilities excluding unit-linked contracts. The document comprises 77 pages, but only the first approximately 25 pages were provided for the summary (p. 1-25).
Regulation (EU) 2021/2036 aims to integrate IFRS 17 into the European regulatory framework, amending Regulation (EC) No 1126/2008. IFRS 17 establishes uniform principles for the accounting, measurement, and presentation of insurance contracts to ensure relevant and faithful financial information about these contracts. This standard replaces previous standards and covers insurance contracts, reinsurance contracts, and certain investment contracts with discretionary participation features (p. 1-4).
The adoption of IFRS 17 is important because it improves transparency and comparability of insurance companies' financial statements within the European Union, meeting international investors' expectations and facilitating stock exchange listings in third countries (p. 2).
A key point of the regulation is the exemption granted to intergenerational mutualized contracts with cash flow compensation, which represent more than 70% of life insurance liabilities in the Union. These contracts may be exempted from the annual cohort requirement imposed by IFRS 17, as this requirement does not always reflect their economic and contractual model, and the cost-benefit ratio is unfavorable (p. 2).
Companies must disclose in their notes the use of this exemption in accordance with IAS 1, without obligation for quantitative impact assessment. The European Commission plans a review of this exemption no later than 31 December 2027 (p. 2-3).
The regulation mandates the compulsory application of IFRS 17 from 1 January 2023 or thereafter, with the possibility for companies to exempt certain specific contract groups from the annual cohort requirement (p. 3).
Finally, IFRS 17 details the principles for identifying portfolios and groups of contracts, measurement methods including future cash flows, adjustments for time value of money, financial and non-financial risks, recognition of contractual service margins, as well as specific rules for loss-making contracts, held reinsurance, and investment contracts with discretionary participation features (p. 4-25).
The regulation was developed to integrate IFRS 17 into the European Union regulatory framework, pursuant to Regulation (EC) No 1606/2002 governing the application of international accounting standards. The IASB published IFRS 17 in 2017, with amendments in 2020, aiming to standardize the accounting of insurance contracts to provide a faithful and relevant depiction of their financial impact (p. 1).
The specific context of the European Union includes a wide diversity of life insurance contracts, a large portion of which are intergenerationally mutualized, with cash flow compensation mechanisms. These contractual and economic characteristics justify a limited adaptation of IFRS 17, notably the exemption from the annual cohort requirement for these contracts (p. 1-2).
The challenges are to ensure consistency with international standards while considering European specificities, notably intergenerational contract management and Solvency II directive requirements (p. 2).
The objective is to adopt IFRS 17 while allowing an application adapted to the realities of the European market, with monitoring and a review of the granted exemption by the end of 2027. The regulation also specifies application modalities, disclosure obligations, and amendments to other related IFRS standards (p. 1-3).
Adoption and scope:
- IFRS 17 applies to issued insurance contracts, held reinsurance contracts, and investment contracts with discretionary participation features, provided the entity also issues insurance contracts (p. 4).
- Excluded from the scope are notably guarantees related to the sale of goods or services, employee benefit plans, certain financial contracts, and insurance contracts where the entity is the policyholder except held reinsurance (p. 5).
Definition and separation of components:
- A contract is an agreement creating enforceable rights and obligations, which may be written, verbal, or implied (p. 4).
- Components of an insurance contract may be separated if they fall under other IFRS standards, notably embedded derivatives and distinct investment components (p. 5-6).
Level of aggregation:
- Contracts are grouped into portfolios of similar risks managed together (p. 6).
- Each portfolio is subdivided into groups according to initial profitability: loss-making, non-loss-making without significant risk of becoming loss-making, and others (p. 6-7).
- Groups are established at initial recognition and are not modified thereafter (p. 7).
Initial recognition and measurement:
- Recognition of a group of contracts occurs at the earliest of coverage start, first premium due, or identification of a loss-making group (p. 7).
- Initial measurement includes the sum of discounted fulfillment cash flows, an adjustment for non-financial risk, and the contractual service margin representing unearned profit (p. 8-9).
- Future cash flows must be estimated objectively, reflect the entity's perspective, be current and explicit (p. 9).
- Discount rates must reflect the time value of money, characteristics of the cash flows, and exclude irrelevant factors (p. 10).
Contractual service margin:
- It represents unearned profit and is adjusted at each reporting date to reflect new contracts, interest, changes in future cash flows, foreign exchange differences, and recognized income (p. 10-12).
Loss-making contracts:
- A contract is loss-making if net fulfillment cash flows are negative at initial recognition (p. 12).
- Losses are recognized immediately in net income and a loss component is added to liabilities (p. 12-13).
- Subsequent changes in cash flows are allocated between the loss component and remaining liabilities, prioritizing coverage of the loss component (p. 13).
Premium allocation approach:
- Simplification is possible for groups with coverage duration up to one year or when the method does not differ significantly from the full approach (p. 13-14).
- This method measures the liability for remaining coverage based on premiums received, adjusted for acquisition costs and recognized income (p. 14).
Held reinsurance contracts:
- IFRS 17 rules are adapted for held reinsurance contracts, notably regarding initial recognition, measurement, and contractual service margin (p. 14-16).
- Held reinsurance contracts cannot be loss-making (p. 16).
Investment contracts with discretionary participation features:
- These contracts do not transfer significant insurance risk and are treated with specific adaptations, notably for initial recognition date and allocation of the contractual service margin (p. 16-17).
Modification and derecognition:
- A modified contract is recognized as a new contract if certain conditions are met; otherwise, modifications are treated as changes in estimates (p. 17-18).
- Derecognition occurs when the contract is extinguished or modified according to defined criteria (p. 18).
Presentation in financial statements:
- Assets and liabilities of portfolios of issued insurance contracts and held reinsurance contracts must be presented separately (p. 18).
- Income and expenses from insurance activities are separated into insurance service result and insurance finance income or expenses (p. 19-20).
Disclosure:
- The entity must provide qualitative and quantitative information to assess the impact of insurance contracts on financial position, performance, and cash flows (p. 20-21).
- Detailed reconciliations of accounting balances must be presented, distinguishing changes due to cash flows and those due to recognized income and expenses (p. 21).
Established facts:
- IFRS 17 is adopted in the European Union with mandatory application from 1 January 2023 (p. 3).
- It covers a wide range of insurance, reinsurance, and investment contracts with discretionary participation features (p. 1-4).
- An exemption is granted for the annual cohort requirement to intergenerational mutualized contracts with cash flow compensation, representing more than 70% of life insurance liabilities in the Union (p. 2).
- The standard imposes detailed rules for aggregation, measurement, recognition, presentation, and disclosure of insurance contracts (p. 4-21).
Assumptions:
- The annual cohort exemption is based on the assumption that strict application of this requirement would be inappropriate and costly for intergenerational mutualized contracts (p. 2).
- Methods for estimating future cash flows assume that reasonable and supportable information is available without excessive cost (p. 9).
Interpretations:
- The granted exemption reflects a compromise between international harmonization and European market specificities (p. 2).
- The contractual service margin is a key mechanism to reflect unearned profit and ensure systematic revenue recognition (p. 10-12).
Uncertainties:
- The exemption review planned for 2027 leaves open the possibility of future adaptations based on implementation experience (p. 3).
- Certain application modalities, notably the premium allocation method, depend on judgments and internal information systems of companies (p. 6, 13).
- The quantitative impact of the annual cohort exemption is not required in the notes, which may limit transparency on this aspect (p. 2-3).
Regulation (EU) 2021/2036 incorporates IFRS 17 into European law, improving the quality and comparability of financial information related to insurance contracts. It recognizes the specificities of the European market, notably through the exemption from the annual cohort requirement for intergenerational mutualized contracts with cash flow compensation, while imposing a disclosure obligation on this use (p. 2-3).
The European Commission plans a review of this exemption no later than 31 December 2027, taking into account feedback and the IASB post-implementation review (p. 3).
Companies must apply IFRS 17 from 1 January 2023, with limited derogation possible for certain specific contract groups (p. 3).
The regulation recommends rigorous application of aggregation, measurement, and presentation principles, as well as increased transparency via disclosures in the notes, to enable financial statement users to assess the impact of insurance contracts (p. 4-21).
In summary, the regulation reconciles international harmonization with European market particularities, while providing for monitoring and future revision to adjust application modalities if necessary.
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