IFRS IC agenda decision on transfer of insurance coverage under a group of annuity contracts

Keywords: Mazars, Thailand, IFRS, IFRS IC, Insurance, IFRS 17, IASB

19 October 2022

As a reminder, IFRS 17 requires an entity to measure the total margin (also called the contractual service margin or CSM) on a group of insurance contracts at the subscription date, and then to allocate the CSM by “coverage unit” over the expected coverage period. Immediate annuity contracts are those under which the policyholder makes a non-refundable payment upfront in exchange for a periodic payment that starts immediately after contract inception for as long as the policyholder survives.

The standard does not specify a particular method for identifying coverage units, other than that they should reflect the services provided in each period to the policyholder under the contract. The request submitted to the Committee related to how these services should be defined in order to determine whether a method is acceptable or not. The request sets out two possible methods: the first presupposes that the expected annuity payment remains constant over time, and the second presupposes that annuity payments will reduce over time, as the likelihood of the policyholder’s survival diminishes as they get older.

The Committee concluded that the first method is acceptable. However, it rejected the second method on the grounds that, if the insurer has accepted and managed the risk that the policyholder may survive longer than expected, the compensation for pertains to the risk adjustment for non-financial risk that is recognised separately from the contractual service margin.