European actuaries approve IFRS 17 educational note
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The Actuarial Association of Europe has approved an educational document for actuaries reporting under IFRS 17, the accounting standard for insurance contracts that took effect this year.
The association adopted the European Actuarial Note on IFRS 17, also known as EAN 4, to help actuaries improve their understanding of the accounting standard. The note is not intended to be authoritative, said the AAE.
The note builds on the International Actuarial Note 100 Application of IFRS 17 Insurance Contracts (IAN 100), an educational document issued by the International Actuarial Association in August 2021.
EAN 4 supplements IAN 100 only in respect where regulation allows an exemption to IFRS 17 paragraph 22.
What does paragraph 22 say?
IFRS 17 has complex aggregation requirements about how insurance contracts should be grouped. Paragraph 22 of IFRS 17 sets out the requirement for annual cohorts and states that contracts issued more than 12 months apart shall not be grouped together.
Many life insurers have complained that the annual cohort requirement is operationally complex and costly. The process is more difficult to account for mutualised contracts, which is commonly sold in Europe.
European insurers and trade associations have lobbied against the rules. Much to their delight, in November 2021, the EU endorsed the standard with a relaxation to the requirement, as it introduced an option for firms to remove annual cohorts for intergenerationally-mutualised contracts and cash-flow matched contracts.
This option, known as a carve out, was approved under two conditions. Insurers taking this option must disclose they are doing so. The European Commission must review by the end of 2027 to see whether the carve out is a success.
Some critics have warned this could cause divergence of IFRS 17. However, it is not yet clear which insurers will take advantage of the option.
Do you intend to adopt the carve out?
