Insurers can decide whether to apply IFRS 17, the new standard for insurance liabilities, or IFRS 9, the standard for insurers’ assets, to account for premiums collected by intermediaries. 

An intermediary often collects policyholder premiums on behalf of the insurer, but the issue becomes complicated when cashflows are collected by an intermediary but not yet forwarded to the insurer. 

In November, the UK Endorsement Board brought this issue to life to query whether premiums receivable from an intermediary are measured under IFRS 17 as expected cash inflows not yet received, or IFRS 9 as a financial asset receivable from an intermediary.

The timing of accounting is important, as insurers need to decide whether to account for premiums receivable when they receive the amount, or when the policyholder pays the intermediary. 

The IFRS Interpretations Committee has come up with two views:

View 1 — an insurer removes premiums receivable from an intermediary from the measurement of a group of insurance contracts only when the insurer receives the premiums in cash; 

View 2 — an insurer removes premiums receivable from the measurement of a group of insurance contracts when the policyholder pays the intermediary in cash. The insurer recognises the premiums receivable from an intermediary as a separate financial asset under IFRS 9.

The staff also noted that IFRS 17 and IFRS 9 deal differently with expected credit losses from an intermediary.

At a meeting on 14 March, members of the committee provided divergent views, with some supporting view 1, some view backing 2 and others arguing both methods were acceptable. Generally, they agreed the issue was not only presentational but was material to accounting. 

Committee member Karen Higgins, an audit and assurance partner at Deloitte, described view 1 as more supportable, saying: “There is a symmetry between the rights. The policyholder believes they're entitled to [insurance services] because they've made a payment and what obligation the insurer might otherwise think they have because they haven't actually received in cash for the amount.”

Another member, Jens Freiberg, who heads up BDO Germany’s accounting advisory and technical accounting groups, said both methods were acceptable but argued view 2 was a better approach. He said: “There are two views but view 2 is more supportable, technically. I wouldn't disagree with view 1.”

Committee member Jon Nelson, vice president and corporate controller at Fiat Chrysler Automobiles US, said the staff analysis in a paper published ahead of the meeting seemed to prioritise view 1 over view 2, but “I found myself to be exactly the opposite”.

Nelson said it was “really critical” to understand the role of the intermediary and whether the intermediary is acting at the behest of the policyholder or the insurer.

“If the policyholder’s obligation or compulsion to pay a premium is not expunged by payment to the intermediary, then you probably end up with view 1, because they're kind of acting on behalf of the policyholder,” he said. 

“If on the other side, they're acting as an agent of the insurance company, then the policyholder’s obligation to pay is satisfied with the remittance of the premium to the intermediary.”

Executive VP and chief finance officer of the international arm of State Grid Corporation of China Yanli Liu, who also sits on the committee, said her team had conducted a survey with insurers and found life and non-life firms held different views on the two approaches. 

“Non-life insurance companies collaborate more with intermediaries and they prefer IFRS 17. For life insurance companies, they directly reach out [to policyholders] rather than through intermediaries and as preparers, they prefer IFRS 9,” she said. 

For composite insurers, Liu said firms apply different accounting treatments to different subsidiaries. 

She concluded: “It’s nice to keep both options available and provide flexibility for the preparers.”

Since the meeting, staff at the committee redrafted its initial decision to say the requirements in IFRS 17 and IFRS 9 “could accommodate both View 1 and View 2 and, therefore result in an insurer recognising premiums receivable from an intermediary applying either IFRS 17 or IFRS 9”.   

In doing so, the relevant expected credit losses on the premium receivable should be accounted for in accordance with the standard applied, according to PwC.

The consultancy added: “Since the IFRS IC has tentatively accepted both views, we do not expect that this agenda decision will require insurers to change their approach.”

Kevin Griffith, partner and global insurance IFRS lead at EY, noted the proposed interpretation was only based on a specific scenario/fact pattern described in the staff paper, so “it does not consider how the views could be applied to other fact patterns”. 

Writing in LinkedIn, he said: “It is, therefore, important that preparers consider the guidance in the tentative agenda decision and consider how it would apply to their arrangements with intermediaries.”