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Press Release

IFRS 17: Proposed changes focus on reinsurance contracts

Insurance Consulting and Technology|Reinsurance
IFRS 17 Solutions|Insurer Solutions

December 12, 2019

The International Accounting Standards Board (IASB) met on Wednesday 11 December to begin the process of redeliberating some of the changes proposed in the Exposure Draft (ED), released on 26 June 2019, based on feedback received from stakeholders.

LONDON, Thursday, 12 December 2019 – The International Accounting Standards Board (IASB) met on Wednesday 11 December to begin the process of redeliberating some of the changes proposed in the Exposure Draft (ED), released on 26 June 2019, based on feedback received from stakeholders1. The IASB has decided to defer discussions on the effective date of IFRS 17 until the extent and complexity of all the amendments has been determined, expected end of February 2020.

In addition to approving the adoption of six specific proposals in the ED for which there had been widespread support, the Board also agreed, after further consideration, to proceed with the proposed amendments in respect of deferring some acquisition costs for renewal business.

Comments on the ED highlighted ongoing concerns with the treatment of reinsurance contracts held, and the IASB has clearly recognised and sought to address the points raised. Following further analysis, the Board approved significant changes to the ED proposals in this area.

In the June ED, the IASB’s intention to allow insurers to recognise gains on reinsurance contracts held in respect of groups of onerous underlying contracts had been welcomed by respondents since it addressed a fundamental accounting mismatch in the original standard. However, most respondents, including Willis Towers Watson, expressed concerns that the scoping of the relief had been drawn too narrowly in restricting use to a very limited range of reinsurance contracts.

It is imperative that both insurers and reinsurers analyse the specific impacts on their results, processes and overall implementation programmes.”

Roger Gascoigne
Senior Director at Willis Towers Watson.

In response, the Board has agreed to significantly broaden the scope so that all reinsurance contracts held, including both proportional and non-proportional, would be taken into account where they cover groups of onerous underlying contracts, allowing losses on initial recognition of the underlying contracts to be offset by the matching reinsurance. The calculation would change from one based on narrow contractual terms to one based on expected cash flows. Willis Towers Watson agrees that this also makes the treatment of reinsurance at initial recognition consistent with its subsequent measurement.

“If ultimately ratified and incorporated into the final standard, this change would largely address insurers’ concerns about the consequences of the existing economic mismatch,” said Roger Gascoigne, Senior Director at Willis Towers Watson. “Nevertheless, insurers should be aware that implementing these changes at this stage is likely to add significantly to the complexity of reflecting many current reinsurance or retrocession arrangements, particularly for contracts measured using the Premium Allocation Approach. It is imperative that both insurers and reinsurers analyse the specific impacts on their results, processes and overall implementation programmes.”

Brian Shea, Managing Director, Strategic and Financial Analytics at Willis Re commented: “The treatment of reinsurance under IFRS 17 has been deserving of greater attention for some time. These proposed amendments better reflect the role of reinsurance in mitigating risks. We continue to work with insurers and reinsurers to ensure that their reinsurance programmes are fit for IFRS 17.”

About Insurance Consulting and Technology

Willis Towers Watson’s Insurance Consulting and Technology business has over 1,200 colleagues operating in 35 markets worldwide. It is a leading provider of advice, solutions and software – primarily to the insurance industry. Its consulting services help clients manage risk and capital, improve business performance and create competitive advantage – by focusing on financial and regulatory reporting, enterprise risk and capital management, M&A and corporate restructuring, products, pricing, business management and strategy.

About Willis Re

One of the world's leading reinsurance brokers, Willis Re is known for its world-class analytics capabilities, which it combines with its reinsurance expertise in a seamless, integrated offering that can help clients increase the value of their businesses. Willis Re serves the risk management and risk transfer needs of a diverse, global client base that includes all of the world's top insurance and reinsurance carriers as well as national catastrophe schemes in many countries around the world. The broker's global team of experts offers services and advice that can help clients make better reinsurance decisions and negotiate optimum terms. For more information, visit willisre.com.

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving in more than 140 countries and markets. We design and deliver solutions that manage risk, optimise benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential.

1 Review Willis Towers Watson’s response to the amendments to the IFRS Standard proposed by the IASB on 26 June 2019.

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