Modified Retrospective Approach – FAQ | IFRS

Modified retrospective approach

Applying the modified retrospective approach, an entity should achieve the closest possible outcome to the retrospective application using reasonable and supportable information without undue cost or effort. An entity should maximise the use of information required for the retrospective application, and it is permitted to use each modification only if there is no reasonable and supportable information available, without undue cost or effort, to apply a retrospective approach.

Applying the modified retrospective approach, the simplifications listed below are available; an entity should use simplifications only where it does not have reasonable and supportable information, without undue cost or effort, as required by the full retrospective approach:

  1. assessments at the date of initial recognition of groups of insurance contracts;
  2. contractual service margin for insurance contracts without direct participation features;
  3. contractual service margin for insurance contracts with direct participation features; and
  4. insurance finance income or expenses.

Each simplification is considered in detail below.

Assessments at the Date of Initial Recognition of Groups of Insurance Contracts

An entity is permitted to aggregate, together in a group, contracts that have been issued more than one year apart if there is no reasonable and supportable information available without undue cost or effort.

No ‘annual cohorts’ requirement on transition

In many cases, it will be impracticable for entities to group contracts in force on transition according to the year when they were written, because information might not be available at that level of detail. Entities can aggregate contracts issued more than one year apart in one group in such circumstances. This simplification is expected to streamline the aggregation of contracts on transition and reduce implementation costs.

An entity should apply the requirements listed below at the transition date, instead of applying them at the date of initial recognition of a group of insurance contracts:

  1. identification of groups of insurance contracts;
  2. assessment of whether an insurance contract has direct participation features; and
  3. definition of discretion for contracts without direct participation features.

Contractual Service Margin for Insurance Contracts without Direct Participation Features

The contractual service margin for insurance contracts without direct participation features at initial recognition is determined in line with the requirements of the general model described in the section on ‘Initial measurement of the contractual service margin’ above. Under the modified retrospective approach, an entity can use the following simplifications for calculation of components of the fulfilment cash flows if there is no reasonable and supportable information available without undue cost or effort:

  • Future cash flows at the date of initial recognition of a group of insurance contracts can equal the future cash flows at the transition date (or earlier date, if determinable), adjusted by the actual cash flows that have occurred between the transition (or earlier) date and the date of initial recognition. Actual cash flows include cash flows from contracts derecognised before the transition date.
  • The discount rate to be applied at the date of initial recognition can be determined:
    1. by using an observable yield curve that, for at least three years immediately before the transition date, approximates to the yield curve required by IFRS 17, if such an observable yield curve exists; and
    2. if an observable yield curve does not exist, by calculating the average spread between an observable yield curve and the yield curve required by IFRS 17 for at least three years before the transition date, and applying that spread to that observable yield curve.
  • The risk adjustment is determined as the risk adjustment at the transition date adjusted for the expected release of risk before the transition date. The expected release of risk should be determined by reference to release of risk for similar insurance contracts that the entity issues at the transition date.

The contractual service margin recognised in profit or loss, as a result of the transfer of services before the transition date, is determined by comparing the remaining coverage units at the transition date to the coverage units provided under the group of contracts before the transition date.

Contractual Service Margin for Insurance Contracts with Direct Participation Features

If there is no reasonable and supportable information available without undue cost or effort, the contractual service margin for insurance contracts with direct participation features at the transition date equals:

  1. the total fair value of the underlying items at the transition date; minusIFRS 17 Insurance contracts Contents
  2. the fulfilment cash flows at the transition date, adjusted for:
    1. amounts charged by the entity to the policyholder before that date;
    2. amounts paid to the policyholder before that date; and
    3. release of the risk adjustment for non-financial risk before transition date.

The resulting contractual service margin is a proxy for the contractual service margin before any amounts have been recycled in profit or loss. This amount is reduced for allocation to services provided before the transition date, based on the coverage units.

If the calculated contractual service margin results in a loss component, the resulting loss component is reduced to nil by transfer of the amount to the liability for remaining coverage excluding the loss component.

Insurance Finance Income or Expenses

Under the modified retrospective approach, an entity is allowed to use the following simplifications if there is no reasonable and supportable information available without undue cost or effort:

For a group that has insurance contracts issued more than one year apart

For a group that has no insurance contracts issued more than one year apart

Locked-in discount rate at the date of initial recognition of a group or when a claim incurred for the premium allocation approach

Apply discount rate locked in at transition date

Use simplification for discount rate for estimation of the contractual service margin, as discussed in the section on ‘Contractual service margin for insurance contracts without direct participation features’ above

Determine the cumulative amount recognised in other comprehensive income before the transition date, as described below, if an entity chooses to recognise an eligible portion of insurance finance income and expenses in other comprehensive income:

For insurance contracts with direct participation features where an entity holds underlying items as assets

As equal to the cumulative amount for the underlying items recognised in other comprehensive income

For insurance contracts without direct participation features for which changes in financial assumptions do not have a substantial effect on the amounts paid to the policyholder

As nil

Using the discount rates that applied at the date of initial recognition, determined as described in the section on ‘Contractual service margin for insurance contracts without direct participation features’ above

For insurance contracts without direct participation features for which changes in financial assumptions have a substantial effect on the amounts paid to the policyholder

As nil

For insurance contracts measured using the premium allocation approach

Using the discount rates that applied at the date of incurred claim, determined as described in the section on ‘Contractual service margin for insurance contracts without direct participation features’ above

Modified retrospective approach Modified retrospective approach Modified retrospective approach Modified retrospective approach Modified retrospective approach

Modified retrospective approach

Modified retrospective approach

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