Strategic Report Governance
Financial Statements
149
IFRS 17 requires that the CSM is recognised in profit and loss over the period of the contracts issued. The recognition of amounts in profit and loss is based on coverage units which represent the services that are received by the customers. The Group provides the following services to customers:
• investment return service when a customer is in the deferred or guarantee phase; and • insurance coverage services when an annuitant is in payment period for annuitants.
By their nature, coverage units vary depending on the type of service provided. A weighting then needs to be applied to the different types of coverage unit in order to calculate an aggregate value of the proportion of the CSM balance that is to be released. The Group uses the probability of the policy being in force in each time period for weighting the disparate types of coverage units. This weighting reflects management’s view that the value of services provided to policyholders is broadly equivalent across the different phases in the life of contracts. The coverage units and the weightings used to combine coverage units are discounted using the locked-in discount rates and financial risk assumptions as at inception of the contracts. The weightings applied are updated each period for changes in life expectancies of annuitants. 1.7.7. Reinsurance contracts Reinsurance contracts are measured using policies consistent with those described above for underlying contracts. Measurement of the estimates of the present value of future cash flows uses assumptions that are consistent with those used to measure the estimates of the present value of future cash flows for the underlying insurance contracts, with an adjustment for risk of non-performance by the reinsurer. The effect of the non-performance risk of the reinsurer is assessed at each reporting date and the effect of changes in the non- performance risk is recognised in profit or loss. The risk adjustment for non-financial risk represents the amount of the risk transferred by the Group to the reinsurer. On initial recognition, the CSM of a group of reinsurance contracts represents the net cost or net gain on purchasing reinsurance. Reinsurance contracts cannot be onerous. The initial CSM is measured as the equal and opposite amount of the total of the reinsurance fulfilment cash flows recognised in the period including any cash flows arising at that date. However, if any net cost on purchasing reinsurance coverage relates to insured events that occurred before the purchase, the cost is recognised immediately in profit or loss as an expense. The level of aggregation for CSM calculation purposes is at annual cohort level for each treaty. The existing treaties for which the deposit back arrangements were reported separately as financial liabilities prior to adoption of IFRS 17 are included within the value of the associated reinsurance contracts under IFRS 17. Reinsurance contracts are presented in the Statement of financial position based on whether the portfolios of reinsurance contracts are an asset or liability. The Group has identified separate portfolios of reinsurance contracts, based on whether or not the underlying contracts transfer financial risk in addition to longevity risk. The carrying amount of the reinsurance CSM at the end of each period is the carrying amount at the start of the year, adjusted for: • the CSM of reinsurance ceded in the period; • interest accreted on the CSM during the period, measured at the discount rates determined on initial recognition; • changes in fulfilment cash flows that relate to future services, measured at the discount rates determined on initial recognition, except to the extent that a change results from a change in fulfilment cash flows allocated to a group of underlying insurance contracts that does not adjust the CSM of the group of underlying contracts, in which case the change is recognised in profit or loss; • any reinsurance recovery, or reversal thereof, recognised in connection with a loss component on underlying contracts calculated based on the reinsurance quota share; and • the amount representing either the cost or gain of services received from reinsurance in the period. The allowance for benefit inflation within the CSM calculation uses the locked-in inflation assumptions prospectively, with actual inflation experience recognised in the period up to the measurement date. The coverage units for the release of the reinsurance CSM in profit and loss are based on the cash flows associated with the risk transferred to the reinsurer, this includes “variable leg” reinsurance claim cash flow values. 1.7.8. Derecognition and contract modification The Group derecognises a contract when it is extinguished – i.e. when the specified obligations in the contract expire or are discharged or cancelled. It also derecognises a contract if its terms are modified in a way that would have changed the accounting for the contract significantly had the new terms always existed, in which case a new contract based on the modified terms is recognised. If a contract modification does not result in derecognition, then the Group treats the changes in cash flows caused by the modification as changes in estimates of fulfilment cash flows. The Group transacts two main types of contract modification which are not normally expected to result in derecognition as they do not result in changes to profitability groupings or accounting treatment: • transition of DB schemes from Buy-in to Buy-out is anticipated within the original contracts and is therefore not treated as modifications; and • from time to time, fees and quota shares are amended within reinsurance treaties however these do not have a significant impact on the accounting for the treaties. On the derecognition of a contract from within a group of contracts, the fulfilment cash flows, CSM and coverage units of the group are adjusted to reflect the removal of the contract that has been derecognised.
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