Page 1 of 12The guidance below was developed by the Financial Reporting Standards Committee(FRSC) of the Hong Kong Institute of Certified Public Accountants (HKICPA) and is forgeneral reference only. The HKICPA, FRSC and their staff do not accept anyresponsibility or liability, and disclaim all responsibility and liability, in respect of theguidance and any consequences that may arise from any person acting or refrainingfrom action as a result of any materials in the guidance. Members of the HKICPA andother users of this guidance should also read the full Standard, as found in theHKICPA Members’ Handbook (https://www.hkicpa.org.hk/-/media/HKICPA-Website/Members-Handbook/volumeII/hkfrs17.pdf) for further reference, and seekprofessional advice where necessary when applying the references contained in thisguidance.The HKICPA Standard Setting Department welcomes your comments and feedback, whichshould be sent to commentletters@hkicpa.org.hk.HKFRS 17 Insurance Contracts – Contractual service margin educational guidanceDetermining coverage units and relative weighting for contracts that provide multipleservicesThe HKICPA, during its work on finalising HKFRS 17 Insurance Contracts and itsamendments, noted comments from stakeholders that the identification of coverage unitsand determination of the amount of contractual service margin (CSM) to recognise in profitor loss is a topic involving technical complexity and judgement1. This was notablypronounced in relation to contracts involving blends of multiple and heterogeneous services,which are present in Hong Kong.This publication is designed to provide preparers with a summary of relevant requirementsand principles in HKFRS 172, and to illustrate the potential application of those requirementsto specific and simplified scenarios. In doing so, it considers two examples intended to berepresentative of products in the Hong Kong market that help to illustrate commonchallenges encountered when applying the requirements in question. The principles-basednature of the HKFRS 17 requirements means that in both examples more than one approachmay be possible; in presenting the different possible approaches, commentary has beenprovided on certain considerations that an entity would need to take into account in order toassess whether the approach might be applicable.Users of this guidance should note that the examples in this publication are simplified factpatterns designed for educational purposes. As such, the illustrative approaches in thispublication may not necessarily be applicable to other circumstances or fact patterns.Entities should exercise judgement and carefully consider their specific contractual terms,facts, and circumstances when applying HKFRS 17. This publication does not prescribe, norshould it be interpreted as requiring, a specific approach to applying the requirements.ScopeThis publication considers the recognition of the CSM in profit or loss under HKFRS 17 forinsurance contracts that provide multiple services. In particular, it focuses on theidentification of coverage units and the determination of the relative weighting of the benefitsprovided.1 This feedback was noted in the Institute’s response to the IASB Exposure Draft Amendments to IFRS 17 dated25 September 2019 (available on the Institute’s website.)
2 HKFRS 17 is fully aligned with IFRS 17 as issued by the IASB.Page 2 of 12For the purposes of illustration, this publication assumes that both examples are insurancecontracts without direct participation features, and that the investment services provided inIllustrative example 2 are investment-return services (and as such, that the criteria of aninvestment-return service in HKFRS 17 paragraph B119B are met). The provision ofeducational guidance on the assessment of whether an insurance contract has directparticipation features or provides an investment-return service is beyond the scope of thispublication. Although this publication presents examples of insurance contracts withoutdirect participation features, the CSM recognition principles for insurance contracts withdirect participation features are similar, and much of this guidance would be relevant forconsideration when assessing contracts with direct participation features, which provideinvestment-related services (see Illustrative example 2: Fact pattern).HKFRS 17 ReferencesHKFRS 17 prescribes the subsequent measurement of the CSM for contracts without directparticipation features in paragraph 44, which states that the carrying amount of the CSM atthe start of the reporting period should be adjusted for a selection of factors to arrive at thecarrying amount at the end of the reporting period. One adjusting factor is the recognition ofthe CSM in profit or loss as per paragraph 44(e)3:
…(e) the amount recognised as insurance revenue because of the transfer ofinsurance contract services in the period, determined by the allocation ofthe contractual service margin remaining at the end of the reportingperiod (before any allocation) over the current and remaining coverageperiod applying paragraph B119.The term coverage period is defined in Appendix A of HKFRS 17 as:
The period during which the entity provides insurance contract services. This periodincludes the insurance contract services that relate to all premiums within theboundary of the insurance contract.The term insurance contract services is defined in Appendix A of HKFRS 17 as:
The following services that an entity provides to a policyholder of an insurancecontract:
(a) coverage for an insured event (insurance coverage);
(b) for insurance contracts without direct participation features, thegeneration of an investment return for the policyholder, if applicable(investment-return service); and(c) for insurance contracts with direct participation features, the managementof underlying items on behalf of the policyholder (investment-related service).As directed by paragraph 44(e), paragraph B119 and its accompanying paragraph B119Aprovide guidance on the recognition of the CSM in profit or loss as follows:
B119An amount of the contractual service margin for a group of insurancecontracts is recognised in profit or loss in each period to reflect the insurancecontract services provided under the group of insurance contracts in thatperiod (see paragraphs 44(e), 45(e) and 66(e)). The amount is determinedby:
3 For insurance contracts with direct participation features, equivalent guidance is located in paragraph 45(e).Page 3 of 12(a) identifying the coverage units in the group. The number of coverage unitsin a group is the quantity of insurance contract services provided by thecontracts in the group, determined by considering for each contract thequantity of the benefits provided under a contract and its expectedcoverage period.(b) allocating the contractual service margin at the end of the period (beforerecognising any amounts in profit or loss to reflect the insurance contractservices provided in the period) equally to each coverage unit provided inthe current period and expected to be provided in the future.(c) recognising in profit or loss the amount allocated to coverage unitsprovided in the period.B119A To apply paragraph B119, the period of investment-return service orinvestment-related service ends at or before the date that all amounts due tocurrent policyholders relating to those services have been paid, withoutconsidering payments to future policyholders included in the fulfilment cashflows applying paragraph B68.As such, as noted by paragraph BC279 of the Basis of Conclusions to HKFRS 17, the CSMis recognised over the coverage period in a pattern that reflects the provision of insurancecontract services as required by the contract.Transition Resource Group for IFRS 17 observations4The determination of coverage units to reflect the services provided under a group ofinsurance contracts was discussed in the May 2018 meeting of the Transition ResourceGroup for IFRS 17 (TRG). The TRG’s meeting summaries are not authoritative guidance;
however, they do provide an understanding of how those involved with the implementation ofIFRS 17 have commented at that point in time.The summary for that meeting explains TRG members observed that the determination ofcoverage units involves judgement and estimates to best achieve the principle of reflectingthe services provided. The TRG also noted those judgements and estimates should beapplied systematically and rationally, and the method which would best reflect the services isa matter of judgement based on facts and circumstances.Observations made by TRG members at the May 2018 meeting in considering how toachieve the principle of reflecting the services provided are reproduced below5:
(a) The period in which an entity bears insurance risk is not necessarily the same as theinsurance coverage period.(b) Expectations of lapses of contracts are included in the determination of coverageunits because they affect the expected duration of the coverage. Consistently,coverage units reflect the likelihood of insured events occurring to the extent thatthey affect the expected duration of coverage for contracts in the group.(c) Because the objective is to reflect the insurance services provided in each period,different levels of service across periods should be reflected in the determination ofcoverage units.4 This meeting took place prior to the issuance of Amendments to IFRS 17, and as such, focuses on insurancecoverage and not investment-return service.5 From paragraph 35 of the Summary of the Transition Resource Group for IFRS 17 Insurance Contracts meetingheld on 2 May 2018 (accessible through the website of the International Accounting Standards Board).Page 4 of 12(d) Determining the quantity of benefits provided under a contract requires an entity toconsider the benefits expected to be received by the policyholder, not the costs ofproviding those benefits expected to be incurred by the entity.(e) A policyholder benefits from the entity standing ready to meet valid claims, not justfrom making a claim if an insured event occurs. The quantity of benefits providedtherefore relates to the amounts that can be claimed by the policyholder.(f) Different probabilities of an insured event occurring in different periods do not affectthe benefit provided in those periods of the entity standing ready to meet valid claimsfor that insured event. Different probabilities of different types of insured eventsoccurring might affect the benefit provided by the entity standing ready to meet validclaims for the different types of insured events.(g) IFRS 17 does not specify a particular method or methods to determine the quantity ofbenefits. Different methods may achieve the objective of reflecting the servicesprovided in each period, depending on facts and circumstances.(h) The following methods might achieve the objective if they are reasonable proxies forthe services provided under the group of insurance contracts in each period:
(i) A straight-line allocation over the passage of time, but reflecting the numberof contracts in a group.(ii) A method based on the maximum contractual cover in each period.(iii) A method based on the amount the entity expects the policyholder to be ableto validly claim in each period if an insured event occurs.(iv) Methods based on premiums. However, premiums will not be reasonableproxies when comparing serviced across periods if they are receivable indifferent periods to those in which insurance services are provided, or reflectdifferent probabilities of claims for the same type of insured event in differentperiods rather than different levels of service of standing ready to meetclaims. Additionally, premiums will not be reasonable proxies whencomparing contracts in a group if the premiums reflect different levels ofprofitability in contracts. The level of profitability in a contract does not affectthe services provided by the contract.(v) Methods based on expected cash flows. However, methods that result in noallocation of the contractual service margin to periods in which the entity isstanding ready to meet valid claims do not meet the objective.Illustrative examplesThese illustrative examples assume that the group of contracts do not contain otherproducts. If other products are included in the group, the determination of coverage unitsshould be considered for the group of contracts as a whole by considering the servicesprovided for each contract in the group. Also, the approaches illustrated below should not beviewed as the only possible approaches.Illustrative example 1Illustrative example 1: Fact patternConsider a medical reimbursement product with multiple insurance services wherepolicyholders are required to choose a benefit tier (ward, semi-private or private) with thefollowing benefit schedules:
Page 5 of 12ItemType of limitBenefit limit (USD)
WardSemi-privatePrivateConfinement benefitsDaily room & boardPer dayPhysician’s visitPer daySpecialist’s feePer confinement1,200Miscellaneous expensesPer confinement1,2002,5004,000Intensive carePer day1,500Surgical benefitsSurgeon’s feesPer surgery6,0009,00012,000Anaesthetist’s feesPer surgery35% of surgeon’s feeOperating theatre feesPer surgery35% of surgeon’s feeOther benefitsEmergency OP treatmentPer injury1,5002,50010 Home nursingPer visit11 Long-term treatmentPer illness7,50015,00022,50012 Worldwide emergencyassistance servicesPer trip60,000There is no specific annual limit or lifetime limit stated in the contract. The benefits and limitsin the schedule are constant year on year. The contract is assumed to be measured underthe general measurement model and all contracts are grouped into the same portfolio.Illustrative example 1: HKFRS 17 analysisThis illustrative example raises several complexities in the application of the HKFRS 17requirements in determining the insurance contract services provided, including:
-How to determine the amount that the policyholder benefits from when the contractdoes not contain one single contractual annual or lifetime limit and when the limitsthat do exist are based on number of occurrences?-How to determine the relative weighting of the different benefits in the contract indetermining coverage units for the contract as a whole?Illustrative approach 1A: Voluntary disaggregation into groups of contracts which consist ofhomogeneous contracts-Divide the three tiers of policyholders (ward, semi-private, private) into three differentgroups of contracts.-For each group of contracts, coverage units are calculated based on the actual andprojected number of contracts in-force in the group (policy count). Effectively theCSM is recognised into profit or loss based on passage of time, with adjustment fordecrement (lapse or maturity of the insurance contracts) to account for the expectedduration of the coverage.Approach 1A does not explicitly calculate the quantity of benefits of contracts in each groupand avoids the associated application complexities. Instead, in recognition of the constantamount of service being provided over the duration of the contract, approach 1A uses thenumber of policies as a proxy for the services provided in each period and will provide anallocation of the CSM to profit or loss in a straight-line over the passage of time, adjusted forthe number of contracts in the group.Page 6 of 12In taking this approach, consideration needs to be given to the time period that should beused and the level of service for the group of contracts during that time period. Theappropriate time period would align with the expected coverage period coming from the fullmeasurement of cash flows including the effect of insured events. If the benefits and limitsin the contract were not constant over the duration of the contract, recognition of the CSMinto profit or loss on the basis of passage of time may not be appropriate. Examples could bewhere the various benefits of the contract were subject to conditions that differed betweenbenefits such as waiting periods, annual or lifetime limits and changes in the benefit levelover time. Where the benefits and limits in the contract are constant over the duration of thecontract, decrements in the number of policies should be allowed for to reflect expectedlapses and hence a reduction in the insurance service being provided for the group ofcontracts as a whole.HKFRS 17 paragraph 21 permits the further subdivision of portfolios beyond the minimumthree groups described in HKFRS 17 paragraph 16 when setting the level of aggregation ofinsurance contracts. In dividing the insurance contracts into three separate groups ofcontracts based on the policyholder tier, each group will contain homogeneous insurancecontracts providing the same level of service. For each category of ward, semi-private andprivate, the benefit levels are the same. The entity is standing ready to meet, and thepolicyholder can validly claim, the same level of benefits within each category. The entity istherefore providing the same level of insurance service for each contract in the group. Usinga constant quantity of benefits measure for the actual and expected number of contracts inthe group (e.g. policy count) will provide an allocation of the CSM into profit or loss reflectingthe level of service provided in the period.A key feature of approach 1A as a potential approach is that it requires each of the group ofcontracts to contain homogeneous contracts, and while voluntarily sub-dividing groups ispermitted by HKFRS 17, it is not a requirement and there could be other reasons whyentities may want to aggregate all these contracts into one group.Illustrative approach 1B: Keep insurance contracts in one group, differentiate betweendifferent tiers of policyholdersApproach 1B is an extension of approach 1A. For a base tier of contracts, e.g. the wardclassification, the quantity of benefits is policy count with a value of 1. The quantity ofbenefits for the semi-private and private insurance contracts are also policy count but scaledup relative to the difference in level of benefits compared to the base tier. For example, thequantity of benefits for each contract in the semi-private and private classification could be
1.5 and 2 respectively. Judgement would need to be applied on the scaling factor as thedifference in benefits between tiers is rarely a straight multiple across all benefits. Possibleapproaches to determine the relative level of service between the different tiers include:
-Using total premiums as a scaling method, if the only factor affecting the premiumlevel is the benefit level (i.e. premium is not differentiated between age groups orother risk factors), and the level of profitability is similar to all contracts and across alltiers.-Using historical claims data to determine the distribution of claims for each tier, andinferring the relative service level between different tiers (e.g. by comparing the meanof the claims or a specific percentile of the claims).The relative scaling factor would be applied to the calculation of coverage units in a reportingperiod to reflect differences in the amount of insurance service provided between contractsof differing tiers (i.e. the different "quantity of benefits" from paragraph B119(a)).Page 7 of 12Illustrative approach 2: Calculate probable maximums of each benefit based on historicalclaims data-Determine the maximum amount of claim under each benefit based on a “probablemaximum” metric.-The probable maximum could be assessed based on credible historic claims data ofsimilar products.TRG members observed that in determining the quantity of benefits provided under acontract, an entity should consider the benefits expected to be received by the policyholder.Given a policyholder benefits from an entity standing ready to meet valid claims, the quantityof benefits provided relates to the amounts that can be claimed by the policyholder. Possiblemethods include the use of (i) the maximum contractual cover in each period, and (ii) theamount the entity expects the policyholder to be able to validly claim in each period if aninsured event occurs. The probable maximum method described in approach 2 identifies anexpected maximum that a policyholder can validly claim in each period using informationavailable to the insurer. This could be calculated as a probable maximum amount of claimfor each benefit or for the contract as a whole. One possible technique to estimate theprobable maximum could be to identify the tail of the claims distribution based on historicalclaims or pricing assumptions, and use this amount as the coverage unit of a contract in anygiven period. This method could reflect the different levels of cover across the benefit tiersin the group. In estimating a probable maximum based on distribution patterns, judgementwould be required as to the appropriate point in the tail to be selected for use.If the probable maximum amount is determined for each benefit, the total coverage unit canbe determined by summing up these amounts. This approach would effectively be weightingthe benefits in the contract in a way that excludes statistically improbable scenarios whileavoiding an overall approach of incorporating probability into the determination of coverageunits. Having excluded the statistically improbable scenarios, equal weighting is given to thedifferent types of benefits (i.e. no additional weighting mechanism is incorporated). Thisapproach of summing up all the levels of cover provided is consistent with the TRGdiscussions on an example of a contract with a combination of different types of cover(Example 11 in Agenda Paper 5 of the May 2018 TRG).Proxy methodsApproaches 3 and 4 are methods which look to approximate the service patterns that wouldbe achieved through approaches such as those above using methods which are simpleroperationally. The circumstances when such proxy methods would be reasonable arediscussed below.Illustrative approach 3: Premiums as a proxy for the services provided in the contract-Using premiums or adjusted premiums as a proxy for the quantity of benefits in thecontract.Premiums will not be a reasonable proxy for the services provided in the contract if any ofthe following exist:
-For an individual contract, the premiums are receivable in different periods to those inwhich the insurance service is being provided.-For an individual contract, the premiums reflect different probabilities for the sametype of insured event in different periods.Page 8 of 12-For the group of contracts, the premiums reflect different levels of profitability incontracts.If any of the above conditions exist, the premiums would need to be adjusted to remove thedifferentiation of premiums receivable in different periods, different probabilities for the sameinsured event, or different levels of profitability for the same insured event, as the case maybe.In this approach, a relative weighting of benefits within the contract is not required as thequantity of benefits is calculated for the contract as a whole.Illustrative approach 4: Expected cash flows as a proxy for the services provided in thecontract-Using expected cash flows or adjusted expected cash flows as a proxy for thequantity of benefits in the contract.This could be an acceptable approach if expected cash flows are a reasonable proxy for theservices provided under the group of insurance contracts in each period. However,expected cash flows will not be a reasonable proxy for the services provided in the contract ifany of the following exist:
-Expected cash flows reflect different probabilities of claims for the same type ofinsured event in different periods.-The approach results in no allocation of the CSM to periods in which the entity isstanding ready to meet valid claims.In this approach, a relative weighting of benefits within the contract is not required as thequantity of benefits is calculated for the contract as a whole.Illustrative example 2Illustrative example 2: Fact patternConsider an investment-linked product with a blend of investment services and multipleinsurance services. The base contract is a regular premium investment-linked product withflexible investment options, as well as protection from death and total permanent disability(TPD) with a fixed sum assured. The fixed sum assured depends on the amount of protectiondesired by the policyholder and will therefore be different between different policyholders andcan take a range of values. The fixed sum assured is paid in addition to the account balanceof the contract on death or TPD. The following “unit-deducting riders” (i.e. the cost of insuranceof the riders are deducted from the unit balance of the contract) are attached to the basecontract as optional additional insurance benefits:
1.A medical reimbursement rider – benefit schedule is the same as that in Illustrativeexample 1.
2.A critical illness rider that pays a fixed amount of benefit upon the diagnosis ofvarious defined illnesses.The base contract and the riders have the same expected coverage period.For purposes of illustration, the contract as a whole (base and rider combined) is assumed tobe measured under the general measurement model with investment-return service. Similartypes of investment-linked contracts might be measured under the variable fee approach,depending on whether they meet the conditions for the scope of the variable fee approach inparagraph B101 of the standard, meaning that the contract would be considered to containPage 9 of 12investment-related services rather than investment-return services. While the approachesbelow do not address this scenario explicitly, much of the below would be relevant forconsideration when assessing contracts containing investment-related services.Illustrative example 2: HKFRS 17 analysisThis illustrative example raises several complexities in the application of the HKFRS 17requirements in determining the insurance contract services provided:
-What is the quantity of benefits for the investment-return service?-What is the quantity of benefits for the multiple insurance services given the largevariation in maximum benefits for each contract (death benefit can vary considerablybetween policyholders)?-What is the quantity of benefits for the contract as a whole, if the quantity of benefitsfor the investment-return service and insurance services are not comparable?Various approaches are set out below for measuring the quantity of benefits for theinvestment-return service. To an extent, these are all proxies that make use of readilyavailable data, and the considerations when these would be appropriate for use are notedfor each approach.Illustrative approach 1: Calculate quantity of benefits for the contract using maximumpayment of the different contractual features-The quantity of benefits for the insurance service and investment-return service is notseparately determined. One total quantity of benefit is calculated for each contract.This approach would note that it is not a requirement or necessity to identify thequantity of benefits for different benefits and services separately in all cases and itwill not be required in this illustrative example because the base contract and ridershave the same expected coverage period.-The quantity of benefits for the combined insurance service and investment-returnservice is based on the account balance and the maximum of the various insurancebenefits included in the contract:
o Death benefit – based on sum assured (excludes the account balance).o TPD – based on sum assured (excludes the account balance).o Medical reimbursement – based on the probable maximum loss concept inapproach 2 of Illustrative example 1 (note that the straight-line approach inapproach 1A or 1B of Illustrative example 1 cannot be used here becausecontracts are not homogeneous within the same group).o Critical illness – based on sum assured.-The use of account balance here is a proxy for the benefit being provided through theinvestment-return service. Hence, its use here is not on grounds of principle. Inusing account balance, an entity would need to be satisfied that it is a reasonablereflection of the pattern of service being provided under the contract.-In determining the relative weighting of the benefits provided by the insurancecoverage and the investment-return service, the entity considers that using ameasure of maximum payment for each service will already incorporate a form ofweighting (e.g. weight each service by its maximum amount) and it would thereforebe appropriate for the total quantity of benefits for the whole contract to be the sum ofall the maximum payments calculated, without further adjustment.Page 10 of 12Illustrative approach 2: Calculate a constant quantity of benefit for each contract and scaleby a factor to reflect different sizes of contracts in the group-Approach 2 views the services provided by each individual contract to be constantover the duration of the insurance contract.-For the insurance benefits, the limits of the protection cover are fixed as stated in thecontract and are constant over the duration of the contract.-For the investment-return service, this is viewed by the entity as a constant serviceover the duration of the contract, because the key service provided by the entity tothe policyholder is one that generates an investment return for the policyholderthrough the provision of access to investment options that are managed by third partymanagers. If the level of that access is considered to be provided constantly andcontinuously until the end of the contract, then the measure of service can be viewedas constant. On an individual policy level, the pattern is therefore considered to beconstant.-The entity therefore considers the insurance service and investment-return service tobe constant throughout the duration of each contract and, in satisfaction of theweighting requirements of different services within a single contract, one constantmeasure of the quantity of benefits can be used for the total contract. If all contractsare of the same size, the use of policy count (number of policies in the group allowingfor expected lapses and maturities) would be possible.-To reflect the fact that contracts within the group may be of different sizes, theconstant measure used for each contract should be scaled by a relevant factor. Inselecting a factor, the entity should consider measures that allow for comparability ofthe size of a contract relative to other contracts, meaning that to the extent actual orexpected policy lapses differ between contracts of different sizes, this is reflected inthe pattern of coverage units of the group of contracts. Examples of relevant factorswould include initial expectations on total premiums, total payments to policyholders,total sum assured or other factors that reflect the size of different contracts. Thecoverage units for the group of contracts over time will then be the sum of the scaledpolicy counts of the group.This approach (approach 2) could be a reasonable reflection of the services provided whenthe insurer considers all the services in a contract are constant over the duration of thecontract, as is the case for this example as the expected coverage period is the same for thebase contract and the riders. At an individual contract level, if the insurance and investment-return service are both constant services, then the quantity of service for the contract isconstant and therefore a relative weighting of the different benefits within the contract is notrequired for measurement purposes. In satisfying the requirement to disclose the basis ofweighting, such an approach could be disclosed as giving equal weight to the differentamount of benefits.Illustrative approach 3: Separately calculate quantity of benefits for the investment-returnservice and insurance coverage, using account balance for investment-return service-Approach 3 calculates the quantity of benefits for the insurance coverage andinvestment-return service separately. This approach acknowledges that the pattern ofprovision of insurance coverage and investment-return service may differ.-Quantity of benefits for the insurance coverage is based on the maximum of thevarious insurance benefits included in the contract:
o Death benefit – based on sum assured (excludes the account balance).o TPD – based on sum assured (excludes the account balance).Page 11 of 12o Medical reimbursement – based on the probable maximum loss concept inapproach 2 of Illustrative example 1 (note that the straight-line approach inapproach 1A or 1B of the Illustrative example 1 cannot be used here becausecontracts are not homogeneous within the same group).o Critical illness – based on sum assured.-For the investment-return service, the investment account balance is considered aproxy. The entity considers the account balance to reflect the different level ofinvestment services being provided to the policyholder over the duration of thecontract. In choosing the account balance (which is similar to maximum benefit) toreflect the investment service, this approach will be similar to Illustrative approach 1which would not be the case if a different measure had been chosen to reflect theinvestment service.-In determining the relative weighting of the benefits provided by the insurancecoverage and the investment-return service, the entity considers that using ameasure of maximum payment for each service will already incorporate a form ofweighting and it would therefore be appropriate for the total quantity of benefits forthe whole contract to be the sum of all the maximum payments calculated, withoutfurther adjustment. This calculation would give a quantity of coverage units for thegroup of contracts as a whole, to which the end of period CSM would then be appliedequally in accordance with paragraph B119(b) to determine the CSM amortisation forthe period.Illustrative approach 4: Similar to approach 3 with a weighting of all the insurance contractservices in the contractSimilar to approach 3, but instead of a simple aggregation of all the quantity ofbenefits calculated for each benefit, a weight is calculated and applied to eachbenefit. Judgement is required in determining appropriate weights to reflect thedifferent services in the contract and care should be taken to ensure the data pointsused are not arbitrary. Examples of non-arbitrary data points could be the use ofpolicyholder outflows (which could be expected or maximum possible claims).Illustrative approach 5: Separately calculate quantity of benefits for the investment-returnservice and insurance coverage, using a constant measure for investment-return serviceThis approach could be a reasonable proxy for the insurance contract services providedwhen the insurer considers that the investment-return service in a contract is constant overthe duration of the contract, but where the level of insurance coverage varies over theduration of the contract.-Similar to approach 3, but the insurer takes the view that the level of investment-return service provided to the policyholder is constant throughout the duration of thecontract based on the same arguments mentioned in approach 2, where theinvestment-return service is the generation of an investment return for thepolicyholder through the provision of access to investment options.-Setting aside consideration of how to aggregate with the insurance coverage, policycount (allowing for expected lapses and maturities) could be used as a proxy for thequantity of benefits for the investment return-service given it is considered to be aconstant level.-However, in determining the total quantity of benefits for both insurance coverageand investment-return service, an equal weighting of the insurance coverage and theinvestment-return service would not be appropriate if policy count is used as a proxyfor the investment-return service (i.e. were the quantity of benefits of “1” to be simplyPage 12 of 12summed without further adjustment with the quantity of benefits for the insurancecoverage measured using maximum benefit). This would distort the total quantity ofbenefits for the contract as a whole by unduly allocating substantially all of thequantity of benefits to the insurance coverage. In this case, a relative weightingshould be applied to increase the weight of the investment-return service so as to becomparable to the quantity of benefits of the insurance coverage. Possible factorsthat could be used to weight the investment-return service to make it comparablewith the quantum of the insurance coverage would include metrics such as expectedtotal premiums, total payments to policyholders, total sum assured or other factors.
HKFRS 17 Contractual Service Margin educational guidance
下载原件Page 1 of 12The guidance below was developed by the Financial Reporting Standards Committee(FRSC) of the Hong Kong Institute of Certified Public Accountants (HKICPA) and is forgeneral reference only. The HKICPA, FRSC and their staff do not accept anyresponsibility or liability, and disclaim all responsibility and liability, in respect of theguidance and any consequences that may arise from any person acting or refrainingfrom action as a result of any materials in the guidance. Members of the HKICPA andother users of this guidance should also read the full Standard, as found in theHKICPA Members’ Handbook (https://www.hkicpa.org.hk/-/media/HKICPA-Website/Members-Handbook/volumeII/hkfrs17.pdf) for further reference, and seekprofessional advice where necessary when applying the references contained in thisguidance.The HKICPA Standard Setting Department welcomes your comments and feedback, whichshould be sent to commentletters@hkicpa.org.hk.HKFRS 17 Insurance Contracts – Contractual service margin educational guidanceDetermining coverage units and relative weighting for contracts that provide multipleservicesThe HKICPA, during its work on finalising HKFRS 17 Insurance Contracts and itsamendments, noted comments from stakeholders that the identification of coverage unitsand determination of the amount of contractual service margin (CSM) to recognise in profitor loss is a topic involving technical complexity and judgement1. This was notablypronounced in relation to contracts involving blends of multiple and heterogeneous services,which are present in Hong Kong.This publication is designed to provide preparers with a summary of relevant requirementsand principles in HKFRS 172, and to illustrate the potential application of those requirementsto specific and simplified scenarios. In doing so, it considers two examples intended to berepresentative of products in the Hong Kong market that help to illustrate commonchallenges encountered when applying the requirements in question. The principles-basednature of the HKFRS 17 requirements means that in both examples more than one approachmay be possible; in presenting the different possible approaches, commentary has beenprovided on certain considerations that an entity would need to take into account in order toassess whether the approach might be applicable.Users of this guidance should note that the examples in this publication are simplified factpatterns designed for educational purposes. As such, the illustrative approaches in thispublication may not necessarily be applicable to other circumstances or fact patterns.Entities should exercise judgement and carefully consider their specific contractual terms,facts, and circumstances when applying HKFRS 17. This publication does not prescribe, norshould it be interpreted as requiring, a specific approach to applying the requirements.ScopeThis publication considers the recognition of the CSM in profit or loss under HKFRS 17 forinsurance contracts that provide multiple services. In particular, it focuses on theidentification of coverage units and the determination of the relative weighting of the benefitsprovided.1 This feedback was noted in the Institute’s response to the IASB Exposure Draft Amendments to IFRS 17 dated25 September 2019 (available on the Institute’s website.)
2 HKFRS 17 is fully aligned with IFRS 17 as issued by the IASB.Page 2 of 12For the purposes of illustration, this publication assumes that both examples are insurancecontracts without direct participation features, and that the investment services provided inIllustrative example 2 are investment-return services (and as such, that the criteria of aninvestment-return service in HKFRS 17 paragraph B119B are met). The provision ofeducational guidance on the assessment of whether an insurance contract has directparticipation features or provides an investment-return service is beyond the scope of thispublication. Although this publication presents examples of insurance contracts withoutdirect participation features, the CSM recognition principles for insurance contracts withdirect participation features are similar, and much of this guidance would be relevant forconsideration when assessing contracts with direct participation features, which provideinvestment-related services (see Illustrative example 2: Fact pattern).HKFRS 17 ReferencesHKFRS 17 prescribes the subsequent measurement of the CSM for contracts without directparticipation features in paragraph 44, which states that the carrying amount of the CSM atthe start of the reporting period should be adjusted for a selection of factors to arrive at thecarrying amount at the end of the reporting period. One adjusting factor is the recognition ofthe CSM in profit or loss as per paragraph 44(e)3:
…(e) the amount recognised as insurance revenue because of the transfer ofinsurance contract services in the period, determined by the allocation ofthe contractual service margin remaining at the end of the reportingperiod (before any allocation) over the current and remaining coverageperiod applying paragraph B119.The term coverage period is defined in Appendix A of HKFRS 17 as:
The period during which the entity provides insurance contract services. This periodincludes the insurance contract services that relate to all premiums within theboundary of the insurance contract.The term insurance contract services is defined in Appendix A of HKFRS 17 as:
The following services that an entity provides to a policyholder of an insurancecontract:
(a) coverage for an insured event (insurance coverage);
(b) for insurance contracts without direct participation features, thegeneration of an investment return for the policyholder, if applicable(investment-return service); and(c) for insurance contracts with direct participation features, the managementof underlying items on behalf of the policyholder (investment-related service).As directed by paragraph 44(e), paragraph B119 and its accompanying paragraph B119Aprovide guidance on the recognition of the CSM in profit or loss as follows:
B119An amount of the contractual service margin for a group of insurancecontracts is recognised in profit or loss in each period to reflect the insurancecontract services provided under the group of insurance contracts in thatperiod (see paragraphs 44(e), 45(e) and 66(e)). The amount is determinedby:
3 For insurance contracts with direct participation features, equivalent guidance is located in paragraph 45(e).Page 3 of 12(a) identifying the coverage units in the group. The number of coverage unitsin a group is the quantity of insurance contract services provided by thecontracts in the group, determined by considering for each contract thequantity of the benefits provided under a contract and its expectedcoverage period.(b) allocating the contractual service margin at the end of the period (beforerecognising any amounts in profit or loss to reflect the insurance contractservices provided in the period) equally to each coverage unit provided inthe current period and expected to be provided in the future.(c) recognising in profit or loss the amount allocated to coverage unitsprovided in the period.B119A To apply paragraph B119, the period of investment-return service orinvestment-related service ends at or before the date that all amounts due tocurrent policyholders relating to those services have been paid, withoutconsidering payments to future policyholders included in the fulfilment cashflows applying paragraph B68.As such, as noted by paragraph BC279 of the Basis of Conclusions to HKFRS 17, the CSMis recognised over the coverage period in a pattern that reflects the provision of insurancecontract services as required by the contract.Transition Resource Group for IFRS 17 observations4The determination of coverage units to reflect the services provided under a group ofinsurance contracts was discussed in the May 2018 meeting of the Transition ResourceGroup for IFRS 17 (TRG). The TRG’s meeting summaries are not authoritative guidance;
however, they do provide an understanding of how those involved with the implementation ofIFRS 17 have commented at that point in time.The summary for that meeting explains TRG members observed that the determination ofcoverage units involves judgement and estimates to best achieve the principle of reflectingthe services provided. The TRG also noted those judgements and estimates should beapplied systematically and rationally, and the method which would best reflect the services isa matter of judgement based on facts and circumstances.Observations made by TRG members at the May 2018 meeting in considering how toachieve the principle of reflecting the services provided are reproduced below5:
(a) The period in which an entity bears insurance risk is not necessarily the same as theinsurance coverage period.(b) Expectations of lapses of contracts are included in the determination of coverageunits because they affect the expected duration of the coverage. Consistently,coverage units reflect the likelihood of insured events occurring to the extent thatthey affect the expected duration of coverage for contracts in the group.(c) Because the objective is to reflect the insurance services provided in each period,different levels of service across periods should be reflected in the determination ofcoverage units.4 This meeting took place prior to the issuance of Amendments to IFRS 17, and as such, focuses on insurancecoverage and not investment-return service.5 From paragraph 35 of the Summary of the Transition Resource Group for IFRS 17 Insurance Contracts meetingheld on 2 May 2018 (accessible through the website of the International Accounting Standards Board).Page 4 of 12(d) Determining the quantity of benefits provided under a contract requires an entity toconsider the benefits expected to be received by the policyholder, not the costs ofproviding those benefits expected to be incurred by the entity.(e) A policyholder benefits from the entity standing ready to meet valid claims, not justfrom making a claim if an insured event occurs. The quantity of benefits providedtherefore relates to the amounts that can be claimed by the policyholder.(f) Different probabilities of an insured event occurring in different periods do not affectthe benefit provided in those periods of the entity standing ready to meet valid claimsfor that insured event. Different probabilities of different types of insured eventsoccurring might affect the benefit provided by the entity standing ready to meet validclaims for the different types of insured events.(g) IFRS 17 does not specify a particular method or methods to determine the quantity ofbenefits. Different methods may achieve the objective of reflecting the servicesprovided in each period, depending on facts and circumstances.(h) The following methods might achieve the objective if they are reasonable proxies forthe services provided under the group of insurance contracts in each period:
(i) A straight-line allocation over the passage of time, but reflecting the numberof contracts in a group.(ii) A method based on the maximum contractual cover in each period.(iii) A method based on the amount the entity expects the policyholder to be ableto validly claim in each period if an insured event occurs.(iv) Methods based on premiums. However, premiums will not be reasonableproxies when comparing serviced across periods if they are receivable indifferent periods to those in which insurance services are provided, or reflectdifferent probabilities of claims for the same type of insured event in differentperiods rather than different levels of service of standing ready to meetclaims. Additionally, premiums will not be reasonable proxies whencomparing contracts in a group if the premiums reflect different levels ofprofitability in contracts. The level of profitability in a contract does not affectthe services provided by the contract.(v) Methods based on expected cash flows. However, methods that result in noallocation of the contractual service margin to periods in which the entity isstanding ready to meet valid claims do not meet the objective.Illustrative examplesThese illustrative examples assume that the group of contracts do not contain otherproducts. If other products are included in the group, the determination of coverage unitsshould be considered for the group of contracts as a whole by considering the servicesprovided for each contract in the group. Also, the approaches illustrated below should not beviewed as the only possible approaches.Illustrative example 1Illustrative example 1: Fact patternConsider a medical reimbursement product with multiple insurance services wherepolicyholders are required to choose a benefit tier (ward, semi-private or private) with thefollowing benefit schedules:
Page 5 of 12ItemType of limitBenefit limit (USD)
WardSemi-privatePrivateConfinement benefitsDaily room & boardPer dayPhysician’s visitPer daySpecialist’s feePer confinement1,200Miscellaneous expensesPer confinement1,2002,5004,000Intensive carePer day1,500Surgical benefitsSurgeon’s feesPer surgery6,0009,00012,000Anaesthetist’s feesPer surgery35% of surgeon’s feeOperating theatre feesPer surgery35% of surgeon’s feeOther benefitsEmergency OP treatmentPer injury1,5002,50010 Home nursingPer visit11 Long-term treatmentPer illness7,50015,00022,50012 Worldwide emergencyassistance servicesPer trip60,000There is no specific annual limit or lifetime limit stated in the contract. The benefits and limitsin the schedule are constant year on year. The contract is assumed to be measured underthe general measurement model and all contracts are grouped into the same portfolio.Illustrative example 1: HKFRS 17 analysisThis illustrative example raises several complexities in the application of the HKFRS 17requirements in determining the insurance contract services provided, including:
-How to determine the amount that the policyholder benefits from when the contractdoes not contain one single contractual annual or lifetime limit and when the limitsthat do exist are based on number of occurrences?-How to determine the relative weighting of the different benefits in the contract indetermining coverage units for the contract as a whole?Illustrative approach 1A: Voluntary disaggregation into groups of contracts which consist ofhomogeneous contracts-Divide the three tiers of policyholders (ward, semi-private, private) into three differentgroups of contracts.-For each group of contracts, coverage units are calculated based on the actual andprojected number of contracts in-force in the group (policy count). Effectively theCSM is recognised into profit or loss based on passage of time, with adjustment fordecrement (lapse or maturity of the insurance contracts) to account for the expectedduration of the coverage.Approach 1A does not explicitly calculate the quantity of benefits of contracts in each groupand avoids the associated application complexities. Instead, in recognition of the constantamount of service being provided over the duration of the contract, approach 1A uses thenumber of policies as a proxy for the services provided in each period and will provide anallocation of the CSM to profit or loss in a straight-line over the passage of time, adjusted forthe number of contracts in the group.Page 6 of 12In taking this approach, consideration needs to be given to the time period that should beused and the level of service for the group of contracts during that time period. Theappropriate time period would align with the expected coverage period coming from the fullmeasurement of cash flows including the effect of insured events. If the benefits and limitsin the contract were not constant over the duration of the contract, recognition of the CSMinto profit or loss on the basis of passage of time may not be appropriate. Examples could bewhere the various benefits of the contract were subject to conditions that differed betweenbenefits such as waiting periods, annual or lifetime limits and changes in the benefit levelover time. Where the benefits and limits in the contract are constant over the duration of thecontract, decrements in the number of policies should be allowed for to reflect expectedlapses and hence a reduction in the insurance service being provided for the group ofcontracts as a whole.HKFRS 17 paragraph 21 permits the further subdivision of portfolios beyond the minimumthree groups described in HKFRS 17 paragraph 16 when setting the level of aggregation ofinsurance contracts. In dividing the insurance contracts into three separate groups ofcontracts based on the policyholder tier, each group will contain homogeneous insurancecontracts providing the same level of service. For each category of ward, semi-private andprivate, the benefit levels are the same. The entity is standing ready to meet, and thepolicyholder can validly claim, the same level of benefits within each category. The entity istherefore providing the same level of insurance service for each contract in the group. Usinga constant quantity of benefits measure for the actual and expected number of contracts inthe group (e.g. policy count) will provide an allocation of the CSM into profit or loss reflectingthe level of service provided in the period.A key feature of approach 1A as a potential approach is that it requires each of the group ofcontracts to contain homogeneous contracts, and while voluntarily sub-dividing groups ispermitted by HKFRS 17, it is not a requirement and there could be other reasons whyentities may want to aggregate all these contracts into one group.Illustrative approach 1B: Keep insurance contracts in one group, differentiate betweendifferent tiers of policyholdersApproach 1B is an extension of approach 1A. For a base tier of contracts, e.g. the wardclassification, the quantity of benefits is policy count with a value of 1. The quantity ofbenefits for the semi-private and private insurance contracts are also policy count but scaledup relative to the difference in level of benefits compared to the base tier. For example, thequantity of benefits for each contract in the semi-private and private classification could be
1.5 and 2 respectively. Judgement would need to be applied on the scaling factor as thedifference in benefits between tiers is rarely a straight multiple across all benefits. Possibleapproaches to determine the relative level of service between the different tiers include:
-Using total premiums as a scaling method, if the only factor affecting the premiumlevel is the benefit level (i.e. premium is not differentiated between age groups orother risk factors), and the level of profitability is similar to all contracts and across alltiers.-Using historical claims data to determine the distribution of claims for each tier, andinferring the relative service level between different tiers (e.g. by comparing the meanof the claims or a specific percentile of the claims).The relative scaling factor would be applied to the calculation of coverage units in a reportingperiod to reflect differences in the amount of insurance service provided between contractsof differing tiers (i.e. the different "quantity of benefits" from paragraph B119(a)).Page 7 of 12Illustrative approach 2: Calculate probable maximums of each benefit based on historicalclaims data-Determine the maximum amount of claim under each benefit based on a “probablemaximum” metric.-The probable maximum could be assessed based on credible historic claims data ofsimilar products.TRG members observed that in determining the quantity of benefits provided under acontract, an entity should consider the benefits expected to be received by the policyholder.Given a policyholder benefits from an entity standing ready to meet valid claims, the quantityof benefits provided relates to the amounts that can be claimed by the policyholder. Possiblemethods include the use of (i) the maximum contractual cover in each period, and (ii) theamount the entity expects the policyholder to be able to validly claim in each period if aninsured event occurs. The probable maximum method described in approach 2 identifies anexpected maximum that a policyholder can validly claim in each period using informationavailable to the insurer. This could be calculated as a probable maximum amount of claimfor each benefit or for the contract as a whole. One possible technique to estimate theprobable maximum could be to identify the tail of the claims distribution based on historicalclaims or pricing assumptions, and use this amount as the coverage unit of a contract in anygiven period. This method could reflect the different levels of cover across the benefit tiersin the group. In estimating a probable maximum based on distribution patterns, judgementwould be required as to the appropriate point in the tail to be selected for use.If the probable maximum amount is determined for each benefit, the total coverage unit canbe determined by summing up these amounts. This approach would effectively be weightingthe benefits in the contract in a way that excludes statistically improbable scenarios whileavoiding an overall approach of incorporating probability into the determination of coverageunits. Having excluded the statistically improbable scenarios, equal weighting is given to thedifferent types of benefits (i.e. no additional weighting mechanism is incorporated). Thisapproach of summing up all the levels of cover provided is consistent with the TRGdiscussions on an example of a contract with a combination of different types of cover(Example 11 in Agenda Paper 5 of the May 2018 TRG).Proxy methodsApproaches 3 and 4 are methods which look to approximate the service patterns that wouldbe achieved through approaches such as those above using methods which are simpleroperationally. The circumstances when such proxy methods would be reasonable arediscussed below.Illustrative approach 3: Premiums as a proxy for the services provided in the contract-Using premiums or adjusted premiums as a proxy for the quantity of benefits in thecontract.Premiums will not be a reasonable proxy for the services provided in the contract if any ofthe following exist:
-For an individual contract, the premiums are receivable in different periods to those inwhich the insurance service is being provided.-For an individual contract, the premiums reflect different probabilities for the sametype of insured event in different periods.Page 8 of 12-For the group of contracts, the premiums reflect different levels of profitability incontracts.If any of the above conditions exist, the premiums would need to be adjusted to remove thedifferentiation of premiums receivable in different periods, different probabilities for the sameinsured event, or different levels of profitability for the same insured event, as the case maybe.In this approach, a relative weighting of benefits within the contract is not required as thequantity of benefits is calculated for the contract as a whole.Illustrative approach 4: Expected cash flows as a proxy for the services provided in thecontract-Using expected cash flows or adjusted expected cash flows as a proxy for thequantity of benefits in the contract.This could be an acceptable approach if expected cash flows are a reasonable proxy for theservices provided under the group of insurance contracts in each period. However,expected cash flows will not be a reasonable proxy for the services provided in the contract ifany of the following exist:
-Expected cash flows reflect different probabilities of claims for the same type ofinsured event in different periods.-The approach results in no allocation of the CSM to periods in which the entity isstanding ready to meet valid claims.In this approach, a relative weighting of benefits within the contract is not required as thequantity of benefits is calculated for the contract as a whole.Illustrative example 2Illustrative example 2: Fact patternConsider an investment-linked product with a blend of investment services and multipleinsurance services. The base contract is a regular premium investment-linked product withflexible investment options, as well as protection from death and total permanent disability(TPD) with a fixed sum assured. The fixed sum assured depends on the amount of protectiondesired by the policyholder and will therefore be different between different policyholders andcan take a range of values. The fixed sum assured is paid in addition to the account balanceof the contract on death or TPD. The following “unit-deducting riders” (i.e. the cost of insuranceof the riders are deducted from the unit balance of the contract) are attached to the basecontract as optional additional insurance benefits:
1.A medical reimbursement rider – benefit schedule is the same as that in Illustrativeexample 1.
2.A critical illness rider that pays a fixed amount of benefit upon the diagnosis ofvarious defined illnesses.The base contract and the riders have the same expected coverage period.For purposes of illustration, the contract as a whole (base and rider combined) is assumed tobe measured under the general measurement model with investment-return service. Similartypes of investment-linked contracts might be measured under the variable fee approach,depending on whether they meet the conditions for the scope of the variable fee approach inparagraph B101 of the standard, meaning that the contract would be considered to containPage 9 of 12investment-related services rather than investment-return services. While the approachesbelow do not address this scenario explicitly, much of the below would be relevant forconsideration when assessing contracts containing investment-related services.Illustrative example 2: HKFRS 17 analysisThis illustrative example raises several complexities in the application of the HKFRS 17requirements in determining the insurance contract services provided:
-What is the quantity of benefits for the investment-return service?-What is the quantity of benefits for the multiple insurance services given the largevariation in maximum benefits for each contract (death benefit can vary considerablybetween policyholders)?-What is the quantity of benefits for the contract as a whole, if the quantity of benefitsfor the investment-return service and insurance services are not comparable?Various approaches are set out below for measuring the quantity of benefits for theinvestment-return service. To an extent, these are all proxies that make use of readilyavailable data, and the considerations when these would be appropriate for use are notedfor each approach.Illustrative approach 1: Calculate quantity of benefits for the contract using maximumpayment of the different contractual features-The quantity of benefits for the insurance service and investment-return service is notseparately determined. One total quantity of benefit is calculated for each contract.This approach would note that it is not a requirement or necessity to identify thequantity of benefits for different benefits and services separately in all cases and itwill not be required in this illustrative example because the base contract and ridershave the same expected coverage period.-The quantity of benefits for the combined insurance service and investment-returnservice is based on the account balance and the maximum of the various insurancebenefits included in the contract:
o Death benefit – based on sum assured (excludes the account balance).o TPD – based on sum assured (excludes the account balance).o Medical reimbursement – based on the probable maximum loss concept inapproach 2 of Illustrative example 1 (note that the straight-line approach inapproach 1A or 1B of Illustrative example 1 cannot be used here becausecontracts are not homogeneous within the same group).o Critical illness – based on sum assured.-The use of account balance here is a proxy for the benefit being provided through theinvestment-return service. Hence, its use here is not on grounds of principle. Inusing account balance, an entity would need to be satisfied that it is a reasonablereflection of the pattern of service being provided under the contract.-In determining the relative weighting of the benefits provided by the insurancecoverage and the investment-return service, the entity considers that using ameasure of maximum payment for each service will already incorporate a form ofweighting (e.g. weight each service by its maximum amount) and it would thereforebe appropriate for the total quantity of benefits for the whole contract to be the sum ofall the maximum payments calculated, without further adjustment.Page 10 of 12Illustrative approach 2: Calculate a constant quantity of benefit for each contract and scaleby a factor to reflect different sizes of contracts in the group-Approach 2 views the services provided by each individual contract to be constantover the duration of the insurance contract.-For the insurance benefits, the limits of the protection cover are fixed as stated in thecontract and are constant over the duration of the contract.-For the investment-return service, this is viewed by the entity as a constant serviceover the duration of the contract, because the key service provided by the entity tothe policyholder is one that generates an investment return for the policyholderthrough the provision of access to investment options that are managed by third partymanagers. If the level of that access is considered to be provided constantly andcontinuously until the end of the contract, then the measure of service can be viewedas constant. On an individual policy level, the pattern is therefore considered to beconstant.-The entity therefore considers the insurance service and investment-return service tobe constant throughout the duration of each contract and, in satisfaction of theweighting requirements of different services within a single contract, one constantmeasure of the quantity of benefits can be used for the total contract. If all contractsare of the same size, the use of policy count (number of policies in the group allowingfor expected lapses and maturities) would be possible.-To reflect the fact that contracts within the group may be of different sizes, theconstant measure used for each contract should be scaled by a relevant factor. Inselecting a factor, the entity should consider measures that allow for comparability ofthe size of a contract relative to other contracts, meaning that to the extent actual orexpected policy lapses differ between contracts of different sizes, this is reflected inthe pattern of coverage units of the group of contracts. Examples of relevant factorswould include initial expectations on total premiums, total payments to policyholders,total sum assured or other factors that reflect the size of different contracts. Thecoverage units for the group of contracts over time will then be the sum of the scaledpolicy counts of the group.This approach (approach 2) could be a reasonable reflection of the services provided whenthe insurer considers all the services in a contract are constant over the duration of thecontract, as is the case for this example as the expected coverage period is the same for thebase contract and the riders. At an individual contract level, if the insurance and investment-return service are both constant services, then the quantity of service for the contract isconstant and therefore a relative weighting of the different benefits within the contract is notrequired for measurement purposes. In satisfying the requirement to disclose the basis ofweighting, such an approach could be disclosed as giving equal weight to the differentamount of benefits.Illustrative approach 3: Separately calculate quantity of benefits for the investment-returnservice and insurance coverage, using account balance for investment-return service-Approach 3 calculates the quantity of benefits for the insurance coverage andinvestment-return service separately. This approach acknowledges that the pattern ofprovision of insurance coverage and investment-return service may differ.-Quantity of benefits for the insurance coverage is based on the maximum of thevarious insurance benefits included in the contract:
o Death benefit – based on sum assured (excludes the account balance).o TPD – based on sum assured (excludes the account balance).Page 11 of 12o Medical reimbursement – based on the probable maximum loss concept inapproach 2 of Illustrative example 1 (note that the straight-line approach inapproach 1A or 1B of the Illustrative example 1 cannot be used here becausecontracts are not homogeneous within the same group).o Critical illness – based on sum assured.-For the investment-return service, the investment account balance is considered aproxy. The entity considers the account balance to reflect the different level ofinvestment services being provided to the policyholder over the duration of thecontract. In choosing the account balance (which is similar to maximum benefit) toreflect the investment service, this approach will be similar to Illustrative approach 1which would not be the case if a different measure had been chosen to reflect theinvestment service.-In determining the relative weighting of the benefits provided by the insurancecoverage and the investment-return service, the entity considers that using ameasure of maximum payment for each service will already incorporate a form ofweighting and it would therefore be appropriate for the total quantity of benefits forthe whole contract to be the sum of all the maximum payments calculated, withoutfurther adjustment. This calculation would give a quantity of coverage units for thegroup of contracts as a whole, to which the end of period CSM would then be appliedequally in accordance with paragraph B119(b) to determine the CSM amortisation forthe period.Illustrative approach 4: Similar to approach 3 with a weighting of all the insurance contractservices in the contractSimilar to approach 3, but instead of a simple aggregation of all the quantity ofbenefits calculated for each benefit, a weight is calculated and applied to eachbenefit. Judgement is required in determining appropriate weights to reflect thedifferent services in the contract and care should be taken to ensure the data pointsused are not arbitrary. Examples of non-arbitrary data points could be the use ofpolicyholder outflows (which could be expected or maximum possible claims).Illustrative approach 5: Separately calculate quantity of benefits for the investment-returnservice and insurance coverage, using a constant measure for investment-return serviceThis approach could be a reasonable proxy for the insurance contract services providedwhen the insurer considers that the investment-return service in a contract is constant overthe duration of the contract, but where the level of insurance coverage varies over theduration of the contract.-Similar to approach 3, but the insurer takes the view that the level of investment-return service provided to the policyholder is constant throughout the duration of thecontract based on the same arguments mentioned in approach 2, where theinvestment-return service is the generation of an investment return for thepolicyholder through the provision of access to investment options.-Setting aside consideration of how to aggregate with the insurance coverage, policycount (allowing for expected lapses and maturities) could be used as a proxy for thequantity of benefits for the investment return-service given it is considered to be aconstant level.-However, in determining the total quantity of benefits for both insurance coverageand investment-return service, an equal weighting of the insurance coverage and theinvestment-return service would not be appropriate if policy count is used as a proxyfor the investment-return service (i.e. were the quantity of benefits of “1” to be simplyPage 12 of 12summed without further adjustment with the quantity of benefits for the insurancecoverage measured using maximum benefit). This would distort the total quantity ofbenefits for the contract as a whole by unduly allocating substantially all of thequantity of benefits to the insurance coverage. In this case, a relative weightingshould be applied to increase the weight of the investment-return service so as to becomparable to the quantity of benefits of the insurance coverage. Possible factorsthat could be used to weight the investment-return service to make it comparablewith the quantum of the insurance coverage would include metrics such as expectedtotal premiums, total payments to policyholders, total sum assured or other factors.