IASB Exposure Draft ED/2019/4 Amendments to IFRS 17

Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)

25 September 2019Mr Hans HoogervorstInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Hans,IASB Exposure Draft ED/2019/4Amendments to IFRS 17The Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditingand ethics for professional accountants, in Hong Kong. We are grateful for theopportunity to provide you with our views on this Exposure Draft (ED).The HKICPA is overall supportive of the Board’s efforts to respond to IFRS 17implementation concerns, and agrees with the ED’s objective to propose amendmentsthat will not result in a significant loss of useful information and avoid unduly disruptingimplementation already underway. In particular, we would like to thank the Board forconsidering the pattern of contractual service margin (CSM) allocation for insurancecontracts without direct participation features which have investment components, andalso the treatment of reinsurance contracts held where underlying insurance contractsare onerous on initial recognition. These were both top technical issues for ourstakeholders, which the HKICPA recommended the IASB staff to consider as proposedamendments in October 2018.The HKICPA generally agrees with the principles of the proposed amendments, and ourcomments focus on suggested refinements and clarifications. The primary issues whichwe focus on for comment are:

1.Expected recovery of insurance acquisition cash flows. Particularly, werecommend that guidance is provided on discounting and comment on a numberof interpretation issues including treatment when applying the premium allocationapproach (PAA).

2.CSM attributable to investment-return service and investment-related service. Inparticular, the definition of investment-return service, the identification ofcoverage units and weighting of benefits.

3.Reinsurance contracts held–recovery of losses on underlying insurancecontracts. Our key issue here is the definition of reinsurance contracts held thatprovide proportionate coverage, and the scope of reinsurance arrangements thatwill qualify for the proposed accounting treatment.

4.Effective date. We especially seek to emphasise the importance of a consistenttimeline for global adoption.

5.An unsolicited edit was made to ED.B107(b)(i), which we recommend bereversed and clarified.Summaries of our stakeholders’ main comments and the HKICPA’s detailed responsesto the questions raised in the ED are in the Appendix.If you have any questions regarding the matters raised in this letter, please contact meor Tiernan Ketchum (tiernanketchum@hkicpa.org.hk), Associate Director of theStandard Setting Department.Sincerely,Christina NgDirector, Standard Setting DepartmentEncl.APPENDIXWork undertaken by HKICPA in forming its viewsThe HKICPA:

(a) issued an Invitation to Comment on the ED on 27 June 2019 to our stakeholders;

(b) hosted industry roundtables on 4 – 5 July 2019, and investor sessions on 3 July2019;

(c) sought input from its Hong Kong Insurance Implementation Support Groupcomprising technical and industry experts, and auditors from accounting firms;

and(d) developed its views through its Financial Reporting Standards Committee,having reflected on its stakeholder feedback. The Committee comprises ofacademics, preparer representatives from various industry sectors, investors,regulators, and technical and industry experts from small, medium and largeaccounting firms.This submission outlines the HKICPA's views and summarises our stakeholders' primarycomments on the ED. As requested in the ED, we have limited our comments to mattersaddressed in the proposals.Detailed comments on IASB ED/2019/4Question 2—Expected recovery of insurance acquisition cash flows (paragraphs 28A‒28D, 105A–105C, B35A–B35C and BC31–BC49)

Stakeholders' views

1.Our stakeholders are generally supportive of the overall principle of extendingthe recognition of an asset for acquisition cash flows to amounts allocated toexpected renewals, and of requiring a recoverability assessment.Discounting

2.Several stakeholders raised concerns that there is a lack of guidance arounddiscounting the expected net cash inflow for the group in ED.B35B(a), includingwhether discounting is required, and if so, what discount rates should be used.Some stated that the proposals are unclear on whether the time value of moneyshould be considered, and could be interpreted to require discounting using therate present at initial recognition of the group. Some stakeholders emphasised itis pertinent to have further guidance on this topic given that the discountingapproach will materially affect the impairment assessment. Some stakeholdersexpressed a preference for discounting being required, and for the Standard tospecify that current discount rates be used.

3.A couple stakeholders questioned whether discounting of the asset for insuranceacquisition cash flow itself would be required. These stakeholders expresseddiverging views on whether it should be.APPENDIXInteraction with the PAA

4.Some stakeholders requested clarity around whether entities applying the PAAwould always be required to allocate acquisition cash flows under theseproposals, or whether they would have an accounting policy choice to expenseall acquisition cash flows, including those related to renewals, when incurred inline with IFRS 17.59(a).

5.One stakeholder contended that the drafting of ED.28A implies that there is theoption to expense the acquisition cash flows even if they relate to future groupsof contracts. This stakeholder argued that this implication would be inconsistentwith IFRS 17.59(a), which allows an entity applying the PAA to choose torecognise acquisition cash flows as expenses when it incurs those costs forgroups of contracts with coverage periods of one year or less. Under this view,an asset for insurance acquisition cash flows related to expected groups ofcontracts should be recognised in all cases, and IFRS 17.59(a) should apply onlyafter the allocation of cash flows has been performed under ED.B35A. As such,this stakeholder proposed that ED.28A be clarified to state that an entity applyingthe PAA may only recognise acquisition cash flows as expenses after they areallocated to a group. This stakeholder further argued that not requiring allocationof the acquisition cash flows for entities applying the PAA would negatively affectthe comparability of entities.

6.Some stakeholders observed that a requirement to allocate acquisition cashflows in all cases including the PAA could be operationally burdensome,specifically for non-life insurers.Disclosure

7.Some stakeholders expressed concern about the disclosure requirementproposed in ED.105B, in particular, that it could result in the disclosure ofcommercially sensitive information which could also lack usefulness and besubject to misinterpretation by users. One stakeholder stated that the disclosurewould be operationally burdensome. However, some user stakeholdersexpressed a desire to have clear disclosure of the allocation of acquisition cashflows and the ability to understand management’s allocation process over time.Other interpretation issues

8.One stakeholder questioned whether any guidance could be provided for theterm expected when assessing whether insurance contracts are expected toarise from renewals in ED.B35A.

9.Some stakeholders questioned whether the term paid in ED.28B(b) should beinterpreted as amounts settled or include amounts payable. A few stakeholdersmentioned that it was common for entities to pay fees over time, and expresseda preference for being able to deem fees payable as paid.

10.One stakeholder stated that the guidance in ED.28B(b) is unclear on how anacquisition cash flow that relates to multiple future groups should be accountedfor (e.g. whether for a group of contracts that is expected to renew each year,one asset should be recognised for each future renewal (multiple assets) or oneasset recognised for all future renewals).APPENDIXHKICPA analysis and recommendation

11.The HKICPA is supportive of this proposal overall. We agree with the Board’srationale that allocating insurance acquisition cash flows to expected renewalsof contracts provides useful information.Discounting

12.The HKICPA suggests clarifying the requirements on discounting the expectednet cash inflows, given it has engendered confusion among some preparers. Theexpected net cash inflows act as a key input for the impairment model, and henceit is important that the Standard be clear as to how they should be measured. Wethink that the measurement of net cash inflows should be on a discounted basis,consistent with IFRS 17’s overall approach to reflect the timing of cash flows inmeasurement, and that the discount rates used should be representative of thecurrent term structure of interest rates. We consider that this is already governedby IFRS 17.32, 36 and B72; however, given the interpretation issues raised byour stakeholders we recommend that the drafting be clarified. Specifically, twopoints should be clarified:

a. Whether discounting of the expected cash inflows is required. We thinkthat it should be.b. If discounted, the rate that should be used. We think that the currentdiscount rate should be used in line with IFRS 17.36. We note that thecurrent discount rate should be representative of the appropriate point intime along an appropriate yield curve.

13.Further, we note that the terms net cash inflow and expected net cash inflow inED.B35B are not used elsewhere in the Standard. Although ED.B35B(a) refersthe reader to IFRS 17.32(a), that paragraph and related guidance do not use theterm net cash inflow or expected net cash inflow, and we think that this draftingis imprecise. We recommend the Board make clear in its drafting what is beingreferred to here and ensure the wording is aligned with the rest of the Standard.Interaction with the PAA

14.We note that the PAA was implemented to provide simplified liabilitymeasurement, and that the option in IFRS 17.59(a) to recognise acquisition cashflows as expenses when incurred currently results in an entity being able to avoidrecognising an asset or liability for these cash flows (which is made clear in IFRS

17.27).

15.We consider that the drafting in ED.28A would grant entities a policy choice toexpense acquisition cash flows when incurred before applying the allocationrequirements in ED.B35A. We observe that this choice is consistent with thecurrent requirements of IFRS 17 that enable an entity applying this option in thePAA to expense acquisition cash flows as incurred and hence not recognise anasset or liability.

16.We note the view of some of our stakeholders that not allocating acquisition cashflows when applying the PAA may result in comparability issues, however weAPPENDIXthink that the guidance as drafted is clear and consistent with the intention of theBoard to provide simplification for the subset of contracts with coverage periodsof one year or less under the PAA. The purpose of the PAA is to provide asimplified approach that is a reasonable approximation of the general model, andhence requiring entities to allocate acquisition cash flows and recognise an assetwould conflict with this objective. We also note that the PAA approach, bydefinition being an approximation, already affects comparability in and of itself.As such, we do not recommend that this optionality be removed.

17.We nevertheless would allow the Board to consider our stakeholder feedback asto whether the extension of the requirements should trigger a broaderreassessment of the optionality provided under the PAA.Disclosure

18.The proposals include further disclosure requirements for the asset for insuranceacquisition cash flows that we think will be useful and respond to user feedback.We also note that some users indicated a desire to understand management’srationale for allocation of acquisition cash flows, and recommend that the Boardensure that disclosure requirements are robust. With regard to the proposeddisclosure in ED.105B, we acknowledge the Board’s rationale for therequirement as noted in ED.BC46. However, we recommend the Boardholistically consider what this disclosure is trying to achieve and the feedbackreceived on the cost constraint.Other interpretation issues

19.We would also draw the Board’s attention to a number of interpretation issues:

a. The term expected in context of assessing whether insurance contractsare expected to arise from renewals (ED.B35A). There is presently noguidance to determine whether an insurance contract would qualify to beconsidered expected to arise and some stakeholders requested furtherguidance on this point. However, the HKICPA notes that the termexpected is common throughout IFRS in myriad contexts, and so we donot recommend adding specific guidance given the risk of creating anarbitrary dividing line.b. The term paid in ED.28B(b) does not specify whether this should beinterpreted as settled amounts or amounts payable. A similar issue wasdiscussed by the TRG in February 2018 with respect to the phrase“premiums, if any, received” in IFRS 17.55(a) and 55(b)(i). We suggestthe Board clarify in the Standard whether paid should be interpreted as“cash paid” or “cash paid and payable”. In doing so, it would not bedesirable to see an arbitrary gross-up of assets for insurance acquisitioncash flows for the insurance industry compared to other preparers (underIFRS 15), and as such, the requirements of other Standards (namelyIFRS 9 and the overall accounting for executory contracts) should betaken under consideration.c. The wording “existing … group” in ED.28B(b) is confusing as it impliesthe group is recognised, however one would expect an acquisition cashAPPENDIXflows asset for a recognised group to have been derecognised in line withED.28C.Question 3—Contractual service margin attributable to investment-return service andinvestment-related service (paragraphs 44–45, 109 and 117(c)(v), Appendix A,paragraphs B119–B119B and BC50–BC66)

Stakeholders' views

20.Our stakeholders are supportive of the overall principle of the proposedamendment and the concept of recognising the contractual service margin(CSM) over a period that considers investment-return services for contractswithout direct participation features. The majority of our stakeholders agreed thatthe existing CSM recognition principles for insurance contracts without directparticipation features that provide an investment service did not appropriatelyrepresent the service provided under the contract. The existing treatment couldadditionally result in the front-loading or back-loading of revenue and createstructuring opportunities. There was also general consensus among our userstakeholders that economically similar contracts should have comparableaccounting treatment. These stakeholders hence welcome the Board’sproposals.Definition of investment-return service and investment-related service

21.Several stakeholders commented on the definition, or lack thereof, of investment-return service and the criteria in ED.B119B. These stakeholders remarked thatthe criteria in B119B appear restrictive and rules-based, and could result invarious contracts that are considered in practice to be providing investmentservices failing the criteria. A few stakeholders stated they were confused as tothe rationale for having different terms for contracts without direct participationfeatures (investment-return service) and for contracts with direct participationfeatures (investment-related service), and what precisely the differences arebetween the two terms.

22.With regard to ED.B119B’s specific criteria, some stakeholders commented thatcriterion B119(a) was acceptable, criterion B119(c) would nearly always be met,and that criterion B119(b) was confusing and appeared too restrictive. Somestakeholders commented that the rationale for using the term “positiveinvestment return” in ED.B119B is unclear regarding how a positive investmentreturn should be assessed, and why the word “positive” is used at all.

23.Some of these stakeholders offered suggestions how the definition ofinvestment-return service may be improved. One stakeholder recommendedED.B119B should clarify that such contracts provide an investment-returnservice if the policyholder expects to receive a return from the contract and isbeing provided a service not otherwise available to the policyholder.

24.Another stakeholder commented that “incidental” investment-return servicesshould be specifically excluded from the scope of the definition. An example of aproduct with such services that some stakeholders would not want to seecaptured by ED.B119B is a whole of life protection policy with pay-out on deaththat has a cash surrender value (which may be required by local regulations).APPENDIXThis cash surrender value would be very low at first, but could build up such thatat certain, later years in the product life cycle, it would be marginally more thanpremiums paid in. The cash surrender value in such cases could be viewed asgenerating a positive investment return and cause the product to fall underED.B119B. However, the stakeholders argue that the cash surrender value is nota core part of the service being provided under such products and is not intendedto make the contract a savings product. As such, they would consider itinappropriate for that feature to affect the profit emergence pattern.

25.One stakeholder suggested a definition utilising the guidance currently in IFRS

17.B75. Paragraph B75 notes that “B74(b) requires cash flows that vary basedon the returns on underlying items to be discounted using rates that reflect thatvariability, or to be adjusted for the effect of that variability and discounted at arate that reflects the adjustment made. The variability is a relevant factorregardless of whether it arises because of contractual terms or because the entityexercises discretion, and regardless of whether the entity holds the underlyingitems.” The existence of this variability, made manifest through the requirementsof paragraphs B74-B75, could prove that the contract in question is providing aninvestment-return service. A definition could hence be formulated that describedan investment-return service to exist when the contract has cash flows that varybased on the returns of underlying items.Identifying coverage units and weighting

26.Several stakeholders commented that identifying coverage units and determiningthe amount of the CSM to recognise in profit or loss in each period remains animplementation challenge. This is particularly the case for contracts involvingcomplex blends of multiple and heterogeneous services, and contracts with longdurations and back-ended cash flow profiles. These stakeholders commentedthat both the existing requirements and proposals provide little direction on whattype of approach should be applied. Some of these stakeholders stated therewas insufficient guidance to assess whether coverage units should be calculatedwith reference to the dollar amount of the underlying assets (e.g. the AUM orasset share), the coverage or surrender value, or the passage of time, et cetera.It was expressed that such lack of guidance could result in diversity in practice.One stakeholder recommended that a practical expedient (e.g. a straight-linemethod) be provided for contracts with complex blends of multiple services.

27.Some stakeholders commented that weighting the various services would becomplex and demanding. Some also questioned the usefulness that thedisclosure of the relative weighting of benefits would provide to users, andcommented that a lack of guidance on how to perform the weighting would resultin incomparability between entities. Some stakeholders noted that furtherguidance allowing unbundling could be beneficial, and suggested that furtherprinciples could be constructed from the TRG discussions on separation of asingle contract in February 2018. One stakeholder recommended against suchan unbundling approach as it could trigger a broader need to reconsider therequirements in IFRS 17, and suggested that the Board provide more practicalsolutions.APPENDIXHKICPA analysis and recommendation

28.The HKICPA appreciates the Board’s efforts to address this issue, which theHKICPA also recommended IASB staff to consider as a proposed amendmentto IFRS 17. We consider that amending the general model so that the CSM isrecognised in profit or loss on the basis of coverage units that are determined byconsidering both insurance coverage and investment services will provide usefulinformation about the services provided, as noted in ED.BC56, and enhanceIFRS 17’s faithful representation. However, we have made some suggestions toimprove the proposal below.Definition of investment-return service and investment-related service

29.The HKICPA notes that that the drafting of the terms of investment-return serviceand investment-related service has raised questions among our stakeholders.The HKICPA understands the Board’s rationale for proposing a distinct concepttermed an “investment-return service” is to distinguish this category fromcontracts under the variable fee approach.

30.We do however note that the proposed guidance has engendered interpretationissues. In particular, the guidance has raised questions concerning: (1) thedifference between the two terms, which is not clearly explained in the body ofthe Standard; and (2) the perceived restrictiveness and rule-based nature of theED.B119B criteria.

31.We find it somewhat challenging to the reader that such concepts are not clearlydefined in ED, for example within Appendix A. The current drafting does notpresent a direct definition of investment-return service nor investment-relatedservice. While a rough understanding could presumably be derived from thedefinition of insurance contract services, insurance contract with directparticipation features and the Basis for Conclusions, it is not accessible or user-friendly and its lack may cause confusion. We hence suggest to defineinvestment-related service and investment-return service in the body of theStandard (e.g. Appendix A).

32.The HKICPA recommends that the Board reflect further on how these categoriescan be demarcated and defined. We suggest the following for your consideration:

a. Defining investment-related service and investment-return service clearly inthe body of the Standard (e.g. Appendix A) as noted above.b. Clarifying in the body of the Standard that the existence of an investment-return service is a matter of judgement and that the criteria presented inED.B119B are not determinative. This appears to be explained in ED.BC60,but the drafting of ED.B119B is ambiguous (particularly in the use of thediscordant phrase “may provide an investment-return service if, and only if:

…”).c. Replacement of ED.B119B(b)-(c) with an apophatic component to defineinvestment-return services by what they are not. This may help resolve thedifficulties faced in positively defining an investment-return service and theconcerns raised by stakeholders that have arisen since the IASB Staff’sproposal to include the B119B criteria in the May 2019 IASB meeting(Agenda Paper 2C). For example:

APPENDIXB119B Insurance contracts without direct participation features may providean investment-return service if, and only if:

(a) an investment component exists, or the policyholder has the right towithdraw an amount; and(b) a significant portion of the services that may be provided to thepolicyholder do not relate to insurance coverage.

33.The HKICPA has noted stakeholder feedback that “incidental” investment-returnservices should be excluded from the scope of the definition. We consider thatone motivation for this would be to avoid instances of structuring where non-genuine clauses could be included to alter the coverage unit profile. We wouldsuggest pertinent guidance may exist in IFRS 17.B18, which excludes scenariosthat have “no commercial substance (ie no discernible effect on the economicsof the transaction)” from affecting the assessment of significant insurance risk.The Board could clarify that this notion extends to assessing if an investment-return service is present.Identifying coverage units and weighting

34.We also note that the comments raised by our stakeholders on the challenges ofidentifying coverage units and allocating the CSM to profit or loss are not new tothe proposals in the ED. IFRS 17.BC279-BC283 contains rationale as to theBoard’s intentions on the matter, and the issue was discussed at the TRG inFebruary and May 2018, during which time the TRG members observed that:

•IFRS 17 established a principle to reflect services provided in a period ratherthan detailed requirements. The determination of coverage units involvesjudgement and estimates, which should be applied systematically andrationally.•Coverage units reflect the likelihood of insured events occurring only to theextent they affect the expected duration of contracts, and do not reflect thelikelihood of insurance events occurring to the extent they affect the amountexpected to be claimed.•The period in which an entity bears insurance risk is not necessarily the sameas the coverage period. Expectations of lapses of contracts and differentlevels of service should be considered in determining coverage units.•Entities should consider the benefits expected to be received by thepolicyholder rather than the expected costs of providing those benefits whendetermining the quantity of benefits provided. Policyholders benefit from theentity standing ready to meet claims, and hence the quantity of benefitsprovided relates to amounts that can be claimed by the policyholder.•IFRS 17 does not specify a particular method to determine the quantity ofbenefits and different methods may achieve the objective. Reasonableproxies may include:

o Straight-line allocation over the passage of time (reflecting thenumber of contracts in a group).o Methods based on the maximum contractual cover or the amount thepolicy holder is expected to be able to claim in each period.o Methods based on premiums or on expected cash flows.APPENDIX

35.The HKICPA supports a principle-based approach to allocating the CSM, and weconsider, as noted by the TRG above, that IFRS 17 has provided the principleon how to do so. Preparers should apply appropriate judgement and estimatesto best achieve that principle. We do however recommend that the Board givethought to the most appropriate way to explain this principle to preparers, andexamine whether the TRG guidance summarised above can be incorporatedmore formally into the Standard. We suggest this could be done in the form ofexamples in the guidance accompanying IFRS 17, and through educationalmaterials. Doing so will support the implementation process and help allayconcerns of diversity in practice.

36.The HKICPA appreciates the comments made by our stakeholders with regardto the complexity of weighting the CSM. However, the HKICPA also notes (asdid some of our stakeholders) that this complexity exists for contracts under thevariable fee approach and contracts with more than one type of insurancecoverage under the general model. We are of the view that the benefit of theresulting information, including the proposed disclosures, outweighs theseconsiderations. We agree with the rationale in ED.BC62 that it is sufficient thatthe allocation be made on a systematic and rational basis, and suggest that thisbe made clear in the body of the Standard. We also suggest that it may be helpfulif the Board were to develop educational materials on this topic.Question 4—Reinsurance contracts held—recovery of losses on underlying insurancecontracts (paragraphs 62, 66A–66B, B119C–B119F and BC67–BC90)

Stakeholders' viewsDefinition of reinsurance contract held that provides proportionate coverage

37.Our stakeholders’ generally support the objective of this proposed amendment;

however, many stakeholders raised concerns about the proposed definition ofreinsurance contract held that provides proportionate coverage. Thesestakeholders think that the definition is overly restrictive, such that certaincommonly used reinsurance contracts that are considered by the industry toprovide proportionate coverage would fail the definition. As a result, they assertthat the proposals are of limited value, fail to achieve the stated objective, andexacerbate comparability issues as similar reinsurance contracts and entitieswith similar reinsurance arrangements become subject to differing treatment.

38.In particular, the current drafting in the definition and ED.B119C draws a hardline as to what qualifies as proportionate, and may result in only a limitedselection of full (first dollar) quota share reinsurance arrangements of the fullscope of a group of underlying insurance contracts meeting the definition. Toillustrate, consider the following points concerning two common forms ofproportionate (or pro rata) reinsurance: quota share and surplus share.a. Quota share reinsurance indemnifies the cedent for a fixed percentage ofloss, but these treaties may only have selected types of risks reinsured,or exclude certain risks from coverage (e.g. a reinsurance arrangementthat excludes dividend cash flows).APPENDIXb. Quota share reinsurance may only be applicable to the net amount at riskinstead of total cash flows, and hence be a fixed percentage of the netamount at risk but a variable percentage of the total sum insured over thelife of the policy.c. It is common that reinsurance arrangements will result in the cedentretaining a portion of risk. This may be seen both in quota sharearrangements and in surplus share reinsurance contracts which involvethe ceding of a proportion of a liability on a given risk above a retention.

39.These and other prevalent forms of reinsurance may fail to meet the proposeddefinition.

40.Furthermore, not all underlying insurance contracts in a group may be coveredby the same ceding percentage. Stakeholders noted that entities may haveproportionate reinsurance arrangements where terms are defined differently onan individual contract level, such that while being individually fixed, they wouldnot be considered “fixed” on a group level. Stakeholders noted that if theproposals require that the proposed definition is applied at the group level, thiscould result in forced grouping of contracts based on applicable reinsurancetreaties. This could also result in facultative reinsurance arrangements not beingeligible for the approach. Stakeholders note this would be a disagreeableoutcome both from an operational perspective and in terms of the faithfulrepresentation of industry practice.

41.Similar to the above, one stakeholder questioned whether the proposals requireall contracts within a group to be covered by reinsurance for the guidance to beapplicable. This stakeholder stated that there may be cases in practice wherecertain contracts within a group are not covered by reinsurance, and thinks thatthe proposals should still be applicable to such cases.

42.Rather than referring to a “fixed percentage of claims”, some stakeholderssuggested that introducing the terms “contractually defined percentage” or “afixed percentage of ceded claims” would enable a more appropriate scope ofreinsurance arrangements to qualify under the proposals.

43.One stakeholder also pointed out that the concept of “proportionate” is termeddifferently by local insurance regulation and expressed concerns that an overlystrict definition in IFRS 17 would create conflicts.Restriction to proportionate

44.Some stakeholders further questioned the rationale for restricting the proposalsto proportionate reinsurance. These stakeholders contend that the proposedamendment should be applicable to all reinsurance contracts held where a directlink can be established between the reinsurance arrangements and theunderlying insurance contracts. These stakeholders assert that it is feasible todetermine a recovery percentage which can be used to estimate the recoverycorresponding to the underlying loss, and that this can be equivalently done forproportionate and non-proportionate (e.g. facultative excess of loss) reinsurance.APPENDIX

45.Some stakeholders pointed to the current guidance in IFRS 17.66(c)(ii) whichrequires that when an underlying group of insurance contracts becomes onerousafter initial recognition because of adverse changes in estimates of fulfilmentcash flows, a loss is recognised with respect to that underlying group and thecorresponding changes in cash inflows from reinsurance contracts held shouldbe recognised in profit or loss. These stakeholders argued that given theguidance for contracts that subsequently become onerous is not restricted toproportional reinsurance, it is not clear why the proposals related to initialrecognition are restricted as long as a direct linkage can be established (whichthey argue can be).Timing of recognition of reinsurance contract

46.Some stakeholders questioned the Board’s rationale for restricting the proposedamendment such that reinsurance contracts held must be recognised before orat the same time that the related onerous contract loss is recognised. Thesestakeholders asserted that it is common for entities to enter into reinsurancearrangements at dates subsequent to when the related underlying insurancecontracts were entered into, and that retroactive reinsurance arrangements cansometimes be seen in practice. These stakeholders also maintain that they mayenter effective verbal agreements or agreements established by mutually-understood practice before or at the same time that the related insurancecontracts are entered into, and questioned the timing of contract enforceabilityversus the proposed requirements. These stakeholders would prefer to see theguidance relaxed so that the proposals could be applied in such scenarios.Other interpretation issues

47.One stakeholder questioned the treatment of the loss-recovery component of theasset for remaining coverage. This stakeholder considered the guidance in ED.IEExample 19 to be unclear as to whether the loss-recovery component and CSMshould be tracked separately, and that there was a lack of guidance for whethersystematic allocation or a coverage unit concept should be applied to the roll-forward of the loss-recovery component.HKICPA analysis and recommendation

48.The HKICPA is supportive of this proposal overall, and appreciates the Board’sefforts to address the treatment of reinsurance contracts held when theunderlying insurance contracts are onerous on initial recognition, as the HKICPArecommended IASB staff to consider as a proposed amendment to IFRS 17.Definition of reinsurance contract held that provides proportionate coverage

49.We share the concerns of our stakeholders that the definition and scope of“proportionate coverage” currently results in many forms of proportionatereinsurance, including types of quota share and surplus share, not meeting thedefinition. The current proposal appears to be written in a manner that envisionsa simplified textbook scenario. This would hamper the usefulness of theproposals and fail to faithfully represent the diversity of proportionate reinsurancearrangements, while also creating comparability issues.APPENDIX

50.We hence recommend that the Board reconsider the definition and scope ofqualifying reinsurance in view of the various forms of arrangements present inthe market, and draft a principle-based definition that will capture reinsurancecontracts that provide an entity a right to recover a known percentage or currencyunit amount of claims for a loss that corresponds to underlying insurancecontracts.

51.We recommend that the Board consider whether the concept of a recoverypercentage can be applied to demonstrate that underlying losses have knowablerecoveries. The recovery percentage can be calculated by dividing expectedrecoveries by expected underlying claims, and this can be applied for variousforms of reinsurance.

52.We also suggest that the drafting clarify that the definition may be assessed oneither a group or individual contract level. The purpose of this would be toaddress concerns noted above for groups where reinsurance arrangements areapplied on a known basis to individual contracts, but would vary at the group levelgiven the known basis could vary contract-by-contract. Additionally, this wouldtake into account situations where not all contracts within a group are coveredby a single reinsurance treaty and instances of proportionate facultativereinsurance transacted on an individual risk basis.

53.Assuming that the Board elects to retain the proposal’s restriction toproportionate reinsurance (discussed further below), we suggest the followingpotential edits to address our concerns above:

•Appendix A, definition of reinsurance contract held that provides proportionatecoverage. Alternative drafting could read:

o A reinsurance contract held that provides an entity with the right torecover from the issuer a contractually defined percentage of all claimsincurred on groups of underlying insurance contracts or individualunderlying insurance contracts within a group of contracts. Thepercentage the entity has a right to recover is fixed for all contracts in asingle group of underlying insurance contracts, but can vary betweengroups of underlying insurance contracts.•B119C.o Paragraph 66A applies to reinsurance contracts held that provideproportionate coverage. Such reinsurance contracts provide the entitywith the right to recover from the issuer a contractually defined fixedpercentage of all claims incurred on a group of underlying insurancecontracts or individual underlying insurance contracts within a group ofcontracts. …•B119D.o An entity shall determine the adjustment to the contractual service marginand the resulting income recognised applying paragraph 66A bymultiplying:

(a) the loss recognised on the group of, or individual, underlyinginsurance contracts within a group of contracts ; and(b) the contractually defined fixed percentage of claims on the group ofunderlying insurance contracts, or individual underlying insuranceAPPENDIXcontracts within a group of contracts, the entity has a right to recoverfrom the group of reinsurance contracts held.Restriction to proportionate

54.The HKICPA considers that the most critical issue regarding this proposal is toexpand the scope of proportionate reinsurance arrangements eligible forinclusion as discussed above. However, we also agree with our stakeholderswho argue that recovery amounts can be known for non-proportionate (e.g.facultative excess of loss) reinsurance, and think that in principle therequirements should allow for such forms of reinsurance to fall within the scopeof the proposals so long as the preparer can establish the appropriate recoverypercentage. This would support consistent accounting for comparable economicphenomena.

55.To illustrate how the recovery can be known for both proportionate and non-proportionate reinsurance, and how the two types can result in equivalenteconomic phenomena, consider the following:

Proportionate quota shareNon-proportionate excess of loss50% ceded to reinsurerLoss above CU75 ceded to reinsurerPremiumsClaimsExpected lossExpected recoveriesRecovery percentage 50%50%Recovery amount

56.Under the current proposal, these two arrangements would be accounted fordifferently because the excess of loss arrangement would not meet the definitionof proportionate reinsurance. While the example above is highly simplified andthe calculation would be more complex in practice, particularly for non-proportionate treaty reinsurance, we consider that the principle stands.

57.Should the Board elect not to allow non-proportionate reinsurance, werecommend that the Basis for Conclusions be expanded upon to explain why.We note that ED.BC80 attempts this, however we do not think it is adequatelydefended and the conclusion presented for the paragraph’s example excess ofloss contract is tenuous.Timing of recognition of reinsurance contract

58.With regard to the restriction that reinsurance contracts held must be recognisedbefore or at the same time that the related loss is recognised, the HKICPAappreciates our stakeholders’ concerns but agrees with the Board’s rationalepresented in ED.BC85 that such a condition is relevant to ensure that therecovery of losses are recognised in alignment with the losses themselves.APPENDIX

59.On stakeholder comments about enforceability, we note that the concept of theenforceability of a contract is not unique to nor begotten by IFRS 17, and do notrecommend to add further guidance in this area.

60.We consider that further relaxation of the guidance could introduce concerns withrespect to the usage of the guidance to achieve a particular accounting outcome,and hence do not recommend broadening the proposals to include reinsurancecontracts recognised after the related loss is recognised.Question 7—Effective date of IFRS 17 and the IFRS 9 temporary exemption in IFRS 4(paragraphs C1, [Draft] Amendments to IFRS 4 and BC110–BC118)

Stakeholders’ views

61.Our stakeholders are supportive of the proposed amendment to defer theeffective date by one year, and feedback indicates that this amendment will bebeneficial to the majority of preparers. Some stakeholders noted that this isparticularly welcome for Hong Kong and other non-European markets that havenot been through full implementation of Solvency II and hence are at a differentstarting point with respect to systems and data.

62.Several stakeholders emphasized the importance of a globally consistenteffective date among major jurisdictions, and our user stakeholders alsoexpressed a preference for having globally comparable financial reporting. Giventhe significant impact that IFRS 17 adoption is expected to have, a misalignedadoption date could result in tangible economic deviations arising betweenentities in different jurisdictions. It would also create substantial negativecomparability issues that would exist for many years going forward. A levelplaying field for entities is considered of high importance, and that will only beachieved through a consistent effective date.

63.Several stakeholders noted that although they supported the deferral of theeffective date by one year, two years would have been preferred. This is becausethere is a dearth of service providers and comprehensive IT solutions in themarket and this presents significant implementation challenges, which areespecially pronounced for smaller insurers. These stakeholders further notedthat the proposals in the ED have exacerbated this as both preparers and serviceproviders have had to respond to a moving target.HKICPA analysis and recommendation

64.The HKICPA welcomes the proposed amendment to defer the effective date byone year and considers it a helpful action that will support implementation.

65.We further agree with our stakeholders’ comments concerning the importance ofa uniform effective date across major jurisdictions. We recommend that theBoard takes into consideration that IFRS 17 represents a significant change tofinancial reporting that may have a material impact on how entities are perceivedby users, and as with other major Standards aim to encourage a consistenttimeline for global adoption.APPENDIXQuestion 9—Minor amendments (BC147–BC163)

Stakeholders' views

66.Our stakeholders noted that there is an unsolicited edit in ED.B107(b)(i), whichnow reads “over the duration of the group of insurance contract contracts;”. Thiscould be interpreted to require that to qualify for the variable fee approach, anentity must assess variability on an individual contract level rather than the grouplevel.

67.These stakeholders commented that such a change not only lacks any rationale,but would also heavily disrupt implementation for entities with IFRS 17 projectsalready in progress, and introduce significant operational costs and complexitiesgiven the size and scope of certain portfolios.HKICPA analysis and recommendation

68.The HKICPA notes that the edit to ED.B107(b)(i) does not appear to have beensolicited prior to publication of the proposals, and the questions in the ED do notseek feedback on the change.

69.The November 2016 IASB meeting Agenda Paper 2C states the following as anissue related to the level of aggregation that the staff proposed the Board notfurther address, which implies that the group is the appropriate level forassessing the variable fee approach and aligns with the existing drafting in IFRS

17.B107:

Scope of variable fee approachSometestparticipantsaskedforclarification on the level of aggregation forassessing eligibility for the variable feeapproach.Because the contracts are measured aspart of a group, the group is the unit ofaccount. The scope of the variable feeapproachandinparticulartheassessment of expected cash flows isassessed on the basis of the cash flowsof the group.

70.The impact of this edit is significant to our stakeholders, and it concerns us thatsuch an edit is put forth in an unsolicited manner. The HKICPA stronglyrecommends the Board reverts paragraph B107 to its prior wording, and clarifiesthe intention of the proposed edit. If the Board wishes to propose edits orchanges to B107, they should be subject to proper IFRS Foundation dueprocess.Other areas of comment

71.The HKICPA is generally supportive of the proposals in ED questions 1, 5, 6, 8and 10, and we noted limited comments and no significant disagreements fromour stakeholders on these issues. We include comments from our stakeholdersfor the Board’s consideration.APPENDIXQuestion 1—Scope exclusions—credit card contracts and loan contracts that meet thedefinition of an insurance contract (paragraphs 7(h), 8A, Appendix D and BC9–BC30)

Stakeholders' views

72.This proposal was not relevant for many of our stakeholders. Those whocommented were generally supportive.Question 5—Presentation in the statement of financial position (paragraphs 78–79, 99,132 and BC91–BC100)

Stakeholders' views

73.Our stakeholders are generally supportive of this proposal. Some stakeholderscommented that this proposal would better reflect the way their business ismanaged, and that it would provide operational relief.Question 6—Applicability of the risk mitigation option (paragraphs B116 and BC101–BC109)

Stakeholders' views

74.Our stakeholders are generally supportive of this proposal. A couple ofstakeholders commented that it would result in a more faithful representation ofthe economics.

75.One stakeholder requested that it be clarified whether the proposals will alsoapply to investment contracts with discretionary participation features that areaccounted for under IFRS 17.Question 8—Transition modifications and reliefs (paragraphs C3(b), C5A, C9A, C22Aand BC119–BC146)

Stakeholders' views

76.Our stakeholders are generally supportive of this proposal. One stakeholderrequested that further clarification be provided as to the Board’s rationale for theoption to apply the fair value approach and when the option may be used. Thisstakeholder commented that although the proposed relief is welcomed, theirpreferred approach would still be to allow existing risk mitigation tools to bereflected in a fully retrospective manner.Question 10—TerminologyStakeholders' views

77.Our stakeholders are generally supportive of this proposal.