IFRS 17 Transition and Progress Report Requirements for Federally Regulated Insurers

Background

In June 2020, the International Accounting Standards Board (IASB) issued amendments to the IFRS 17 Insurance Contracts Standard (IFRS 17). IFRS 17 replaces IFRS 4 and is effective for annual periods beginning on or after January 1, 2023. The Canadian Accounting Standards Board will complete its endorsement process for the amendments, incorporating them into Part I of the CPA Canada Handbook – Accounting no later than November 2020.

The Insurance Companies Act stipulates in the case of federally regulated insurers (FRIs)FRIs refer to all federally regulated insurers, including Canadian branches of foreign life and property and casualty companies, fraternal benefit societies, regulated insurance holding companies and non-operating insurance companies.  that “financial statements shall, except as otherwise specified by the Superintendent, be prepared in accordance with generally accepted accounting principles, the primary source of which is the Handbook of the Chartered Professional Accountants of Canada.”Subsections 331(4) and 887(4) of the Insurance Companies Act.  Generally, Accepted Accounting Principles for FRIs is effectively International Financial Reporting Standards as issued by the IASB. OSFI may specify additional accounting guidance or disclosure requirements, or require FRIs to use a specific option within an applicable accounting standard. OSFI makes these specifications in situations where there is a prudential need for additional accounting guidance.

To support FRIs in their transition to IFRS 17, OSFI is issuing this advisory regarding:

1. Early adoption of IFRS 17;
2. Accounting for financial guarantee contracts; and
3. Semi-annual progress reporting to OSFI.

A. Early Adoption of IFRS 17

1. Expectations with Respect to Early Adoption

   After reviewing several factors (e.g. consistency across insurers, operational capacity, etc.), OSFI determined that FRIs should not adopt IFRS 17 before its effective date of January 1, 2023.

2. FRIs that are Subsidiaries of a Federally Regulated Deposit-Taking Institution (DTI)For the purposes of this Advisory, DTI refers to banks, foreign bank branches, bank holding companies, federally regulated trust companies, federally regulated loan companies, and cooperative retail associations.

   Disallowing adoption before January 1, 2023 implies that FRIs that are subsidiaries of DTIs with an October 31 year-end will adopt IFRS 17 for annual periods beginning November 1, 2023. OSFI confirms this adoption date having considered the complexity of implementing IFRS 17 and the size of these DTI subsidiaries relative to the regulated DTI. DTI subsidiaries with a December 31 year-end will adopt IFRS 17 on January 1, 2023.

B. Accounting for Financial Guarantee Contracts

IFRS 17 provides existing insurers applying IFRS 4 the option to account for financial guarantee contracts using either IFRS 17 or IFRS 9 Financial Instruments. To ensure consistency and comparability across the industry, OSFI determined that existing FRIs should continue accounting for these contracts using IFRS 17.

OSFI will communicate any additional reporting requirements during the application process for new entrants after January 1, 2023. This will ensure comparability and consistency in reporting with existing FRIs.

C. Semi-Annual Progress Reporting to OSFI

OSFI is requiring FRIs to submit semi-annual reports outlining the progress made in preparation for IFRS 17. This advisory sets out OSFI’s expectations with respect to the contents of such reports.

1. Timing and Frequency of Reporting

   FRIs are expected to submit semi-annual progress reports to OSFI on their implementation of IFRS 17. The reports will detail the status of the project and any material decisions made.

   FRIs should submit progress reports semi-annually on or before:

   • September 30, 2020;
   • March 31, 2021;
   • September 30, 2021;
   • March 31, 2022;
   • September 30, 2022; and
   • March 31, 2023.

   FRIs that are subsidiaries of DTIs are expected to submit a final progress report no later than September 30, 2023.

2. Submission Format

   • One (1) electronic copy of the progress report detailing information under section III below to the FRI’s Lead Supervisor ensuring the subject field is identified: “FRI Name - IFRS 17 Progress Report – (MMYYYY)”.
   • A cover page – “IFRS 17 Self-Assessment Summary Questionnaire” (see Appendix A) summarizing the report’s content must be completed and submitted with the FRI’s IFRS 17 progress report.

3. Scope of Progress Reports

   OSFI expects FRIs to engage their senior management in the IFRS 17 work plan. Senior management should review and approve all material elements of the information provided to OSFI. Progress report information received from the FRIs will be considered confidential and treated accordingly.

   The progress reports should include the following:

   1. Project Structure and Resources

      1. Description of the project structure, governance and timeline, including the role of the board or Chief Agent, project sponsor, key project team members (internal and external) and accountabilities.
      2. Assessment of whether resources are sufficient to meet project deliverables.

   2. Project Status

      OSFI expects FRIs to keep their Lead Supervisor informed of any major changes or risks to the IFRS 17 project plan.

      Indicate the status of key milestones of the project plan. For example, indicate if the project is on schedule, ahead of schedule or behind schedule. If behind schedule, indicate the steps being taken to bring the project back on schedule.

      When evaluating project status, FRIs should:

      1. Conduct a qualitative assessment of IFRS 17/IFRS 4 differences (e.g. impact on policyholder liability, retained earnings, regulatory capital, etc.);
      2. Identify issues and solutions in applying IFRS 17 where a decision has been made and, where a decision has not been made, the major factors relevant to the decision and the timeline for completing that decision;
      3. Describe possible choices, actions, elections or policies (accounting or actuarial) being considered and applicable criteria when making a decision;
      4. Where a decision has been determined and it is possible to estimate its impact, provide a preliminary estimate of the range of quantitative impacts for each financial statement item affected by the choice and the potential impact on capital levels. If it is not yet possible to estimate its impact, describe the timeline and process for completing that estimate.

      Details should be included in the progress report based on the areas identified in section 3 below.

   3. Significant Accounting Impacts

      FRIs should provide a summary of the significant changes caused by the difference between IFRS 4 and IFRS 17. OSFI has identified the following accounting policy options affecting the FRI’s financial statements:

      1. Level of Aggregation
      2. Estimate of Future Cash Flows
      3. Discount Rates
      4. Risk Adjustment
      5. Contractual Service Margin
      6. Embedded Guarantees
      7. Accounting for Financial Guarantee Contracts
      8. Deferred Acquisition Costs
      9. Premium Allocation Approach Measurement
      10. Contracts with Direct Participation Features
      11. Reinsurance
      12. Impact of adoption of IFRS 9 on IFRS 17 Transition Date (e.g. classification and measurement, expected credit losses, etc.)
      13. Impact on Presentation and Disclosures
      14. Transition

      The progress report should comment on the above and on any other items that have a significant impact on the FRI’s financial statement balances (mainly on the Statement of Financial Position), recognition, classification, measurement, presentation or disclosure. Each report should provide the status and progress towards decisions made.  

   4. Operational Preparedness

      FRIs should update their assessment of the IFRS 17 impact on:

      1. Preparation of regulatory returns;
      2. Changes required to systems, if any;
      3. Training designed and delivered to staff; and
      4. Any other items impacting the project.

   5. Location of Information

      The information requested in sections 1 to 4 above may incorporateinformation by reference (e.g. from a pre-existing internal document). In suchcases, FRIs are expected to map the reference to the location where therequired information is available to OSFI. If information requested is notavailable in any given semi-annual period, the FRI’s report to OSFI shouldindicate when that information will be available.

      Requiredinformation that has been reported in a previous progress report and thatremains unchanged from one reporting period to the next need not be repeated.However, the FRI should indicate that the information in question is unchangedfrom the previous report.

Appendix A