Disclosures (AASB1023_07-04_COMPmay19_01-20)

In relation to the statement of comprehensive income, the financial statements shall disclose:

(a) the underwriting result for the reporting period, determined as the amount obtained by deducting the sum of claims expense, outwards reinsurance premium expense and underwriting expenses from the sum of direct and inwards reinsurance premium revenues and recoveries revenue;

(b) net claims incurred shall be disclosed, showing separately:

(i) the amount relating to risks borne in the current reporting period; and

(ii) the amount relating to a reassessment of risks borne in all previous reporting periods.

An explanation shall be provided where net claims incurred relating to a reassessment of risks borne in previous reporting periods are material; and

(c) in respect of 17.1(b)(i) and 17.1(b)(ii), the following components shall be separately disclosed:

(i) gross claims incurred – undiscounted;

(ii) reinsurance and other recoveries – undiscounted; and

(iii) discount movements shown separately for (i) and (ii).

This Standard requires the underwriting result for the reporting period to be disclosed. This disclosure gives an indication of an insurer’s underwriting performance, including the extent to which underwriting activities rely on investment income for the payment of claims.

Based on the total movement in net claims incurred, it may appear that there has not been a material reassessment of risks borne in previous periods, however, there may be material movements at a business segment level, that mitigate each other. For example, the insurer may have seen a material deterioration in its motor portfolio, which has been mitigated by material savings in the professional indemnity portfolio, such that when both portfolios are aggregated there appears to have been little change in the reporting period. In such circumstances, the insurer provides an explanation of the reassessments that took place in the net claims incurred for previous periods during the reporting period at the business segment level.

The financial statements shall disclose in relation to the outstanding claims liability:

(a) the central estimate of the expected present value of future payments for claims incurred;

(b) the component related to the risk margin;

(c) the percentage risk margin adopted in determining the outstanding claims liability (determined from (a) and (b) above);

(d) the probability of adequacy intended to be achieved through adoption of the risk margin; and

(e) the process used to determine the risk margin, including the way in which diversification of risks has been allowed for.

An insurer shall disclose the process used to determine which assets back general insurance liabilities and which assets back financial liabilities arising under non-insurance contracts.

Where a general insurer has issued a non-insurance contract or holds a non-insurance contract as a cedant, and that non-insurance contract has a material financial impact on the statement of comprehensive income, statement of financial position or cash flows, the general insurer shall disclose:

(a) the nature of the non-insurance contract;

(b) the recognised assets, liabilities, income, expense and cash flows arising from the non-insurance contract; and

(c) information that helps users to understand the amount, timing and uncertainty of future cash flows from the non-insurance contract.

In applying paragraph 17.4 a non-insurance contract shall be considered together with any related contracts or side letters, when determining the need for disclosure, and in making the disclosures required.

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[Deleted by the AASB]

An insurer shall disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts.

To comply with paragraph 17.6, an insurer shall disclose:

(a) its accounting policies for insurance contracts and related assets, liabilities, income and expense;

(b) the recognised assets, liabilities, income, expense and cash flows arising from insurance contracts. Furthermore, if the insurer is a cedant, it shall disclose:

(i) gains and losses recognised in the statement of comprehensive income on buying reinsurance; and

(ii) if the cedant defers and amortises gains and losses arising on buying reinsurance, the amortisation for the period and the amounts remaining unamortised at the beginning and end of the period;

(c) the process used to determine the assumptions that have the greatest effect on the measurement of the recognised amounts described in (b). When practicable, an insurer shall also give quantified disclosure of those assumptions;

(d) the effect of changes in assumptions used to measure insurance assets and insurance liabilities, showing separately the effect of each change that has a material effect on the financial statements; and

(e) reconciliations of changes in insurance liabilities, reinsurance assets and, if any, related deferred acquisition costs.

In applying paragraph 17.6.1(b), the recognised assets and liabilities arising from insurance contracts would normally include:

(a) gross outstanding claims liability;

(b) reinsurance recoveries receivable arising from the outstanding claims liability;

(c) gross unearned premium liability;

(d) reinsurance recoveries receivable arising from the unearned premium liability;

(e) unexpired risk liability;

(f) other reinsurance recoveries receivable;

(g) other recoveries receivable;

(h) outwards reinsurance expense asset or liability;

(i) direct premium revenue receivable;

(j) inwards reinsurance premium revenue receivable;

(k) deferred acquisition cost asset; and

(l) intangible assets relating to acquired insurance contracts.

In applying paragraph 17.6.1(b), the recognised income and expenses arising from insurance contracts would normally include:

(a) direct premium revenue;

(b) inwards reinsurance premium revenue (including retrocessions);

(c) reinsurance and other recoveries revenue;

(d) direct claims expense;

(e) reinsurance claims expense;

(f) outwards reinsurance premium expense (including retrocessions);

(g) acquisition costs expense; and

(h) other underwriting expenses, including claims handling expenses.

When an insurer is presenting the disclosures required by paragraphs 17.6.1(c) and 17.6.1(d) the insurer determines the level and extent of disclosure that is appropriate having regard to its circumstances and the qualitative characteristics of financial statements under the Conceptual Framework for Financial Reporting (as identified in AASB 1048 Interpretation of Standards).

Notwithstanding paragraph 17.6.4, in respect of AusCF entities, when an insurer is presenting the disclosures required by paragraphs 17.6.1(c) and 17.6.1(d) the insurer determines the level and extent of disclosure that is appropriate having regard to its circumstances and the qualitative characteristics of financial statements under the Framework for the Preparation and Presentation of Financial Statements (as identified in AASB 1048 Interpretation of Standards).

For an insurer that is involved in a large number of insurance classes, across different jurisdictions, disclosure by class of business is likely to be voluminous and may not be understandable to the user of the financial statements. Furthermore, for such an insurer, disclosure for the entity as a whole is also likely to be at too high a level of aggregation to be relevant or comparable. It is expected that for most insurers disclosure at the major business segment level would normally be most appropriate. The insurer may believe that disclosure of a range of values would be relevant to the users of the financial statements.

Some of the assumptions that would normally have the greatest effect on the measurement of the recognised amounts described in paragraph 17.6.1(b), are discount rates, inflation rates, average weighted term to settlement from the claims reporting date, average claim frequency, average claim size and expense rates. The insurer determines whether these assumptions shall be disclosed given the requirements of paragraphs 17.6 and 17.6.1.

An insurer shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from insurance contracts.

To comply with paragraph 17.7, an insurer shall disclose:

(a) its objectives, policies and processes for managing risks arising from insurance contracts and the methods used to manage those risks;

(b) information about insurance risk (both before and after risk mitigation by reinsurance), including information about:

(i) sensitivity to insurance risk (see paragraph 17.7.5);

(ii) concentrations of insurance risk, including a description of how management determines concentrations and a description of the shared characteristic that identifies each concentration (e.g. type of insured event, geographical area, or currency); and

(iii) actual claims compared with previous estimates (i.e. claims development). The disclosure about claims development shall go back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments, but need not go back more than ten years. An insurer need not disclose this information for claims for which uncertainty about the amount and timing of claims payments is typically resolved within one year;

(c) information about credit risk, liquidity risk and market risk that paragraphs 31-42 of AASB 7 Financial Instruments: Disclosures would require if the insurance contracts were within the scope of AASB 7. However:

(i) an insurer need not provide the maturity analyses required by paragraphs 39(a) and (b) of AASB 7 if it discloses information about the estimated timing of the net cash outflows resulting from recognised insurance liabilities instead. This may take the form of an analysis, by estimated timing, of the amounts recognised in the statement of financial position; and

(ii) if an insurer uses an alternative method to manage sensitivity to market conditions, such as an embedded value analysis, it may use that sensitivity analysis to meet the requirement in paragraph 40(a) of AASB 7. Such an insurer shall also provide the disclosures required by paragraph 41 of AASB 7; and

(d) information about exposures to market risk arising from embedded derivatives contained in a host insurance contract if the insurer is not required to, and does not, measure the embedded derivatives at fair value.

For an insurer that is involved in a large number of insurance classes, across different jurisdictions, disclosure by class of business is likely to be voluminous and may not be understandable to the user of the financial statements. Furthermore, for such an insurer disclosure for the entity as a whole would normally be at too high a level of aggregation to be relevant or comparable. It is expected that for most insurers disclosure at the major business segment level would normally be most appropriate.

The claims development disclosure required by paragraph 17.7.1(b)(iii) only applies to classes of business where claims are not typically resolved within one year. The insurer, in disclosing claims development, ensures it is clear to the reader of the financial statements, which classes of business, or which segments of the business, are covered by the disclosures and which classes of business, or which segments of the business, are not covered by the disclosures.

IG Example 5 in the Guidance on Implementing IFRS 4 Insurance Contracts, provides one possible format to meet the claims development disclosure requirements of this Standard. Such a format may be particularly appropriate for longer tail classes of business where the long tail nature of the claims is a significant aspect in the development of the claims, as this format illustrates the development of claims over a number of years. If this format is adopted, disclosure by accident year, gross and net of reinsurance, of undiscounted claims would normally be most relevant to the users of financial statements. The insurer explains the information presented. This includes whether the claims are discounted or undiscounted, gross or net of reinsurance and by accident year or underwriting year.

To comply with paragraph 17.7.1(b)(i), an insurer shall disclose either (a) or (b) as follows:

(a) a sensitivity analysis that shows how profit or loss and equity would have been affected had changes in the relevant risk variable that were reasonably possible at the end of the reporting period occurred; the methods and assumptions used in preparing the sensitivity analysis; and any changes from the previous period in the methods and assumptions used. However, if an insurer uses an alternative method to manage sensitivity to market conditions, such as an embedded value analysis, it may meet this requirement by disclosing that alternative sensitivity analysis and the disclosures required by paragraph 41 of AASB 7; and

(b) qualitative information about sensitivity, and information about those terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of the insurer’s future cash flows.

In relation to the liability adequacy test in section 9, the financial statements shall disclose:

(a) where a deficiency has been identified, the amounts underlying the calculation performed, that is:

(i) unearned premium liability;

(ii) related reinsurance asset;

(iii) deferred acquisition costs;

(iv) intangible assets;

(v) present value of expected future cash flows for future claims, showing expected reinsurance recoveries separately; and

(vi) deficiency;

(b) any write-down of deferred acquisition costs under the liability adequacy test;

(c) any write-down of intangible assets under the liability adequacy test;

(d) in relation to the present value of expected future cash flows for future claims:

(i) the central estimate of the present value of expected future cash flows;

(ii) the component of present value of expected future cash flows related to the risk margin;

(iii) the percentage risk margin adopted in determining the present value of expected future cash flows (determined from (i) and (ii) above);

(iv) the probability of adequacy intended to be achieved through adoption of the risk margin; and

(v) the process used to determine the risk margin, including the way in which diversification of risks has been allowed for;

(e) where the probability of adequacy disclosed in paragraph 17.2(d) is not the same or similar to the probability of adequacy disclosed in paragraph 17.8(d)(iv), the reasons for the difference; and

(f) where a surplus has been identified, the fact that the liability adequacy test identified a surplus.

This Standard addresses disclosure requirements in relation to general insurance contracts. Other Australian Accounting Standards may be relevant to a general insurer’s financial statements. In particular, the disclosure requirements in AASB 7 would normally be relevant to general insurers.